5.

THE MEDIUM TERM

EXPENDITURE
FRAMEWORK

MEDIUM TERM BUDGET PLANNING

The Medium Term Expenditure Framework (MTEF) sets out three-year
spending plans of the national and provincial governments. It aims to ensure
that budgets reflect Government's social and economic priorities and give
substance to Government's reconstruction and development commitments.
The MTEF is one of the most important reforms of the budgetary process this
Government has introduced.

Benefits of the MTEF The benefits of the medium term expenditure framework are:

♦ allocation of resources to priority services;

♦ more efficient planning and management;

♦ a framework within which policy proposals can be assessed;

♦ more transparency in government;

♦ a reduction in roll-overs; and

♦ a clear demonstration of how fiscal targets will be met.

Transformation and Medium term planning is essential for the transformation of South African
reprioritisation society. Transformation requires the reprioritisation of resources in favour of
the previously disadvantaged, providing access to basic services where it was
not provided before. The Reconstruction and Development Fund was created
in 1994/95 to promote reprioritisation. RDP programmes have since been fully
integrated into the budgets of provinces and national departments. The MTEF
supports this ongoing reprioritisation while providing stability and certainty
within the budget process.

Political choices Because resources are limited, Government has to make choices about the
relative priorities of different services. These are political and social choices.
In the past, the budgetary process was largely technical, giving political office
bearers insufficient opportunity to shape spending plans. The MTEF changes
this. It articulates choices systematically and comprehensively by linking the

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amount of funds spent on a service with the quality and quantity of the service
provided. Government is able to assess the costs and benefits of competing
priorities and policies. The MTEF enhances the transparency of the budget
process and budget documentation so that policy goals and resource allocation
are clearly set out. In this way it empowers Government to determine
priorities and deliver change.

Efficiency Improved efficiency is fundamental to the delivery of more and better

improvements services to South African society. Government will not have transformed
South Africa until it has delivered better housing, sound education, basic
health care, a welfare support network for those who have no other means of
support, proper roads to underpin the economy and effective protection
against crime. To achieve this, substantial efficiency improvements in service
delivery are required. The MTEF provides an initial analysis of the efficiency
of service delivery and indicates areas which demand more attention. By
linking inputs to outputs, the MTEF makes it the responsibility of both
national and provincial departments to demonstrate the efficiency with which
South Africa’s scarce resources are employed.

Rolling budgets The MTEF initiates a process of rolling three-year budgets. The projections
published in this year’s Budget Review will be revised in the course of 1998
after taking into account new information and policy priorities. This year's
three-year allocations will be the starting point for that process, and
departments will therefore have agreed spending trajectories within which to
plan. Future policy proposals will need to be budgeted for within the resource
envelopes implied by the MTEF. Enabling departments to enter into forward
commitments without committing the entire amount in the first year of a
proposed project should reduce the need to carry unspent balances from one
year to the next.

Adherence to budgets Once Parliament has voted on the budget allocations for the year ahead, they
become law and it becomes the responsibility of the Accounting Officers,
appointed by political office-bearers, to ensure that the budgets are adhered to.
Divergence from the agreed allocations is both illegal and tantamount to
flouting the democratic decision-making process.

Only Parliament has the power to agree to additional spending. This principle
will be enforced by the proposed Treasury Control Bill to be introduced in
Parliament this year, which will replace the ten Exchequer Acts that govern
provincial and national financial management.

Departments will be expected in future to frame their policy proposals within

their three-year allocations and requests for additional funds will be deferred
and considered together in the subsequent budget process so that a
comprehensive and informed assessment of priorities can take place.

Intergovernmental The 1997/98 fiscal year has seen the introduction of the intergovernmental
financial relations financial system prescribed by the new Constitution. Each sphere of
government is responsible for drawing up a budget which reflects its priorities
and which comes within the overall budgetary envelope. The tool for
implementing and coordinating the new intergovernmental financial system is
the MTEF. It provides both an analytical and operational framework for the
new financial system and facilitates coordination and communication between
the stakeholders.

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MTEF SECTORAL TEAMS

Sectoral teams were established at the MTEF conference in August 1997 and formed
the basis for the cooperative planning and policy analysis of the MTEF process. The
teams focused on six expenditure areas: education, health, welfare, criminal justice,
defence and personnel management. The aims of the MTEF sectoral teams were to:

♦ analyse the budget submissions to improve understanding of the implications for

services of the proposed budgets;

♦ develop a simple model of spending, linking expenditure, unit costs and outputs;

♦ produce a menu of policy choices and an understanding of the implications for

service provision of increases or decreases in budget allocations;

♦ make recommendations on the programme structure of the vote in question; and

♦ in the case of health, education and welfare, look into the possibility of, and reach
agreement on, the amount and structure of conditional grants.

MTEF process The MTEF process began in May 1997 when Cabinet adopted a set of
“indicative allocations” for the nine provinces and national government. The
allocations were based on the macroeconomic projections made at that time,
together with a proposed revenue sharing model, drawing on
recommendations from the Financial and Fiscal Commission. A reserve was
set aside at the beginning of the process to enable Government to meet
contingencies and specific policy priorities without compromising the
proposed budgets of other services. The provincial and national departments
compiled draft MTEFs consisting of three-year costings of their policies and
programmes. These spending proposals were put to the Minister of Finance
and Cabinet for consideration. Through the prioritisation of programmes,
these bids for funds were brought within the overall budget constraint before
compiling the final MTEF.

MTEF sectoral teams Six MTEF sectoral teams brought national and provincial officials together to
examine expenditure options and policy implications. The analysis produced
by these teams informed the MTEF submissions to Cabinet. By providing an
assessment of the implications of the proposed budgets, Cabinet was
empowered to make informed decisions about the allocation of resources and
was able to ensure that resources were directed at the identified priorities.

Several high priority initiatives were identified in finalising the budgets.

