Select Committee on Finance

Annual Budget Process

And

Sector Analysis

09 July 2014

Content Adviser: Esther Mohube

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Structure of the presentation

Annual Budget Process– What is a budget?– Legal Framework – Role Players in Budget Cycle – Budget Cycle– Where are we now?– Documents for budget oversight

Sector analysis – Global economic developments – Developments in the SA economy– SA Policy pronouncements – What are the Implications?– Emerging trends– What must the Committee do?– Conclusion

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Purpose of the presentation is to give a broad overview of the annual budget process A budget is:

– A planning tool that translates policy into service delivery through the allocation of scarce resources.

– The process of how revenue raised by national government will be allocated to national, provincial & local governments.

– The budget is a process through which choices have to be made about competing priorities.

– The budget can potentially act as a powerful tool for redistribution & development in society & can enhance the stability of the country’s economy.

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Annual Budget Process

• SA legal fiscal oversight framework comprises of the Constitution, PFMA, MFMA, the Money Bills Act, DORA & Appropriation Bill

• Constitution– Mandates Parliament or legislative organs of state to scrutinise & oversee Executive actions to ensure accountability– Oversight mandate: Sections 55, 92 , 114 & 133– Oversight processes: Sections 213, 214 & 215

• Public Finance Management Act (PFMA) – Passed to regulate the financial management of both the national and provincial spheres of government– Objective is to ensure transparency, accountability & sound management of the revenue, expenditure, assets &

liabilities of all public institutions. – Section 27 (1): The Minister must table the annual budget for a financial year in the NA before the start of the

financial year. The MEC for finance in a province must table the provincial annual budget for a financial year in the provincial legislatures

• Municipal Finance Management Act (MFMA) – Regulates local government finances– Objective is to ensure sound & sustainable management of the financial affairs of those institutions which fall within

the local government sphere.

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Legal Framework

• The Money Bills Amendment Procedure & Related Matters Act– Provides for a procedure to amend money bills before parliament– Prior to 2009, Parliament could not amend Money Bills – Act was enacted in 2009 to give effect to the Constitution– Section 77 (3) of the Constitution…..“An Act of Parliament must provide for a

procedure to amend money Bills before Parliament”.

• Sections 4 (1) & 15 of the Act provides for establishment of Finance & appropriations committees & the PBO, respectively

• The Act sets out statutory reporting requirements in relation to MTBPS, Fiscal Framework, Division of Revenue, Appropriations & the BRRR

• Section 4 (2) gives Committees on Finance powers and functions to consider & report on:

– Macro-economic and fiscal policy– Fiscal framework and revenue proposals– Reports on actual revenue published by NT

• Recommendations from Finance Committees may include proposals to amend the fiscal framework

• Section 7(4) provides that the Minister of Finance must report to both Houses at the time of tabling the budget how the budget responds to the recommendations of all four Committees

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Legal framework (cont.)

• Intergovernmental Fiscal relations (Act No. 97 of 1997)– Promotes co-operation between the three spheres of government on fiscal, budgetary

& financial matters; and – Prescribes a process for the determination of an equitable sharing & allocation of

revenue raised nationally.

• Mandating Procedures of Provinces (Act No. 52 of 2008)– Provides for a uniform procedure in terms of which provincial legislatures confer

authority on their delegations to cast votes on their behalf– As required by the Sections 65 (2) & 77(3) of the Constitution

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Legal Framework (cont.)

• Portfolio Committees, Finance and Appropriations Committees, SCOPA• Provincial Departments• National Treasury• Auditor-General• Public Entities• Constitutional entities• Financial and Fiscal Commission • Civil Society (public hearings)• Parliamentary Budget Office

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Role players in the budget cycle

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Budget cycle and milestones

• SA uses a three-year rolling budget, the MTEF system that is informed by key government priorities, strategic plans of departments & the fiscal stance.

• January, Cabinet Lekgotla discusses the government priorities for the next financial year

• February, the President presents the SONA, the Minister of Finance introduces the National Budget and money Bills

• March & June, Parliament passes the Division of Revenue Bill & Appropriation Bill. These bills confirm the allocation of funds to each vote.

