The

Budget Process

A Guide for South African Legislators

 The Budget
Process

A Guide for South African

Legislators

Di McIntyre, Jillian Nicholson

Published by
The Health Systems Trust Tel: 031 - 307 2954
401 Maritime House Fax: 031 - 304 0775
Salmon Grove Email: hst@healthlink.org.za
Durban 4001

October 1999
ISBN # 1-919743-37-5

Also available on the Internet:

http://www.hst.org.za

Content researched and conceptualised by:

Di McIntyre, Health Economics Unit, University of Cape Town.
Written in an accessible format for the Health Systems Trust by:
Jillian Nicholson
Illustrations by:
Ian Lusted

Acknowledgements
Thanks are due to Karen Hirt for editing the first draft of this booklet and to
Julia de Bruyn, Luvuyo Msimango and Dirk Besdziek for reading and giving
useful comments.

Every attempt has been made to ensure that the information published here
is accurate. However no responsibility is accepted for any loss or damage that
may arise out of the reliance of any person upon any of the information in
this book.

This publication was supported with grants from the Henry J. Kaiser
Family Foundation (USA), and the Rockefeller Foundation.
 Contents

Introduction 1

What is a budget? 2

The nation’s budget 4

Background to the budget process 12

The stages of the budget process 20

Legislators and the budget process 37

Introduction

It takes little more than an hour for the Minister of Finance to present a
new national budget to parliament each February. But it has taken more
than a year to prepare that budget.

This guide for legislators is about the process leading up to that budget
speech, and what happens immediately after it has been presented. The
budget process has changed a lot since South Africa's first democratic
elections in 1994, and further changes are likely. So the budget process,
like South Africa itself, is in a process of transition.

This guide:

◆ looks at the links between the Constitution, policy, equity and the
budget;

◆ explains the stages the budget goes through as it is drafted, negotiated

and approved;

◆ examines how much South Africans, through their parliamentary

representatives, can impact on their budget;

◆ asks whether there is sufficient transparency in the present process.

It is more specifically for national and provincial legislators who have an

interest in the health sector. It aims to help you understand more about
the budget process, and to know about the opportunities that exist for
you to play a more active role in it.

It will also be a useful handbook for people working in civil society

organisations, or in jobs where it is important to have a basic
understanding of the budget process.

As it is for national and provincial legislators, this guide does not deal
with local governments.

1
 What is a budget?

Most of us budget in some way. There are three basic steps to budgeting.
If you want a budget for your household, for instance, you would follow
these steps:

1st step : Work out how much money comes into your household
each month.

Your household income may come from a single source, such

as a wage. Or it may come from several sources, such as
wages; the pension of an elderly person living in your
household; and rent from a room you let out.

2nd step: Once you know your total household monthly income, you
can decide which things you need to allocate money to first.
These are your spending priorities. You might first have to
take off an amount to pay the mortgage on your house - if
you do not, the bank may repossess it. Then you allocate
certain amounts to school fees, rent, transport, food, and so
on. Luxury items usually come low on the list of priorities.
Sometimes you may not estimate your expenses accurately
and run out of money early in the month. You may have
been forced to spend unplanned money on an emergency.
Or someone in your household may put pressure on you to
change your money allocation.

3rd step: Finally, to check that you do not spend more than you receive,
you monitor your budget against your spending. If you did
spend more than you received, you might have to borrow
from a friend, or the bank, or you might have to dip into
your savings.

2
Your budgeting involves:

◆ estimating

◆ allocating

◆ monitoring.

Your household spending policy says a lot about your priorities and
choices. These priorities and choices also affect the lives of the people in
your household. On a larger and more complicated scale, a government
budget is the tool that government uses to implement its policies. It can
also be used to monitor the activities of the government to see if enough
money is being spent on prioritised issues.

3

Government
In this handbook, the word
government means the
legislature, the executive and the
judiciary. Sometimes the word is
used in a narrow sense to mean
only the executive.
Revenue
This is all the money government
raises through taxes. It does not
include money raised through
loans. Taxes include income tax
from individuals, value-added tax,
company tax, and taxes on
goods coming into the country.
4
The Nation’s Budget
The government collects its income from a number of different sources.
In 1996/97 it collected 41% from personal income tax (pay as you earn
(PAYE)) and standard income tax on employees (SITE); 24% from value-
added tax (VAT); 16% from company tax; 12% from tax on goods and
services such as tobacco, alcohol and fuel, and 7% from other taxes.
Company Goods and
Company Goods and
Tax
Tax Services
Services
Other
Other Taxes
Taxes
VAT
VAT
PAYE
PAYE
Sources of government revenue - 1996/97
As you can see, a large amount of the government’s income comes from
citizens who not only pay personal income tax, but also pay VAT on
most goods that they buy.
Just like a household budget, the national budget deals with income –
known as revenue – and expenses. It involves setting priorities,
estimating, allocating and monitoring. The government has to estimate
what revenue it can raise from taxes and loans. It must:
◆ estimate what it will cost to run the country;
◆ allocate amounts to its departments and provinces;
◆ monitor its allocations.
This book mainly covers the process of estimating expenditure and
allocating revenue.
The 1999/2000 national budget

South Africa estimates its budget over the twelve-month period running Fiscal and fiscal policy
from 1 April of one year to 31 March of the next year. This is called the Fiscal is about the collection of
fiscal year. taxes. Fiscal policy deals with
taxation, and government's
For the 1999/2000 fiscal year, the government estimated that it would spending and borrowing. This
need R216-billion to run the country. However, its revenue was includes a wide range of other
policy issues such as the size of
estimated to be only R191.7-billion. This meant it would overspend by the state, job creation, social
R24.3-billion. The overspending is called a deficit. It has to be funded development and redistribution.
mainly through loans, which means that the government has to spend These all have budgetary
implications.
more on interest repayments.