Funds were then directed at these priority commitments. For example:

♦ R200 million for the improvement of financial management and quality

enhancement in provincial education departments, increasing to
R600 million by 2000/01;

♦ R2 800 million to be transferred to the provinces in recognition of the need

to support the transformation of education, health and welfare services; a
further R2 600 million is available in 1999/00 and R2 400 million in

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 Chapter 5: The Medium Term Expenditure Framework

2000/01; together with the education funds, this represents an additional

R3 000 million for the provinces in each of the next three years;

♦ R500 million for labour-based poverty relief programmes and non-

governmental organisations in 1998/99;

♦ R100 million for the hospital rehabilitation programme, increasing to

R500 million by 2000/01;

♦ R300 million to be dedicated to the integrated projects of the criminal

justice system for each year of the MTEF;

♦ a further R100 million to be used to upgrade the social security information

systems; and

♦ a R300 million allocation for additional investment in South Africa's

infrastructure, increasing to R800 million in 2000/01.

By targeting these programmes Government demonstrates its commitment to

the reconstruction and development of South Africa. These programmes
address the challenges facing the provision of basic services in South Africa:
the lack of financial and personnel management in the education sector;
improving the welfare systems; creating jobs for the poor; and rehabilitating
hospitals to ensure the effective and efficient delivery of health services to all.
These reflect the priority Government attaches to ensuring that everyone has
access to basic services.

Putting children first The MTEF also reflects the priority Government accords to children's needs -
national and provincial budgets reflect that:

♦ free health care is provided to pregnant women and children under six
years;

♦ the primary school nutrition programme, which reaches an estimated 4,9

million children and aims to improve education quality by enhancing
learning capacities in primary school;

♦ a child support grant is to be introduced, refocusing social security in

favour of the needs of poor children; and

♦ a national early childhood development pilot project has been launched as a

first step towards implementing a compulsory reception year throughout
South Africa.

Focus on gender The Department of Finance has been part of a pilot project which aims to
integrate gender analysis into the budgetary process. This project builds on the
work that has already been done by the two Women's Budget Project reports.
The Department of Finance has incorporated some of this analysis into this
Budget Review. This has involved cooperation with Central Statistics and
several other departments. Government envisages that the data and analysis
that has been collated for the purposes of this publication will contribute to a
wider and more systematic, gender disaggregated, data collection and analysis
process.

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 Chapter 5: The Medium Term Expenditure Framework

The 1998 MTEF The 1998 MTEF will build on the co-operative process that has been
process established between the national and provincial line departments and
treasuries, the Departments of Finance and State Expenditure and the
Financial and Fiscal Commission. Valuable contributions were also made by
the NEDLAC fiscal and monetary chamber in the areas of health and
education. The Financial and Fiscal Commission, in conjunction with the
United Nations Development Programme (UNDP) and the United Nations
International Children’s Fund (UNICEF), published a report on Public
Expenditure on Basic Social Services earlier this year which will make a
significant contribution to the 1998 MTEF process. This communication and
cooperation between the different departments, sectors and institutions is
fundamental to the operation of the new intergovernmental system and the
spirit of cooperative government.

BUDGET REFORM
The introduction of the Medium Term Expenditure Framework is a
cornerstone of a broader process of budget reform in which Government is
engaged.

Challenges Government's budget reform agenda must address the challenges of:

♦ a decentralised fiscal framework, where 60 per cent of public spending

occurs in the provinces, within a policy framework determined in part by
national government;

♦ the translation of policy goals into delivery of public services;

♦ the need to make choices between priorities so that resources are used to
maximise Government's reconstruction and development aims;

♦ the need for greater transparency and public understanding of the nation's
budget;

♦ the quest for greater efficiency in the management of public resources to

deliver services more effectively and fairly; and

♦ enhancing the partnership between government and the private sector to

improve service delivery and quality.

Budget Reform is an ongoing process which must reach into all levels of the
public service to improve management, budgeting and service delivery.

Budget Reform White Government will publish a White Paper on Budget Reform later this year. The
Paper conceptual foundations of the proposals will be:

♦ greater devolution of decision-making, empowering departments to allocate

resources and manage their personnel and other inputs to improve services;

♦ improved accountability, through greater transparency, an improved link

between inputs and outputs, clearer roles for accounting officers, and
service delivery targets;

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 Chapter 5: The Medium Term Expenditure Framework

♦ tougher enforcement of controls, including improved financial accounting

systems; and

♦ more rapid audit and tougher penalties for overspending or inappropriate

use of funds.

Improvements in One of the major reform initiatives, brought about and fostered through the
conditions of service MTEF process has focused on the management and financial aspects of
personnel. Improved human resource management is an important mechanism
to improve the delivery of services. Currently, managers have little flexibility
over personnel, as key factors such as wage rates and promotions are largely
determined by rules over which they have little control.

Personnel costs are by far the largest single item of government spending,
accounting for some 40 per cent of the total. It is therefore crucial that
personnel costs are controlled. Government has decided to change the
treatment of the Vote: Improvement of Conditions of Service, which is
currently negotiated nationally yet has a substantial impact on provincial
expenditure, so that it becomes part of departmental and provincial budgets.
This decentralisation will occur in the third year of the current MTEF
(2000/01) to ensure that there is sufficient capacity within departments and
provinces to participate meaningfully in the wage bargaining process.

Decentralisation of the improvements vote will improve the transparency of

the three year budgets and will give public service managers an incentive to
take greater responsibility for the control of personnel costs.

Financial management Budget reform must be accompanied by significant improvements in

capacity financial management capacity. The MTEF published today sets aside
R100 million for 1998/99 to invest in financial management capacity in
national and provincial governments. The introduction of greater
accountability and tougher penalties for mismanagement will encourage
greater demand for financial management skills.

THE CONSOLIDATED MTEF

Total spending Consolidated national and provincial spending in 1997/98 is estimated at
R196,3 billion. Of this, approximately R94,0 billion was provincial
expenditure; the remainder was spent by national government or on behalf of
national government. Total spending in 1997/98 is estimated to have increased
by some 7,5 per cent compared to 1996/97. This relatively moderate increase
follows an 18,3 per cent increase in spending in 1996/97, in part because of
the rolling forward of unspent balances from 1995/96 and significant salary
improvements.

Spending trends Spending is projected to decline as a share of national

income from 32,9 per cent of GDP in 1996/97 to 29,6 per cent in 2000/01.
However, the real level of resources going into public services and the real
level of services are increasing. There has been rapid growth in spending in
recent years, and the rate of growth is expected to be more moderate in the
immediate future. But over the three years of the MTEF, expenditure is
expected to grow by 7¼ per cent in real terms. With continued

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 Chapter 5: The Medium Term Expenditure Framework

reprioritisation between and within votes, and improved efficiency

Government will be able to meet its reconstruction and development
commitments within the overall spending framework.