• September to November, the NA submits BRRR reports, Finance Committees adopt the fiscal framework

– BRRR provides an assessment of the department’s service delivery performance given available resources.

– MTBPS sets out the budget policy framework for the next 3 years

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Budget Cycle (cont.)

• As the peoples’ representative, Parliament:– Approves or amends the budget.– Ensures budget matches the nation’s needs with the resources available.

• Committee approved the fiscal framework in March 2014, following the tabling of the National Budget in February 2014

• Committee continuously monitor the finances of provincial departments

• Through Quarterly engagements with the Provincial Treasuries, next engagement on the 2013/14 budget expenditure & performance

• Next fiscal framework report will be tabled & considered in November 2014

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Where are we now ??

• Key documents that are relevant:– State of the Nation Address – Sector relevant documents – National Budget documents– Division of Revenue Act of 2014– Budget Review– Estimates of National Expenditure (ENE)– Appropriation Bill– Minister’s speeches and presentations to committees– Auditor General and SCOPA reports – Reports of other relevant institutions (FFC)– Legislation (PFMA, Money Bills Act, MFMA etc.)

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Documents for budget oversight

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Sector Analysis

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Global economic developments

Region / country 2013 2014 2015 2014 2015 Change Percentage

IMF 3.0 3.7 3.9 3.6 3.9 -0.1Advanced economies 1.3 2.2 2.3 2.2 2.3 0.0Emerging markets and developing countries

4.7 5.1 5.4 4.9 5.3-0.2

Sub-Saharan Africa 4.9 6.1 5.8 5.4 5.5 -0.7 South Africa 1.9 2.8 3.3 2.3 2.7 -0.5

GDP projections: January 2014 GDP projections: April 2014

• IMF Global economic prospects January 2014– Economic activity improved & world trade strengthened in 2013– Economic growth, 3 % in 2013– Driven by export rebound in emerging market economies– IMF expected growth to increase from 3 % in 2013 - 3.7 % in 2014 & 3.9 % in 2015– On account of recovery in advanced economies– SSA was expected to remain the fastest growing region– SA economy to grow at 2.8 % in 2014 & 3.3 % in 2015

• IMF Global economic prospects: April 2014– Economic activity strengthened, expected to improve further in 2014 & 2015,

supported by advanced economies– World GDP is expected to grow at 3.6 % (slightly revised by 0.1 percentage points) in

2014 & 3.9 % in 2015 (unchanged)– Key drivers include reduction in fiscal tightening, except in Japan and still highly

accommodative monetary policy– SSA growth forecast to increase from 4.9 % in 2013 - 5.4 % in 2014 & 5.5 % in 2015– SA economy expected to grow at a rate of 2.3 % in 2014 (revised down) & 2.7 % in

2015

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Global economic developments (cont.)

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Recent developments in the SA economy

Region / country 2014 2015 2014 2015 Change Percentage GDP projections: Dec to Feb 2014 2014 forecast

IMF 2.8 3.3 2.3 2.7 -0.5World Bank 2.7 3.4 2.0 3.0 -0.7OECD 2.7 3.4 2.5 3.2 -0.2SARB 2.8 3.3 2.1 3.1 -0.7BER 2.8 3.5 1.8 2.8 -1.0Fitch 2.8 3.5 1.7 3.0 -1.1Standard & Poor's 2.7 3.2 1.9 2.9 -0.8National Treasury 2.7 3.2 ??? ???? ???Average 2.7 3.3 2.0 3.0 -0.7

GDP projections: April to June 2014

• NT Economic growth prospects: February 2014– Growth rate1.9 % in 2013– NT projected GDP of 2.7 % in 2014 & 3.2 % in 2015;– Drivers of growth:

• New power plants & transport infrastructure; • Stronger global recovery expected to support exports;• Growth in sub-Saharan Africa will promote expanded trade & investment.

• Economic growth prospects: Post February 2014 – SA economy contracted by 0.6 % in first quarter of 2014 (mining &

manufacturing sectors)

– Analysts, IMF, World Bank, Rating agencies, SARB, BER reduced SA growth rates from December/January 2014 forecasts

– The 2014 forecast revised down by 0.7 percentage points, on average – On average, SA economy forecast to grow at 2 % in 2014 & 2.9 % in 2015;– During the MTBPS period, NT will determine its latest forecasts– SA growth expected to be supported by stronger external demand

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Developments in the SA economy (cont.)