The government's budget is a statement of a nation's priorities. This graph

shows where the South African government's priorities lie. Health is the Deficit
third highest expenditure in the budget. The second largest allocation is When a government spends
for paying interest on money borrowed to help run the country. Some of more money than the revenue it
this debt is from the previous government's borrowing during apartheid. has collected, it will have a
deficit - a debt. It will have to
borrow money to meet its
expenses. At present, South
Africa's budget priorities are
influenced by the government's
attempt to reduce its existing
deficit.

Education R 48.5 bn

Debt Servicing the state debt R 48.2 bn

Health services R24.0 bn

Prisons, Police & Justice R23.5 bn

Welfare & social grants R19.8 bn

Government's five top budget allocations in 1999/2000

5
 The South African Constitution and the
budget

The Constitution is the foundation of the laws and policies of

the country. It protects the fundamental rights of all South
Africans. It sets out principles, such as fairness and human
dignity, upon which the country is run. The Constitution also
sets out rules for how the government must operate. No policy
or budget can go against the Constitution.

The Constitution says:

“National, provincial and municipal budgets and budgetary

processes must promote transparency, accountability and
the effective financial management of the economy, debt
and the public sector.”
(Section 215)

On people's health rights, it says:

“Everyone has the right to an environment that is not

harmful to their health or well being.”
(Section 24)

“Everyone has the right to have access to health care services,

including reproductive health care; sufficient food and
water; and social security if they are unable to support
themselves and their dependants.”
(Section 27)

“Every child has the right to basic nutrition, shelter, basic

health care services and social services.”
(Section 28)

6
The link between government policies and the
budget

In 1995/96 the government spent 10.4% of its total budget on health. In

1999/2000 this had risen to 10.9%. So more is spent on health now, as a
proportion of the total budget, than in the past. This is largely due to
government health policies. These include:

“ To develop a comprehensive and integrated National Health System

which provides accessible services to all South Africans.”

“ To improve the mental health and social well-being of individuals

and communities.”

“ To reduce sexually transmitted diseases and HIV/AIDS.”

These come from the White Paper for the transformation of the health
system in South Africa (Government Gazette No 17910, 16 April 1997).

These policy goals could not be achieved without increasing the amount
of money allocated to health. So, the budget is a tool for implementing
government policy - in this case health policy.

National and provincial functions

Policies affect the way the budget is divided between national and
provincial levels. If, for instance, combating crime is a major government
priority then the national level will get more because the departments of
Safety and Security, Justice, and Correctional Services are all national
functions and financed at the national level. If education and health are
higher priorities, then more will be allocated to the provinces, as these
are provincial functions.

Policies should be linked directly to the needs and priorities of the people
of the country. Legislators, as representatives of the people, have the
final responsibility for making sure this happens. You have to ensure
that the budget allocations enable these policies to be implemented. In
South Africa, where basic needs of people have not been met and where
the budget is tight, decisions about allocation are difficult. These decisions
need to be made in a transparent way so that everybody can know about
them. Both the executive and the legislature should be able to engage
with the budget process to influence allocations.

7
 The budget and equity

Equity is about trying to make sure everyone in the country gets a fair
share of its resources. It means those who have the least should be given
more than average, and those who have the most should be given less
than average. This is a way of redistributing the wealth of the country.

Equity is not the same as equality. Equality is when everyone already has
the same share of resources, or when everyone is given an equal share
irrespective of their need.

Equality Equity

The budget plays a very important role in achieving equity. Government,

through the budget should make sure the poor receive more than average,
and the rich receive less than average. However, in most government
departments a large amount of expenditure goes on staffing. In the
Department of Health, for instance, 70% of expenditure is on staffing.
One of the challenges in achieving equity is to shift staff so that there is a
more equitable spread across the country.

8
 Case study: looking more closely at the Northern Province

The Northern Province is one of the most disadvantaged provinces

in South Africa. It is estimated that about 77% of its population are
“poor”, and 37% of residents over the age of 20 years have no
schooling. It has high unemployment - 46% of working age adults
are still seeking employment. Only 18% of households in this province
have a tap in the house, compared with 45% of households nationally.
Only 13% of households have access to a flush or chemical toilet,
compared with 51% nationally. The Northern Province thus has severe
backlogs in basic needs. It has the worst educational status, and the
least access to water and sanitation of all provinces. To try to do
something about this backlog, 13.5% of the part of the budget that
has been set aside for provinces is allocated to the Northern Province
even though this province only accounts for 12.1% of the total
population.