Table 5.1 Consolidated National and Provincial Spending: 1995/96 to 2000/01

Outcome Preliminary MTEF Projections
R billion 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
Total spending 154,4 182,7 196,3 205,2 219,8 239,6
- as % of GDP 31,1% 32,9% 32,0% 30,7% 29,9% 29,6%
- % growth 18,3% 7,5% 4,5% 7,1% 9,0%
less debt service costs 31,3 34,3 39,6 43,0 45,3 48,1
Total non-interest spending 123,1 148,4 156,7 162,2 174,5 191,5
- as % of GDP 24,8% 26,7% 25,6% 24,2% 23,8% 23,7%
- % growth 20,5% 5,6% 3,5% 7,6% 9,7%
GDP inflation rate 8,2% 8,5% 8,5% 6,0% 5,5% 5,0%
GDP (R billion) 497,3 556,0 613,0 669,3 734,3 809,6
Source: Department of State Expenditure; Provincial Treasuries; Department of Finance calculations

The MTEF projections show consolidated non-interest expenditure stabilising

at around 24 per cent of GDP. Just under 60 per cent of total non-interest
spending is in the provinces.

SUMMARY OF MTEF ESTIMATES

The national Budget MTEF estimates are set out in chapter 6. Provinces are
responsible for preparing their own medium term spending plans, given their
shares of nationally raised revenue and their own other resources. Provincial
budgets are not tabled until after the national budget, and hence only
preliminary projections of provincial spending are available. Based on these
preliminary projections, the tables below set out functional and economic
breakdowns of budgets from 1995/96 to 1997/98 and for the MTEF period.

Functional breakdown of consolidated spending

Table 5.2 below sets out a functional breakdown of national and provincial
budgets.

Reprioritisation Government has made substantial progress in the reprioritisation of spending

towards social services and crime prevention activities. Social services
budgets have increased significantly from R73,9 billion in 1995/96 to R88,6
billion in 1997/98. Budgeted spending on police, prisons and justice has
similarly increased over this period.

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 Chapter 5: The Medium Term Expenditure Framework

Table 5.2 Consolidated national and provincial expenditure: functional breakdown:1995/96 to 2000/01
Budgets MTEF projections Average
real growth
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
R billions for MTEF
Protection services: 25,1 28,1 29,6 33,0 35,2 37,8 2,8%
Defence 11,6 11,8 10,7 11,0 11,6 12,3 -0,8%
Justice 1,6 1,7 2,0 2,5 2,7 3,0 9,5%
Police 9,3 11,4 13,1 14,1 15,1 16,0 1,5%
Prisons 2,7 3,1 3,9 5,4 5,8 6,4 12,3%
Social services: 73,9 81,4 88,6 102,1 107,1 114,4 3,2%
Education 34,6 39,2 40,3 46,8 49,2 52,2 3,4%
Health 16,1 18,5 20,2 25,1 26,4 28,1 5,8%
Social security and
welfare 15,2 16,4 18,4 19,8 20,7 22,2 0,9%
Housing 3,0 1,6 4,2 3,9 4,3 4,3 -3,9%
Other 5,1 5,7 5,5 6,5 6,5 7,5 5,0%
Economic services: 17,5 19,5 18,9 17,1 18,6 20,6 -2,5%
Water schemes, related 1,4 2,2 1,9 1,9 2,0 2,3 1,2%
services
Fuel and energy 0,2 0,2 0,2 0,1 0,1 0,1 -9,9%
Transport,
communication 7,3 7,7 7,3 6,5 7,0 7,7 -3,5%
Agriculture, forestry,
fishing 3,5 4,4 4,5 4,3 4,5 4,9 -2,3%
Mining 0,2 0,3 0,3 0,3 0,3 0,3 -1,4%
Manufacturing 0,8 1,0 1,1 0,6 0,6 0,6 -20,6%
Regional development 0,9 0,7 0,9 0,7 0,7 0,7 -10,2%
Other 3,3 3,2 2,8 2,6 3,2 3,8 4,7%
General admin, other 10,8 13,5 13,2 9,0 10,7 11,7 -9,0%
Interest 29,5 34,6 38,6 43,0 45,3 48,1 2,0%
Reserve 1,3 0,5 1,3 1,0 3,0 7,0
Total Budget
Expenditure 158,1 177,6 190,2 205,2 219,8 239,6 2,4%
Source: Central Statistics ; Department of Finance projections

1995/96 to 1997/98 These increased budgets were funded to a large extent through substantial
savings in the defence budget, which has been reduced from R11,6 billion in
1995/96 to R10,7 billion in 1997/98. Spending on economic services and
general administrative functions has also declined over this period, although to
a lesser extent.

1997/98 to 2000/01 Reprioritisation of budgets will continue over the period of the MTEF.
Table 5.2 above sets out the projected budgets (in nominal terms) for the main
functions, together with the average annual real growth rate over the MTEF

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 Chapter 5: The Medium Term Expenditure Framework

period. Spending on social services is projected to increase at an average of

3,2 per cent a year in real terms, with spending in health increasing by 5,8 per
cent and education by 3,4 per cent a year. Government is therefore giving
substance to its commitment to provide basic services for all.

New priorities The safety of South Africans remains a priority for Government. Spending on
prisons increases by 12,3 per cent per annum over the three years and on
justice by 9,5 per cent a year. Economic services, general administrative
functions and to a lesser extent defence, decline over this period. This leaves
less room for shifting funds between budgets. Increased levels of service
provision can therefore no longer be achieved only through reprioritisation
between votes, but will depend on reprioritisation and efficiency savings
within votes.

Economic breakdown of consolidated spending

Table 5.3 below sets out an projected economic breakdown of consolidated
national and provincial budgets.

Capital spending Investment in infrastructure, particularly addressing backlogs in previously

disadvantaged areas, is a priority for Government and is crucial for the
achievement of its reconstruction and development aims. As noted above,
Government has committed substantial amounts to a number of infrastructure
development programmes over the next three years.

The estimates in table 5.3 reflect lower capital spending to accommodate

rising pressures on current spending within the provincial budgets in 1998/99
and 1999/00. Although the MTEF estimates do not show a strengthening of
capital spending.