• Reasons for reduced growth forecasts – All analysts cited prolonged platinum strike activity as the main reason– Electricity supply constraints, – Deterioration of the SA growth outlook (Slow GDP growth) – Risks posed by strike action on the fiscal consolidation path

• Other economic developments – Inflation rate expected to stay outside 3-6 % target range until 2015, currently 6.1 %

April 2014– Interest rates hiked by 50 b.p. in April 2014, likely to increase by 25 b.p.– Consumer spending environment constrained – Unemployment rate stood at 25.2 % Q1 of 2014, from 24.1 % in Q3 of 2013– Strike disputes in platinum mines have since been resolved as at June 2014

• What does that mean??– Economic environment has changed, recovery had been slow, outlook may have

deteriorated– SA economy continue to growth below potential, pointing to the economy’s

susceptibility to shocks– Economy not creating sufficient jobs to absorb new entrants in the labour market – These factors may have implications for the fiscus.

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Developments in the SA economy (cont.)

Fiscal Implications – Countercyclical fiscal policy response to global economic crisis resulted in

large budget deficit– Deficit remained persistently high as revenue & growth forecasts were

repeatedly revised downwards– Deficit was expected to narrow from 4 % of GDP in 2013/14 to 2.8 % of

GDP in 2016/17; assuming the economic growth & revenue collection pick up pace

– Increased cost of borrowing for businesses & government;– Increased debt servicing costs, but net national debt expected to stabilise

as a % of GDP in 2016/17– Fiscal space has been eroded by rising debt.– Limited scope for government to allocate additional funds

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What are the implications

NDP, Budget Review, SONA • Government prioritised the accelerated implementation of the NDP• SONA acknowledged that the SA economy needs to grow at a faster rate, than the current

rate of 1.9 % in 2013• Measures to unlock economic growth potential include:

– Roll-out the infrastructure programme– A wide range of job creation initiatives– SMMEs– Transformation of the energy sector– Partnerships & collaboration between labour, business and the community

• Fiscal policy– In the Budget Review released in February 2014, Government remain committed to

maintain fiscal sustainability & keep its debt within manageable levels– Fiscal consolidation path continues, the commitment to reduce the budget deficit

remain

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SA policy pronouncements

Provinces– Finances not properly managed– Budgets are not credible & projections are unreliable– Transfer payments to entities or implementing agencies not monitored & reported

correctly– Performance target setting is conservative– Planning for aligning financial & non-financial performance remained poor– Capacity to spend budget allocated not necessarily translating into service delivery

Municipalities– Lack of capacity, financial management – General non-compliance with legislation & SCM processes – General improvement in 2012/13 AG audit outcomes but more needs to be done– High vacancy rates in critical positions

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Trends emerging

• The committee must exercise its powers and functions conferred to it by legislation to:

– Influence budget policy decisions through effective implementation of the Money Bills Act

– Ensure compliance with legislation – Enhance financial health of provincial departments & entities– Conduct oversight visits to provinces & municipalities– Strengthen coordinated support to municipalities– Ensure value for money in services delivered– Seek for effective, efficient and economical delivery of services

• The committee must continue its quarterly engagements with provinces

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What must the Committee do?

• SA economic outlook may have deteriorated, growth expected to be modest• Mining & manufacturing production sectors likely to continue to struggle• Scope for a Q2 growth rebound limited (strikes & consumer environment)• However:

– Platinum strike has been resolved by June– Overall GDP growth likely to recover in the second half of the year– New electricity capacity could provide the positive supply side shock which could help

growth– New ways to deal with labour market issues may assist • The current fiscal stance (modelled on growth forecasts of 2.7 % in 2014)

may have to be revised.• Economic uncertainty remain a key risk to fiscal sustainability• Given emerging trends, the SeCoF has a critical role to play in the

management of finances of provinces & municipalities

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In Conclusion

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THANK YOU