50

40

30

20

10

Taps Toilets Residents over 20

with no schooling

Northern Province National Average

There is a lot of debate about whether the budget sufficiently addresses

the issue of equity.

Page 16 describes how the Department of Finance decided on the amount

to be allocated to provinces in the most recent budget.

9

Inflation
Inflation is the increase in prices
of goods in a country.
As the prices of goods go up,
the cash value of money goes
down. Your wages may go up
each year, but if they do not go
up as much as the average
increase in prices in the country,
then each year you will be able
to buy less than you could the
previous year. To see if there has
been an increase or decrease in
the real value of money, we have
to take inflation into account.
There is a formula for doing this.
10
The Constitution, government policies, the principle of equity, and the
budget process are interlinked. The budget should reflect both the
fundamental principles of the Constitution and the government's policy
direction. This direction has to be in accordance with the Constitution.
How does a macro-economic policy affect a
budget and visa versa?
The economic policies of a government affect everyone in the country.
They also affect the country’s budget.
“Macro” means big. Macro-economics looks at the overall economic
picture of the country. Unemployment is a macro-economic issue; so is
the alleviation of poverty. The economic growth of a country is a macro-
economic issue. To tackle these macro-economic problems, our
government has a macro-economic policy called Growth, Employment,
and Redistribution (GEAR). GEAR is the government’s macro-economic
strategy that aims to improve economic growth in South Africa.
GEAR affects the budget because one of its objectives is to reduce the
budget deficit. Through GEAR the government has set deficit reduction
targets. To meet them, overall government spending has to be reduced.
For example, the government spent about R3,960 on each person in the
1995/96 fiscal year. But it plans to spend only R3,720 per person in the
2000/01 fiscal year. (This amount takes population growth and inflation
into account.)
GEAR therefore impacts very strongly on
budget allocations and on what can be spent
on bringing about equity in future.

The budget, in turn, affects macro-economic

policy. The amount of money allocated to,
for instance, job creation or economic
development will affect our country’s
economic growth.

GEAR puts the squeeze on the budget and

reduces the deficit.

GEAR: a debatable issue

Economic growth occurs when the value of all the goods and services in a country
Wha

nk
t
hi

increases. This should lead to more jobs, more money in circulation and more revenue. do you t
We need economic growth to raise people’s standard of living, and to solve problems
like unemployment and poverty.

Most people would agree the country needs economic growth. But there is a lot of
debate and disagreement about the best way to make this happen. GEAR is just one
strategy for growth. Some people believe deficit reduction should not be given such a
high priority in a country which has so much poverty to overcome.

Economic growth alone cannot solve these problems. Internationally, it has been shown
that unless growth policies are accompanied by strong redistribution policies, the rich
get richer and the poor get poorer.

11
 Background to the
budget process

National budgets used to be drawn up for a twelve-month period only.

In 1997, a new way of preparing the budget was introduced, called the
Medium Term Expenditure Framework (MTEF). All budgeting is now
done over a three-year period. This is called a rolling budget. In 1999,
budgets were drawn up for the fiscal years of 1999/2000 to 2001/2002.
Each year the process rolls on to include one more year.

Although parliament is presented with three-year budget plans, it only

votes on the budget for the coming year.

A rolling budget

12
Why budget for a longer period?

Some of the advantages of budgeting over three years are:

◆ It helps provinces and departments plan with greater certainty

because they have a better indication of what their allocations will
be for the next three years.

◆ It encourages departments to set three year priorities and to plan

further ahead than they did in the past and to enter into development
contracts that may go over a number of years.

◆ It gives the public a better picture of how government plans to spend

its money. Reconstruction and development goals can be evaluated
against how much the government plans to spend over the next
three years.

Role players in the budget process

The budget is a plan for raising and spending the money of the people of
the country. Parliament and the Constitution, which sets guidelines for
estimating, allocating and monitoring the budget, represent the people.
But these guidelines are very broad. More direct responsibility for the
budget rests with Cabinet, the Department of Finance (DoF), the
Provincial Executive Councils (Excos), and the following people and
bodies:

The Budget Council

The Budget Council consists of the Minister of Finance and the MECs of
finance for each province. Its function is to co-ordinate the different
interests of national and provincial governments and to make sure that
agreement is reached on how to share the revenue. The national
government and the provincial governments consult the Budget Council
on any matters relating to legislation or policy that have financial
implications for the provinces, or on matters relating to provincial budgets.

13
 The Medium Term Expenditure Framework (MTEF)
Committee
This is made up of the Minister and Deputy Minister of Finance, the
Director General of Finance, the Director General of State Expenditure
and other officials of these Departments.

The main role of this committee is to hear what allocations national

departments want and to decide on the final allocations between national
departments.

The Financial and Fiscal Commission (FFC)

This is an independent body, established in the Constitution. Its function
is to advise parliament and provincial legislatures on matters concerning
finance. For instance, it makes recommendations on how to decide on a
fair division of the budget between the national, provincial and local
levels. It is an advisory body and so its recommendations are not legally
binding. It is an observer at Budget Council meetings.