There are a number of reasons to think that the overall trend is more
favourable:

♦ Public private partnership projects and capital programmes of parastatals

are increasingly replacing the direct spending on infrastructure on budgets.

♦ Government has retained a reserve on the budget that will in due course be
allocated to services, including some capital spending.

♦ There has been underspending on capital programmes in recent years. The

capital budgets for the future are the result of more careful and realistic
examination of budgets, and are therefore more realistic.

Over time, this improved transparency and realistic budgeting should help to
protect capital spending and enable Government to give it greater priority.

Personnel spending As the projections for investment show, Government is experiencing

increasing pressure from rising personnel spending. This is a largely a result
of the realignment of pay levels which have resulted in a 30 per cent increase
in personnel budgets over the last two years. Personnel spending is projected
to continue to increase over the period of the MTEF, but at a less rapid pace
than in previous years.

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Improvements in For the MTEF period, provisional estimates of improvements in conditions of

conditions of service service are included in the allocations. In 1998/99, an amount of R3 375
million has been set aside as to be voted in the Supplementary Estimate. The
actual distribution will reflect the outcome of negotiations in the public sector
bargaining councils. For the subsequent years, the MTEF estimates provide
for improvements in conditions of service in line with projected inflation.

The management of personnel is discussed more fully in section 5.5.6 below. To the
extent that personnel spending can be moderated, more funds will be released for
capital investment and service delivery.

Table 5.3 Consolidated national and provincial expenditure: economic breakdown: 1995/96 to 2000/01
Budgets MTEF projections Average
real growth
R billion 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 for MTEF
Current: 143,7 162,9 174,1 189,8 201,7 216,2 1,9%
Personnel 56,7 67,6 73,8 83,3 89,1 94,3 2,9%
Other goods and 20,6 23,6 24,5 24,1 25,5 28,1 -0,9%
services
Interest 29,5 34,6 38,5 43,0 45,3 48,1 2,0%
Current transfers 23,4 24,2 24,7 24,4 25,7 27,7 -1,6%
Current transfers to 13,4 12,8 12,5 15,0 16,1 18,2 7,3%
local government
Capital: 13,1 14,2 14,8 14,4 15,1 16,3 -2,1%
Acquisitions of fixed 8,8 10,1 9,4 8,4 8,7 9,5 -4,8%
assets, stock, land
Capital transfers, 0,7 0,7 1,5 1,1 1,1 1,2 -12,8%
loans, advances
Capital transfers to 3,5 3,4 4,0 4,9 5,4 5,7 6,8%
rest of government
Reserve 1,3 0,5 1,3 1,0 3,0 7,0
Total consolidated 158,1 177,6 190,2 205,2 219,8 239,6 2,4%
budget expenditure
1. Source: Central Statistics; Department of Finance projections

Reserve Public expenditure projections over three years are inherently more uncertain
than those that extend only a year ahead. There will be changes to
macroeconomic conditions and prices; there will be changes to policies; and
there may be unforeseen emergencies and spending pressures. A contingency
reserve is included within the spending total, but not allocated to particular
programmes, to cater for these risks. The amount set aside increases from
R1 billion in 1998/99 to R7 billion in 2000/01.

Conclusion Government has made substantial progress in reprioritising funds between

sectors - from defence, industrial subsidies and administrative functions, to
social services and crime prevention. Capital budgets are lower, but more
realistic and projected to increase. To increase spending on social services

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 Chapter 5: The Medium Term Expenditure Framework

and infrastructure will require further efficiency savings and reprioritisation

within sectors.

SECTORAL REVIEWS
Drawing on the work of the MTEF sectoral teams, brief reviews follow on the
challenges facing six sectors: education, health, welfare, criminal justice,
defence and personnel management. The discussions include an analysis of
spending trends and assessment of the critical issues, together with some
remarks on the way forward for each sector.

Education
Education is a right guaranteed by the Constitution, and the foundation of
South Africa's economic and social development. Sustainable growth in a
competitive international environment depends on a skilled, well-educated
work force.

Table 5.4 Education spending estimates and enrolment numbers

Medium Term Expenditure Framework
R billion 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
National spending 4,165 5,319 6,098 6,498 7,268 8,005
Provincial spending 29,352 36,573 38,680 38,870 40,746 42,238
Total national and 33,517 41,892 44,778 45,368 48,014 50,243
provincial spending
- per cent growth - 25% 7% 4% 6% 5%
School enrolment - 12 048 937 12 466 100 12 859 000 13 277 800 13 728 200
estimates
Source: Education and Manpower Development, 1996: Strauss, van der Linde, Plekker, Strauss
Provincial and national spending estimates

Spending trends Table 5.4 above sets out estimated total expenditure on national and provincial
education. These figures differ from table 5.2 in that the figures for the past
are estimated outcomes, rather than budgets, and that they concentrate on the
votes of the national and provincial education departments, rather than all
spending by Government on education.

Spending by education departments in 1997/98 is estimated to be

R44,8 billion. The education system accommodates about 12,5 million
learners, one third of the total population, and employs one in three civil
servants. Although there is a sizeable and growing private school and college
sector, and fees contribute to the running costs of many public schools, three
quarters of education is paid for by the government. At 26,6 per cent of non-
interest spending, education is the largest single component of government
spending.

A marked increase in education spending occurred between 1995/96 and

1996/97. Spending is estimated to have increased by 25 per cent, with

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personnel spending rising by 36 per cent. The increase in personnel was the
result of:

♦ a 12 per cent increase in average salaries;

♦ a 5 per cent increase in the number of personnel; and

♦ major increases in “other remuneration” and severance payments (around

R1 billion).

Increases of this order in a component of public spending of the size of

education personnel, must inevitably lead to distortions in expenditure
patterns in subsequent years. While provincial education spending increased
by a further 6 per cent in 1997/98, this was taken up by a 10 per cent rise in
personnel spending. As a consequence, non-personnel expenditure declined
significantly in absolute terms in 1997/98.

Education spending is projected to increase at a rate of between 4 and 6 per

cent a year over the MTEF period, broadly in line with anticipated inflation.

The increase in education spending over the next three years is however
predominantly in the national education vote - that is, university and
technikon funding. The national vote increases by 7 per cent in 1998/99,
followed by further increases of 10 per cent and 7 per cent in the following
two years. The increased spending on higher and tertiary education reflects the
improved access to and rising demand for higher education. Because of the
very substantial increases which have occurred in recent years, provincial
education spending increases further by a more modest average of 3 per cent
for the three MTEF years.