The Minister’s Committee on the Budget (Mincombud)

This consists of the:
Minister of Finance
Deputy Minister of Finance
Ministers of Trade and Industry
Minister of Arts and Culture, Science and Technology
Minister of Health
Minister of Education.

Mincombud sets broad priorities on issues such as the allocation of

resources within the social sectors and economic sector. These priorities
are submitted to Cabinet via the Minister of Finance

The Budget Forum

This consists of everyone who sits on the Budget Council as well as
representatives from the South African Local Government Association
and the Minister of Constitutional Development. It is the only role player
in the budget process that has representatives from local government.

14
Civil servants
Although they do not have real decision-making powers, civil servants
play a very powerful and influential role in the budget making process,
particularly those in the national Department of Finance and the provincial
treasuries. They provide information, administer policies, and assist in
the technicalities of drawing up budgets.

National Portfolio committees and provincial standing

committees
Parliamentarians sit on different portfolio or standing committees, such
as the Joint Portfolio Committee on Finance. These committees can review
any aspect of the budget or anything that may influence the budget, call
for public hearings and make recommendations.

The first broad allocation decisions made by

central government

Top
Top Slice
Slice
23.1%
23.1%

National
Nationalallocation
allocation
32.3%
32.3%

Provincial
Provincial
allocation
allocation43.5%
43.5%

Local
Local government
government
allocation
allocation1.1%
1.1%

The vertical division of the budget allocation

15

Spending agencies
Departments are sometimes
referred to as spending
agencies. This is because not
only departments, but also other
government units or agencies
incur costs and have to estimate
budgets. Statistics South Africa
is an example of a spending
agency that is not a department.
16
First - take off the top slice
As you can see from the diagram, the first amount of money to be set
aside from the total revenue is the “top slice”. This is for things like
repayment of the national debt; an emergency reserve; and a reserve for
meeting specific policy priorities. This 23.1% is not available for sharing
between the different levels of government.
Next - decide on national, provincial and local government
allocations
These are the first broad allocations that are made through a process
called the vertical division.
The Department of Finance has indicated that each year it will try to
keep the proportions allocated to national, provincial and local levels
relatively constant.
Next - decide on how much each individual province will get
The lump sum allocated for all the provinces has to be divided into nine
parts. This process is called the horizontal division. The new Constitution
made fundamental changes to the way this horizontal division is made.
Previously, the central government decided on amounts for all the different
provincial departments. Now, each province receives a lump sum - called
a “global” allocation. It then decides how to divide this amongst its
departments, or spending agencies. So there has been a move to a more
decentralised system.
How is the horizontal division worked out?
Each province receives an allocation that is largely based on the needs of
each province compared to the others. This is an attempt to try and
correct past inequities. Over the past few years a number of formulas
have been recommended for deciding how to do this. At present the
Department of Finance uses a formula that takes the following factors
into account:
Education

The average size of the school-age population and the number of learners
enrolled in public, ordinary schools.

Health

The size of the population that does not have private health insurance,
with a small allowance for those with private insurance who may use
some public sector services.

Social welfare

The estimated number of people entitled to security grants. This is targeted

at the elderly, the disabled and children.

Basic component

Each province’s share of the total population of the country.

Economic activity

The amount of money paid in wages and salaries in each province.

Backlogs

This tries to compensate for backlogs in health and education

infrastructure in the provinces, with extra weight given to provinces with
a large rural population.

When the Minister of Finance presents the budget to parliament, the

Minister must introduce a Revenue Sharing Bill that explains how these
allocations were worked out.

17
 Northern
Northern Province
Province13.5%
13.5%
North-West
North West 8.2%
8.2%

Gauteng 15.7%
Gauteng 15.7%

Mpumalanga 7.1%
Mpumalanga 7.1%

Northern Cape 2.4%

Northern Cape 2.4 %

Free State 6.6%

Free

KwaZulu-Natal 20.7%

Eastern Cape
Cape 16.8%
16.8%

Western Cape
WesternCape
Western Cape8.9%
8.9%
Western Cape
Eastern Cape
13.5% 8.9%
Eastern Cape
Northern Cape
Northern Cape
7.1% 16.8% KwaZulu-Natal
KwaZulu-Natal
Free State
Free State
2.4% North-West
15.7%
North-West
Gauteng
Mpumalanga
Gauteng
20.7%
8.2% Northern Province
6.6% Mpumalanga

Northern Province

The Medium Term Expenditure Framework estimates

for provincial allocations for 1999/2000

This graph shows what percentage of the total resources each province is
allocated. This is worked out according to the Department of Finance's
formula.

18
Do the vertical and horizontal divisions of the budget promote equity?

Wha

nk
t

hi
Decisions on how the vertical and horizontal divisions of the budget are made are do you t
critically important to the issue of equity. These decisions also affect the speed at which
we move towards equity. There is a lot of debate about this. The Northern Province
case study on page 9 highlights this. The Northern Province is one of the most
disadvantaged provinces in South Africa. The Eastern Cape is another. Some people
believe these provinces should get a much bigger share of the budget than they do; and
that the present moves towards equity are not going far or fast enough.