PROGRESSIVE EDUCATION POLICIES

Education policies are designed to redress the inheritance of race-based inequality in education provision, to build a
new and unified national system based on equity, redress, a progressive increase in quality, relevance to the
country’s agenda for development in the 21st century, and improved management and governance.

Policies and programmes which address educational rights, redress and equity include adult basic education and
training, education of learners with special needs, the norms and standards for schools funding, and redress
initiatives flowing from the schools register of needs. Early childhood development is also an important element in
achieving educational equity. Government conducted an audit in 1997 of the distribution of early childhood
programmes offered and institutions and organisations involved. A national pilot project has also been launched and
will target 70 000 of South Africa's most disadvantaged learners. An agreement has been reached with the
European community to provide further support to this project. This represents the first step towards implementing a
compulsory reception year throughout South Africa.

Policies and programmes aimed at improving management and governance include the teaching and service
campaign, preparation of guidelines for school governance, and education management development programmes.
A three year campaign, aimed at promoting a culture of learning, teaching and service at all learning institutions,
was launched by the President in February 1997. The campaign addresses issues of discipline, application,
involvement of parents and community support of schools, crime prevention in education institutions, and
community ownership of the education process through partnerships with the provincial departments of education.

Programmes focused on quality improvements include Curriculum 2005, in-service education of teachers, and a
science, technology, engineering and mathematics project.

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Challenges to the Within the overall education funding constraint, there remain considerable
system: funding inequalities in the distribution of funding between provinces and institutions.
This is being addressed through the introduction of an equitable revenue
sharing formula for provincial funding, discussed in Chapter 4.

Government is addressing inequities in funding between the various

educational institutions within the provinces. Public schools range from
historically well-resourced suburban institutions to sparsely equipped and
overcrowded rural and township classes. Although provincial departments do
not meet all the running costs of historically privileged schools, they
nonetheless account for disproportionately high spending per learner.
Government is examining more equitable policies for subsidising private
schools and financing colleges, specialised schools and early childhood
learning. A framework to govern school fees has been introduced, with the
aim that suburban schools carry some of the costs currently met by the
taxpayer, while at the same time ensuring that fees may not be set at
unaffordable levels.

Administrative The delivery of effective and efficient education has been delayed by a
capacity lack of administrative capacity. Progress is being made in provincial education
departments on the consolidation of management systems relating to
information, personnel and finance.

The National Department of Education has been allocated R200 million in

1998/99 for quality improvements in the delivery of education and to address
the problem of financial management in the provinces. These funds will
contribute to the establishment of an Education Management Development
Institute which will strengthen school administration. Other training
programmes, quality indicators and assessment tools are being developed with
the aim of improving the quality of education provided in South Africa. The
funds will also contribute to the introduction of Curriculum 2005 in schools.

Personnel management The biggest challenge identified by the education sectoral team is in the
and expenditure provisioning and funding of personnel. As personnel expenditure comes to
over 90 per cent of provincial education spending, the achievement of equity
in funding is inextricably linked to staff levels in schools. Redeployment of
teachers has proved difficult to implement. Agreements reached in the
Education Labour Relations Council had significant financial implications and
have stretched the management capacity of provincial departments. Enrolment
growth, the need to address backlogs in facilities and improving teacher
qualifications have contributed to sharp increases in overall education
spending. It is important that quality improvements should not be threatened
by excessive personnel costs.

Supplementary Government has identified education as one of its top priorities. Taking into
allocation account the findings of the sectoral review, part of the supplementary
allocations to provincial governments for the MTEF period will be distributed
between the provinces by means of the education share of the equitable shares
formula. Government envisages that much of these funds will go to meeting
the shortfalls in provincial education budgets, and seeking long-term solutions
in the form of financial and personnel management systems and quality
improvements through the introduction of policies such as Curriculum 2005.

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 Chapter 5: The Medium Term Expenditure Framework

Demographics In planning infrastructure and the future provision of education services

Government also takes account of South Africa's demographic transition. The
size of the school-age population has reached its peak and is now declining.
There are also significant shifts of learners, from rural to urban areas, from
townships to suburban schools and from informal settlements into townships.
The proportion of learners in primary schools is steadily falling, while
enrolment in secondary schools and demand for tertiary education
opportunities must be expected to grow for the foreseeable future.

Higher education Universities and technikons are funded in terms of an agreed subsidy formula,
based on student numbers, enrolment growth, research outputs and a range of
related cost parameters. This is the largest component on the budget of the
National Department of Education, and contributes the bulk of the public
funding received by these institutions. The MTEF will provide universities
and technikons with greater certainty in their budgets.

New framework for Following recommendations in the report of the Commission into Higher
higher education Education, a new public funding framework is envisaged, intended to create
more equitable student access, improved quality of teaching and research,
increased student progression and graduation rates, and greater responsiveness
to social and economic needs. It will have the following main elements: a
simplified mechanism for allocating general purpose, block funding to
institutions on a rolling three year basis, and the provision of earmarked funds
to achieve specific purposes, including targeted redress of inequities in access
and capacity. It is envisaged that earmarked funding will increase substantially
at the expense of formula funding. This will enable funds to be allocated
according to needs and identified purposes, rather than on the grounds of
student enrolment numbers only.

Health

Table 5.5 Health spending estimates

R billion 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
National and provincial spending 17,066 21,159 22,504 22,792 24,500 26,059
- per cent growth rate 24% 6% 1% 7% 6%
Number of clinics built between April 1994 and September 1997: 493
Number of Academic Health Service Complexes, regional and district hospitals in April 1997: 441
Source: National Department of Health
Budget figures from Department of State Expenditure and provincial treasuries

Spending trends As in education, the main increase in health spending came in 1996/97 when
spending increased by 24 per cent on the previous year, from R17,066 billion
to R21,159 billion. Provincial health expenditure increased by an
unprecedented 29 per cent. This was largely the result of a realignment in
remuneration of health personnel. In addition, the clinic building programme,
which to date has seen the building of 493 clinics, the strengthening of
primary health care and the elimination of charges at clinics contributed to
increasing health expenditure.