Both the Finance and Fiscal Commission (FFC) and the Department of Finance (DoF)
made recommendations about how the vertical and horizontal divisions should be
made. This year, the DoF's recommendations were accepted. The FFC had different
views. Here they are - which do you agree with?

The vertical division

◆ The DoF recommended the proportional divisions between national and provincial
levels should stay the same for the MTEF.

◆ The FFC said provincial departments are affected by population increases, and for
the next three years the allocation to provinces should go up by 0.5% each year.

◆ The DoF recommended a top slice be taken off before the vertical division is
made.

◆ The FFC recommended that there should be no top slice because this can lead to
more resources actually going into the national level each year.

The horizontal divisions

◆ The DoF's formula for deciding on the horizontal divisions, while attempting to
move towards equity, starts off by using old expenditure patterns on social services
as a base to work towards equity.
◆ The FFC recommended that social services spending should be based on existing
needs and priorities in each province.

◆ The DoF rewards provinces able to bring in a high proportion of revenue through
their economic activities.

◆ The FFC recommends if a province is unable to generate sufficient revenue itself,

the national budget should compensate it by allocating it more.

19
 The Stages of the Budget
Process

Estimating a household's budget Making spending cuts

We have described the broad allocations of money from central

government. But enormous decisions about allocations do not happen
in one meeting. They have to go through a long process. This involves
drawing up estimates, drafting and redrafting, and negotiating. This
section of the guide takes you through all the steps involved in the budget
process, for both national and provincial governments.

It may help you to think back to our earlier comparison of a household

budget. Before you, as head of a household, decide on how much to
allocate towards education, for instance, you might ask the school to
estimate how much schooling will cost each month. You might ask
someone in your household to estimate how much transport costs are
likely to come to. And you might try to work out what you will need for
food and clothes. You would do this with other expected expenditures.

If you put all these estimates together they might easily come to more
than your household income. So you would have to negotiate with

20
everyone about how to make spending cuts.

This is the kind of process that happens with the national budget. There
have to be estimations done of:

◆ how much total revenue the government can expect to raise;

◆ expenditure for each of the national and provincial departments

over the next three years;

And there have to be negotiations to settle differences between the

estimations of the departments and the allocations of the Budget Council.

Laws linked to the budget process

There are several laws that govern the budget process.

Bills and Acts

A Bill is a law that has been drawn up but not passed by the legislators. Bills go through several stages, called
readings before they are finalised. An Act is a Bill that has been passed by parliament and has become a law.

The Constitution
This has already been discussed on page 6 (The South African Constitution and the budget).

Money Bills
This is a general way of describing all Bills that allow for money to be allocated to various departments in national or
provincial government, and for taxes to be levied. Appropriation Bills are Money Bills. They allow departments to take
and use - to appropriate - government money.

The Division of Revenue Bill

This Bill has to go before parliament each year at the same time as the budget is announced. It explains how the
vertical and horizontal divisions have been made. This Bill has to be approved by parliament. There is a move to have
it tabled much earlier in the budget process. This will allow for more discussion before the allocation within
departments starts.

Money Bills Amendment Procedure Act

The Constitution says there has to be law to allow parliament to amend Money Bills. Although the Constitution was
passed in 1996, this Act does not yet exist. When it does, it will give parliament more power over Money Bills.

21
 January - March
Setting policies, estimating revenue and setting
an upper limit on spending

The Cabinet sets broad policy priorities so

when the detailed budgets are evaluated, they
can be measured against these policies.

The Department of Finance:

◆ estimates how much the economy will
grow;
◆ estimates how much revenue can be
expected through the collection of taxes
for the next three years;
◆ uses the GEAR deficit reduction targets to
work out how much overspending will be
allowed;
◆ sets the upper spending limit for the total
government budget for the next three
years;
◆ presents this to Cabinet for approval.

Cabinet sets policies
This forms the basic framework for the budget.
It is called setting the Medium Term Fiscal
Framework because this part of the process is
about estimating income from taxes (revenue)
not expenditure.

22
March - May
Departments estimate their expenditure and
submit draft expenditure applications

National and provincial departments go through

strategic planning sessions to identify their
departmental goals and prepare an initial three-
year budget estimate. They need to try to keep
in line with the three-year allocations determined
in the previous MTEF cycle.

Although government makes the important

budget decisions, the actual drawing up of the
budget is done almost entirely by civil servants.
For instance, each health department (provincial
and national) has some form of financial
directorate. It is civil servants in these
directorates or sub-departments who draft the
initial budget estimates. They are meant to
consult with other civil servants in the health
department to find out what their budgetary
needs are. For instance, they would talk to the
person responsible for hospitals; for district level
services; for infectious diseases; and so on, before
preparing a budget for the health department. Estimating departmental budgets

A range of civil servants in the health department then look at the draft
budget, and suggest changes. This revised draft then goes to the provincial
treasuries or, in the case of national level, to the Department of State
Expenditure.