A further increase of 8 per cent in provincial health spending is expected in

the current financial year, bringing estimated spending on the health sector in

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 Chapter 5: The Medium Term Expenditure Framework

1997/98 to R22,504 billion. This will increase at around 6 per cent a year for
the next three years, more or less in line with inflation. Budgets that increase
faster than inflation, especially in the provinces, are not affordable in view of
the steep increase in health expenditure in the previous and current financial
years' spending.

Primary health care Government believes that improved quality and access to primary health care
is the most effective and cost-efficient approach to addressing the health needs
of all South Africans. The delivery of primary health care services is the top
priority in national health policy. This approach implies a health system that is
led by primary health care services, based on an integrated district health
system. The district based health care system will facilitate both increased
equity and efficiency in health services management, as well as increased
community participation and responsiveness to the needs of patients and
communities.

All South Africans have the right of access to public primary health care
services on equal terms. These services are provided free of charge although
there is a charge for prescribed medicines for those who can afford to pay.

The principle of equal access to primary health care services requires the
equalisation of geographical access and quality of services throughout the
country. Government has made significant progress. The clinic building
programme has seen the building of 493 clinics since 1994, thereby increasing
access to a further 5 million people. To address the problem of unequal access
across the country, the Department of Health has brought in foreign doctors
who work in otherwise underserved rural areas.

Government's goal is to increase the average number of publicly provided

primary health care consultations per person from an estimated 1,8 visits a
person a year in 1992/93 to 2,8 by the year 2000 and to 3,5 over the following
five years.

Redistribution of Given the budget constraint, the prioritisation of primary health care services
resources implies a shift in resources within and between provinces from tertiary health
care hospitals to district health services. This implies a rationalisation of
tertiary hospital services. Progress has also been made on the redistribution of
health resources between provinces.

There is also an intention to decentralise district health system to local

government. A number of issues about the definition, accountability and
financing of these services still have to be finalised.

Under the new Constitution, provinces are allocated an equitable share of

revenue and must budget for the provision of services, such as health,
themselves. National coordination and planning of health services is achieved
through the Provincial Health Restructuring Committee (PHRC) and the
MINMEC which meet regularly to discuss health policy issues.

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 Chapter 5: The Medium Term Expenditure Framework

Hospital rehabilitation Following a comprehensive audit of health facilities in South Africa, the
national Department of Health proposes to initiate a long-term hospital
rehabilitation programme. It will rehabilitate those hospitals and institutions
identified in the audit as urgently requiring attention. The project will also
help achieve inter- and intra-provincial equity in the quality of services
provided. The programme has been allocated R100 million in 1998/99,
increasing to R500 million in 2000/01.

NATIONAL HEALTH POLICIES AND PROGRAMMES

Termination of pregnancy:
With effect from February 1997, women have legal access to termination of pregnancy services. Together with other
reforms, this has contributed both to reduced numbers of unsafe abortions and significant improvements in
reproductive health services available to women.

Clinic upgrading and building programme:

The Government's clinic upgrading and building programme earned a nomination as one of three candidates for the
national productivity award of 1997. The programme brings primary health services to communities outside a 5km
radius of a clinic and also adds residential units and improved facilities to existing clinics. 493 new clinics have been
built or initiated since 1994.

HIV/AIDS campaign:
To coordinate the efforts of government as a whole in reducing the incidence of HIV infection, inter-departmental
and inter-Ministerial committees were established in 1997. A campaign to move beyond awareness and to change
behaviour has been launched. In an effort to target children, life skills education programmes were launched in all
provinces on World AIDS Day 1997 in conjunction with Education departments. 8 013 secondary school teachers
received training in life skills education in 1997/98.

Tuberculosis:
One of the most important causes of death and suffering in South Africa is the high rate of tuberculosis. A strategy
aimed at achieving an 85 per cent cure rate of new smear-positive patients has been introduced, requiring health
staff to supervise treatment directly. Satisfactory pilot projects have been conducted in Mpumalanga and the
Western Cape, but progress is regrettably slow in many provinces.

Immunisations:
In an effort to eradicate polio and reduce the transmission of measles, the Department of Health embarked on a
mass immunisation campaign in 1995. National coverage in 1997 was estimated to be 80 per cent for both of these
diseases.

Affordable medicines:
The enactment of the Medicines and Related Substances Control Act, the Pharmacy Act and the Medical, Dental
and Supplementary Health Services Act represent significant milestones in making medicines affordable. Greater
competition is now possible in the pharmaceutical industry, more extensive use of generic alternative medicines is
encouraged and regulations have been passed aimed at limiting undesirable marketing and pricing practices.
Medicine prescriptions for primary care purposes in the public sector are now governed by an essential drugs list
and progress has been made on the lists for second and third level care.

To ensure the prioritisation of primary health care services within provinces

there will need to be a redistribution of resources from tertiary care hospitals
to regional and district health services.

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 Chapter 5: The Medium Term Expenditure Framework

THE CONVERSION OF HILLBROW HOSPITAL TO A COMMUNITY HEALTH

CLINIC

In keeping with national health policy promoting the redistribution of health

resources from the tertiary facilities to regional and district level care, the
Gauteng Health Department has converted Hillbrow Academic Hospital and
several smaller hospitals into community health centres.

The proximity of Hillbrow Hospital to the more modern Johannesburg General

Hospital meant that it had become largely redundant. The conversion to a
community health centre focused mainly on reducing the number of hospital beds
in the central Wits region, resulting in an estimated recurrent saving of around
R40-50 million a year. Health personnel from the hospital were redeployed to
other hospitals. This served two purposes. The personnel assisted hospitals in
central Johannesburg to absorb the increased clinical load which could no longer
go to Hillbrow Hospital. The additional personnel also contributed to the
implementation of the Department's structural transformation plan which
envisages equity in staffing levels between the types of hospitals i.e. tertiary,
regional and district level hospitals. This is an example of how health services
can be reprioritised to ensure universal access to primary health care services.

Conditional grants Increased primary health services within a modestly growing budget implies a
reduction in expenditure on tertiary and regional hospitals. The sectoral team
identified the national importance of some of the services provided in central
referral hospitals and professional training centres. These include supra-
regional services which are of benefit beyond a province's boundaries, highly
specialised services which are concentrated mainly in the ten central hospitals
and serve the whole country, and the academic teaching functions of hospitals
and nursing colleges which increase the cost of providing health services. The
sectoral team agreed that these services should have access to sufficient
funding to provide a minimum level of service. Drawing on recommendations
of the sectoral teams, Government has introduced several conditional grants in
1998/99, aimed at:

♦ stabilising the funding of these services so that realistic budgeting is

possible;

♦ ensuring that services which are of benefit beyond the boundaries of a

province are sufficiently funded to provide an agreed minimum level of
service; and

♦ enabling national planning and coordination of specialised referral services,

thereby contributing to the transformation of the health system.

Three conditional grants have been introduced this year:

♦ the health professional training and research grant, amounting to

R1,060 billion in 1998/99, which compensates provinces for the additional
costs associated with providing academic training and carrying out
research;

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 Chapter 5: The Medium Term Expenditure Framework

♦ the central hospital services grant, amounting to R3,021 billion in

1998/99, which seeks to contribute to the costs incurred by provinces
which provide specialised and other referral services; and

♦ a redistributive grant, amounting to R53 million in 1998/99, to facilitate

the redistribution of tertiary services to those provinces where they are not
currently provided.

Based on recommendations of the sectoral team, the total amount allocated to

these three conditional grants is R4,134 billion in 1998/99. Further work is in
progress on the design and determination of these grants for future years.

The national Budget also includes conditional grants to subsidise the

construction of a new regional hospital in Umtata and the Durban Academic
hospital.

Policy issues There are several policy issues which will be more fully explored during the
1998 MTEF process. These include:

♦ the potential contribution of preferred provider agreements between central

hospitals or provincial health departments and medical schemes or
employers, as a way of securing an increased flow of revenue from insured
patients to public hospitals;

♦ the strengthening of hospital administration and cost recovery from fee-

paying patients;

♦ the possible introduction of social health insurance;

♦ the scope for improved cost-efficiency through out-sourcing of services and

better procurement management;

♦ the contribution of savings associated with the new drugs policy;

♦ scope for savings through personnel management reforms, the proposed

community service programme for medical trainees and improved use of
part-time and contractual employees;

♦ further scope for partnerships with private sector health providers and
medical schemes; and

♦ improved coordination with the Medical Services of the SANDF and public
sector medical schemes.

The increasing pressure that the expanding primary health care system
imposes on provincial budgets, and the need to complement primary services
with well-functioning district hospitals and referral facilities, emphasise the
importance of strengthening the financing and management of the hospital
sector. One aspect of this process is the decentralisation of hospital
management as outlined by the Hospital Strategy Project. Options for
improved cost recovery from private patients, stronger financial management,
partnerships with private health providers and medical schemes and reforms
consistent with improving access to and quality of hospital care are currently
being explored by the Department of Health.

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 Chapter 5: The Medium Term Expenditure Framework

Welfare and social security

Mission statement The mission of the national and provincial welfare departments is to serve and
build a self-reliant nation in partnership with all stakeholders through an
integrated social welfare system which maximises its existing potential, and
which is equitable, sustainable, accessible, people-centred and developmental.

Table 5.6 Welfare spending trends

R billion 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
Total national and provincial 13,853 15,589 17,589 18,877 19,964 21,212
spending
- per cent growth 13% 13% 7% 6% 6%
1
Estimated no. of beneficiaries 2 547 683 2 744 522 2 965 629 3 031 297 3 053 060 3 089 547
1. Projection based on 1997/98 beneficiary numbers;
Budget figures from Department of State Expenditure and provincial treasuries

Spending framework Spending on welfare and social security in 1997/98 is estimated at

R17,589 billion. This is a 13 per cent increase in spending on the year before
and follows an equally large increase in spending from 1995/96 to 1996/97.
The increase is la result of improved uptake of social grants, as backlogs
relating to the previous dispensation have been addressed, and an increase in
the grants. Spending for the years 1998/99 to 2000/01 is projected to keep
pace with inflation.

Welfare system The welfare function is made up of social security, comprising statutory grant
payments in terms of several specific entitlement programmes, and welfare
services, which include support for developmental partnerships between
government, community organisations and the private sector, and a range of
community-oriented activities of the national and provincial welfare
departments.

MAIN SOCIAL GRANT TYPES

Maximum value
Beneficiaries of monthly grant
(August 1997) (August 1997)

♦ Old age pensions 1 742 253 R 470

♦ War veteran grants 11 495 R 470

♦ Disability grants 754 830 R 470

♦ Maintenance - child 222 715 R 135

♦ Maintenance - parent 177 884 R 430

♦ Foster care grants 42 917 R360

♦ Care dependant grants 3 815 R470

♦ Grant-in-aid 9 720 R 80

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 Chapter 5: The Medium Term Expenditure Framework

Social security currently accounts for the major portion of consolidated

welfare spending. The Department of Welfare aims to increase the proportion
of the budget going to welfare services, with particular emphasis on those
activities promoting people-centred, sustainable social development.

Child maintenance The current child maintenance grants go to single parents with insufficient
grant means to support dependent children. This programme has been unfairly
applied in the past, in effect excluding people from black rural areas.
Extending the present maintenance grant scheme to all potential qualifying
parents and children would not be affordable. Government has therefore
resolved to phase out this programme and replace it with a new child support
grant, to be introduced this year.

The grant of R100 per child per month will be paid to the primary caregivers
of children under 7 years, subject to an agreed means test. This represents a
major policy shift, signalling Government's intention to support children in
poverty, particularly in rural areas, who have not benefited from maintenance
grants in the past.

The introduction of the child support grant programme and phasing out of
existing maintenance grants are a joint undertaking of the national and
provincial welfare departments. Implementation details are currently being
finalised.

Pensions It is expected that old age pensions will require R12,0 billion by 2000/01
because of the increased take-up of grants for the elderly. These estimates do
not take account of possible savings through improved system management
and combating fraud.

The on-budget provision of old age pensions is unique for a country of South
Africa's level of development. It has proved a very effective and efficient
means of reaching the poor and supporting South African society. Pensioners
frequently support children and grandchildren, particularly in rural areas, so
that targeting of transfers to the elderly also effectively targets children.

Disability grants Similarly, disability grants have grown strongly in numbers in recent years.
Currently about 2 per cent of the population receive disability grants.
Government recognises that the criteria of assessment for the award of the
disability grants are in need of review. An investigation is underway to assess
the requirements of the disabled sector and make recommendations.