When these national and provincial departments estimate their three-

year budgets, they do not know what amount the Budget Council is
going to allocate to each province or for national level spending. So it is
a bit like working out what your household expenditure will be before
you know what your wage is.

23
 May - June
Guideline estimations are determined for vertical
and horizontal allocations

The Budget Council meets to work out how to divide the revenue into
three lump sums for national, provincial and local governments. Once
the Budget Council has done this vertical division, it must then work out
the provincial allocations amongst the nine provinces. This is the
horizontal division. This is done according to the formula explained on
Top Slice pages 16 and 17.
23.1%
lice
Top S %
23.1

National National allocation

32.3% 32.3%

Percentage of provincial allocation

16.8%

20.7%

15.7%

13.5%
6.6%

8.2%

7.1%
8.9%

2.4%

Provincial Provincial
43.5% allocation 43.5%

Local government
allocation 1.1%
Western Cape 8.9% Eastern Cape 16.8% Northern Cape 2.4%
Local
government KwaZulu-Natal 20.7% Free State 6.6% North-West 8.2%
1.1%
Gauteng 15.7% Mpumalanga 7.1% Northern Province 13.5%

The vertical and horizontal allocation

24
June - August
Combining all the departmental estimates into
one sum and matching it with the Budget
Council's allocation

Trying to match department estimates and budget

allocation

Civil servants at the Department of State Expenditure combine the

separate departmental estimates into one national-level estimate.

Civil servants at the nine provincial treasuries combine all their separate
departmental estimates into one provincial estimate. Provincial treasuries
have a further challenge. They have to ensure that at least 85% of their
total provincial budget is allocated to social services.

The provincial treasuries and the Department of State Expenditure now

look at the vertical and horizontal allocations the Budget Council decided
on. They must be sure their combined estimates match the allocations of
the Budget Council. For instance, all the departmental estimates for
KwaZulu-Natal added together must match the lump sum the Budget
Council has allocated to that province.

25
 Negotiations take place around this:

◆ Provincial treasuries have to negotiate with their provincial

departments - which defend their estimates.

◆ The Department of State Expenditure negotiates with the national

departments - which defend their estimates. The national MTEF
Committee is like a referee here. It has to make the final decision
about these national budgets.

This is a difficult time. Provincial and national departments often have to

take tough decisions about what budget cuts to make so that their
estimates match the amount allocated to them.

26
September - October
Everyone has a last say

What is a conditional grant?

In addition to the allocations to
provinces made through the
horizontal division, a number of
conditional grants are allocated
to provinces. They are often
granted to help fulfil national
priorities such as improved child
nutrition. Provincial departments
have to submit proposals to
show how the money from the
grants will be used. Grants are
approved by the national
parliament and the money for
them must come out of the
budget of the relevant
department. So the money for
◆ The national MTEF Committee makes a decision on what budget conditional grants that are
allocations to recommend for each national department as part of health related, come out of the
national health budget.
the national budget. This recommendation goes to Cabinet.
The health sector receives
◆ The Provincial Executive Councils meet to consider their draft, around half of all conditional
consolidated provincial MTEF. grants, which include the
following:
◆ Sectorial teams for education, health, social welfare, justice, and
◆ the Primary School
defence also look at the estimates. Their comments are incorporated Nutrition Programme;
into the overall draft budget. These teams are made up of civil ◆ research and training of
servants, usually from the national Department of Finance. They health professionals;
include some sectorial representatives from national and provincial ◆ hospital construction or
departments. rehabilitation
◆ a central hospital grant
◆ Proposals for conditional grants to each province are also
◆ a grant to help with the
developed. redistribution of health
services

27
 November - December
A draft, overall MTEF is finalised and a
Medium Term Budget Policy Statement is
published.

Once the Cabinet, the Provincial Executive Councils and the sectorial
MTEF teams have reviewed all the national and provincial MTEFs, a
draft, overall MTEF is compiled and submitted to the Budget Council
and the Cabinet. This document:

◆ shows how the budget matches the broad policy framework set out
at the beginning of the cycle;

◆ suggests allocations for the three year period;

◆ analyses the implications of these allocations;

◆ suggests alternative expenditure options.

28
Once the Budget Council and Cabinet have approved the draft overall
MTEF, the vertical and horizontal divisions are finalised. Allocations to What is a Medium Term
national government and to each province are adjusted to meet the Budget Policy Statement?
requirements of this draft. This is published each year, a few
months before Budget Day.
National departments and provincial treasuries are then told how much It contains:
they will be allocated. They then have to finalise their MTEFs to fall into ◆ a summary of government's
line with this allocation. This includes finalising how much they will goals and objectives;
allocate to different departments, programmes and sub-programmes. They ◆ information about how the
government expects the
must take into consideration any recommendations from the Provincial economy to perform over
Executive Councils, Budget Council, Cabinet or sectorial MTEF teams. the next three years;
◆ how much tax is expected
A Medium Term Budget Policy Statement is published which sets to be collected;
out the policies upon which the MTEF is based. It is likely that in future,
◆ levels of government
the draft MTEF will be released to parliament along with this policy spending and government
statement. This is important for legislators as it will give them time to deficit;
consider the budget before it is presented to parliament in February. ◆ an explanation of the way
revenue will be shared
between national, provincial
and local government;
◆ a summary of the policies
upon which the MTEF is
based.
The objectives in publishing such
a document ahead of the actual
budget are:
◆ to improve transparency;
◆ so debates about the
budget can be informed.

29
 January
Final stamp of approval

The final MTEF is submitted to Budget Council and Cabinet for approval.
Detailed national and provincial expenditure estimates for the year
immediately ahead are finalised and documentation prepared.

30
February
Budget Day and follow up discussion

The minister presents the budget to parliament

The national budget is presented to the National Assembly. The Division

of Revenue Bill accompanies it. This outlines how the vertical and
horizontal divisions were worked out. As from 1999, the budget will be
read on the second Wednesday of February, to allow for more extensive
and meaningful parliamentary debate before the start of the next financial
year.

The provincial government budget is presented to the provincial

legislature.

The budget itself is not law. A Bill has to be drawn up to allow the various
departments to spend the money allocated to them. This is called an
Appropriation Bill.

31
 March - April
Portfolio committees and provincial standing
committees hold hearings and report to legislators

Portfolio committees hold hearings

After the first reading of the budget, the Appropriation Bill and the
proposed tax amendments go to the National Assembly Portfolio
Committee on Finance. It has seven days to hear responses to the Bill.
The Committee invites submissions from whomever it chooses. They
usually ask for submissions from government departments and the South
African Reserve Bank.

In 1999, they asked a range of civil society groups to make submissions

around social services. These groups were asked to comment on the
budget and say whether they felt it addressed social sector needs and
priorities. The main purpose for this is to hear about different aspects of
the budget from technical experts, as most members of the Portfolio
Committee do not have in-depth knowledge of specific sectors. The
submissions are also to provide some opportunity for civil society groups

32
to air their views. The Portfolio Committee then considers whether they
want to propose anything to parliament arising from these submissions.

The Appropriation Bill is then voted on in the National Assembly.

The budget for each department has to be voted on. At present no

amendments to the overall budget are allowed. Shifts in the allocation of
money from one department to another - for example more to Health
and less to Education - are not allowed either. However, it is possible to
make changes to the way that money has been allocated within a
department - for example if parliamentarians feel that not enough money
has been allocated to HIV/AIDS programmes and too much has been
allocated to subsidies for medical research.

At the provincial level the Appropriation Bill then goes to the National
Council of Provinces. Through its Select Standing Committee on Finance
it may hold public hearings on this Bill.

It is important to note that once the Money Bills Amendment Procedure

Bill is law, the National Council of Provinces will be able to recommend
that the Bill is passed, amended or rejected. If it recommends either to
amend or reject the Bill, the National Assembly will have to reconsider
it.

33
 January - March
1. Setting policies, estimating revenue
and setting an upper limit on spending

March - April March - May

2. Departments estimate their
9. Portfolio committees and expenditure and submit draft
provincial standing committees expenditure applications
hold hearings and report to
legislators

May - June
February
3. Guideline estimations are
8. Budget Day and follow up determined for vertical
discussion and horizontal allocations

January June - August

7. Final stamp of approval 4. Departmental estimates are

combined into one sum and
matched with Budget
Council’s allocation

September -
November - December October
6. A draft, overall MTEF is finalised and 5. Everyone has a last say
a Medium Term Budget Policy
Statement is published

Month by Month progress of Budget cycle

34
Summary of the national and provincial budget
processes

National departmental budgets

1. National departments develop their three-year rolling budgets and Budget Council and Cabinet
submit them to the Department of State Expenditure.

2. At approximately the same time, the Budget Council determines 5 7

the vertical and horizontal divisions and informs the national
departments what the national allocation for will be.
2 6
3. The Department of State Expenditure combines all the estimates of
the national departments into one consolidated amount. It then DSE, DoF, MTEF
3 Committee
compares these to the amount they have been allocated by the Budget
Council.
1
4. The national departments negotiate with their relevant programme
officer of the Department of State Expenditure. The Medium Term
Expenditure Committee adjudicates. 4

5. The Medium Term Expenditure Committee recommends budget National spending agencies
allocations for each national department as part of a consolidated
national Medium Term Expenditure. This recommendation is
submitted to the Budget Council and to Cabinet for their National budget process
consideration.

6. The Budget Council and Cabinet consider all the submissions and
decide on a final amount for the vertical and horizontal divisions.
The Department of State Expenditure is informed of the final global
national budget allocation.

7. Based on these allocations, the Department of State Expenditure

prepares a final consolidated national Medium Term Expenditure
Framework. This is once again submitted to the Budget Council
and Cabinet for final approval.

35
 Provincial departments budgets
1. Provincial departments develop their three-year rolling budgets and
submit them to the provincial treasuries.
Budget Council and Cabinet
2. At approximately the same time, the Budget Council determines
5 7 the vertical and horizontal divisions and informs the provincial
treasuries of their global allocation for the province.

2 6 3. The provincial treasuries combine all the estimates of the provincial

departments into one consolidated amount. They then compare these
Provincial treasuries to the amount that they have been allocated by the Budget Council.
3
& EXCOs
4. The provincial treasuries negotiate with the provincial departments
to try and bring their provincial estimates in line with the allocation
1
from the Budget Council. They then submit their final estimations
to their Provincial Executive Council.
4
5. The individual provincial Medium Term Expenditure Framework
Provincial spending agencies estimates are consolidated and then submitted to the Budget Council
and Cabinet for their consideration.
Provincial budget process 6. The Budget Council and Cabinet consider all the submissions and
decide on a final amount for the vertical and horizontal divisions.
Provincial treasuries are informed of their final budget allocations.

7. Based on these allocations, the provincial treasuries prepare their

final consolidated provincial Medium Term Expenditure Framework
which is once again submitted to the Budget Council and Cabinet
for final approval.

36
Legislators and the Budget
Process

When the budget is finally presented to parliament, legislators vote to

accept or reject it. But what part can they play in the process leading up
to this? Most budget decisions are made by the Budget Council, Cabinet
and the Provincial Executive Committees. Initial departmental estimates
are drawn up by civil servants in the respective departments. Can
legislators influence budget priorities and allocations? If so, how?

What do you think about the role of legislators in the budget process at the
moment?

Wha

nk
t

hi
Throughout the world, there are debates about how much power governments should do you t
allow the executive and the legislature when it comes to drawing up or amending a
national budget. It is generally accepted that the executive has the information and
knowledge required to prepare a budget. The legislature monitors the process and
gives the executive the authority to raise and spend revenue.

Those who think the legislature should be more involved in the process, say this will
mean that the priorities set by the executive can be debated more openly. And the
way revenue is allocated can be checked much more closely.

Those in support of increased legislative power say legislators should be able to make
amendments to the budget instead of just voting for or against it.

Those who think the powers of the legislature over the budget should not increase
and that legislators should not be able to make amendments to the budget, say this
would cause problems for long term planning. They say the legislature does not have
enough research capacity and the executive will always have more information about
the budget and will always be in a better position to make sound, long-term decisions.

37
 What is the situation in South Africa at the
moment?

At the moment legislators in South Africa do not have a lot of power to

influence the budget. Their role is restricted to single points in time when
they can debate budgets once they are presented in the National Assembly,
the National Council of Provinces, or Provincial Legislature. What
legislators can do, however, is to prepare in advance for the short window
of opportunity that they do have in the whole process.

The rights of parliamentary committees in money matters

The Constitution gives both national parliamentary committees and
committees of the National Council of Provinces the right to introduce
legislation into their respective parliaments. However, at the moment,
these rights do not extend to Money Bills.

Committees are, however, entitled to call anyone to report to them. They

can receive petitions or submissions on any parliamentary matters, from
interested people or institutions.

Impacting on policy
Important government policy is always debated in parliament. Legislation
putting these policies into practice is passed in parliament. Although
this may seem far removed from the actual budget process, these decisions
by parliament should form the basis for the government priorities
determined by Cabinet (January - March) and by the Minister's Committee
on the Budget (Mincombud) from September to October.

Impacting on the vertical and horizontal divisions

As we have mentioned, on Budget Day the national government budget
is presented to the National Assembly together with the Division of
Revenue Bill. This outlines the method used to work out the vertical and
horizontal divisions. If the National Council of Provinces rejects or
suggests amendments to this Bill, the National Assembly may either pass
the Bill with the suggested amendments of the National Council of
Provinces, or make other amendments that are acceptable. If the National
Assembly rejects the amendments of the National Council of Provinces
altogether, then the Bill goes before a mediation committee.

38
The vertical and horizontal divisions form the basis of the budget. There
is a proposal that the Division of Revenue Bill is presented to parliament
at a much earlier stage so there can be time to debate and settle this
before the details of other allocations are worked out.

Amending the budget

At present legislators can only vote for or against a Money Bill. However,
when the Money Bills Amendment Procedure Act becomes law it will be
possible to make limited amendments to budgets within a particular
departmental vote. A vote is the budget for a specific department.

While parliament will not be allowed to change tax rates or to change

allocations across departmental votes, it will be allowed to suggest changes
to allocations within a particular vote. Parliament would not be able to
suggest reducing the health budget and giving more money to education,
but could suggest changes within the health vote. For example, if
parliamentarians feel the national Department of Health has allocated
too much money to subsidies for medical research and not enough to
HIV/AIDS education programs, they can recommend a re-allocation
between these two.

Provincial parliaments will also be able to suggest and vote on

amendments within provincial departmental budgets.

39
40
This publication, for national and provincial legislators, is
about the process leading up to the budget speech, and what
happens immediately after it has been presented.

This guide:

◆ looks at the links between the Constitution, policy, equity

and the budget;

◆ explains the stages the budget goes through as it is

drafted, negotiated and approved;

◆ examines how much South Africans, through their

parliamentary representatives, can impact on their
budget;

◆ asks whether there is sufficient transparency in the

present process.

It will also be a useful handbook for people working in civil

society organisations, or in jobs where it is important to have
a basic understanding of the budget process.

http://www.hst.org.za

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