Social assistance and In keeping with Government’s commitment to putting the needs of children
welfare services first, social assistance and welfare services focus strongly on the
transformation of the child and youth care system. These include services for
abused and neglected children, probation services and diversion programmes
for juvenile offenders, and community-based care for children with disabilities
and HIV/AIDS orphans. Pilot programmes for unemployed women with
children under the age of five have been introduced and will be replicated in
all provinces.

Social development The social development approach to the delivery of social welfare services
and social security aims for coordinated, integrated and targeted poverty
eradication programmes within government, while building the capacities and
assets of the poor, in close partnership with organisations of civil society.

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 Chapter 5: The Medium Term Expenditure Framework

Income generating The Department of Welfare has launched a new programme of support for
projects income generating projects, aimed at women, children and youth, and drawing
on funds set aside for poverty relief programmes. A two-fold strategy has been
agreed between the national Department of Welfare and its provincial
counterparts, drawing on the resources of some 2 000 non-governmental
organisations.

Budgeting for welfare Cabinet has approved that social security should be established as a national
services and social system, over which policy matters be agreed at the national level. However,
security provinces manage these services and provision is currently made for welfare
spending programmes on provincial budgets.

Government recognises the importance of locating financial and managerial

responsibilities together in the assignment of responsibilities for social
security and welfare services. For the purposes of the 1998/99-2000/01
MTEF, it was agreed that provinces should retain full responsibility for the
budgeting for welfare services and social security. The provincial equitable
shares formula takes account of estimated social security commitments. There
will be no provision on the national budget for these programmes.

The amalgamation of the various social grants data systems has provided a
powerful management tool for ensuring that only legitimate beneficiaries
receive social grants. Government has allocated R100 million for each of the
next two years for the integration and upgrading of social security information
systems. It is anticipated that this process will yield significant savings.

Criminal justice system

An effective criminal justice system is essential to protect the rights and
freedom of individuals enshrined in the Constitution. It is also a precondition
of economic growth and prosperity.

Table 5.7 Spending on Police, Justice and Correctional services: 1996/97-2000/01

R billion 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
Police 9,785 10,462 12,799 13,709 14,498 15,181
Justice 1,283 1,556 2,154 2,173 2,407 2,658
Correctional services 2,599 2,854 3,580 4,493 4,934 5,397
Integrated projects of the 300 300 300
criminal justice sector
Total 13,666 14,872 18 533 20,376 21,839 23,236
- per cent growth 9% 25% 12% 7% 6%
Budget figures from Department of State Expenditure

Budget allocations Spending on Police, Justice and Correctional Services accounted for R18,533
billion of government spending in 1997/98. This was a 25 per cent increase in
spending compared with 1996/97 levels, and spending will increase by a
further 12 per cent in 1998/99 to R20,675 billion.

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 Chapter 5: The Medium Term Expenditure Framework

The police vote increased by 22 per cent in 1997/98, largely as a result of

substantial increases in the police salary levels. Increases for the next three
years will be broadly in line with inflation.

Correctional services have increased by 10 per cent and 25 per cent over the
last two years. Spending will rise by a further 26 per cent in 1998/99 to
address the pressure on the budget which has resulted from a rapidly rising
intake of prisoners over recent years. Prisons will continue to receive
substantial spending increases in 1999/00 and 2000/01 to ensure that budgets
remain in line with the level of service required.

The average yearly increase in the Justice budget from 1995/96 through to
2000/01 is 13 per cent. This reflects the rapidly expanding case load faced by
the courts and the need to improve the flow of cases through the justice
system.

Shortcomings in the One of the shortcomings of the criminal justice system has been its inability
criminal justice system to operate as an integrated whole. This is essential if offenders and cases are to
move through the system at least cost to the taxpayer. For example, the
workload of the criminal courts, correctional services and welfare services (in
respect of probation, rehabilitation, diversion and youth care) are driven
primarily by activities of the Police.

In order to plan and coordinate the criminal justice system more effectively,
several initiatives have been launched:

♦ the MTEF sectoral team began a process addressing the challenges and
issues facing the criminal justice cluster in a coordinated and integrated
manner;

♦ Government has dedicated R300 million for each of the following three
years to initiate integrated projects of the criminal justice sector; and

♦ programmes such as the national crime prevention strategy have been

introduced to specifically deal with problems related to the integration and
communication of these three departments.

National crime The national crime prevention strategy is a programme designed in part to
prevention strategy re-engineer the criminal justice system in order to make it more effective in
crime prevention. The focus is therefore more on prevention than on being
reactive to crime. The strategy involves the re-engineering of the whole
criminal justice system, and includes attention to the design of the human
environment to enable it to enhance crime prevention, the physical design of
buildings and other facilities, and the education system.

In taking forward the work of the criminal justice work team, the focus of
these initiatives will fall on a limited number of key activities:

♦ pro-active policing which consumes about 50 per cent on the SAPS budget
(R5.4 billion);

♦ investigations which consumes about 20 per cent of the SAPS budget (R2.2
billion);

♦ lower courts which hear 80 per cent of all criminal cases;

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 Chapter 5: The Medium Term Expenditure Framework

♦ high courts which hear 20 per cent of criminal cases; and

♦ secure detention, community corrections and rehabilitation which absorb

approximately 77 per cent of the Correctional Services budget.

Cost saving measures Potential cost-savings measures that have been identified are:

♦ diversion of persons from the criminal justice system;

♦ improvements in court and real time management;

♦ better case management;

♦ improving the flow-through of unsentenced prisoners awaiting trial;

♦ community corrections;

♦ joint training of personnel;

♦ rehabilitation of offenders to combat recidivism (repeat offenders);

♦ integrated criminal justice management; and

♦ electronic monitoring of offenders.

The MTEF spending plans include several major investments in improved

management and information systems, such as the SAPS automated
fingerprint identification system, which will increase the effectiveness of
investigations and decrease the costs and time associated with delays in
investigations and trials.

Defence

Table 5.8 Trends in defence spending: 1995/96 - 2000/01

R billion 1989/90 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
Personnel spending - 4 534 5 312 5 333 5 757 5 964 6 034
Other spending - 6 987 4 603 5 347 4 202 4 523 4 953
Total defence spending 9 937 11 521 9 915 10 680 9 959 10 487 10 987
- defence spending as per cent 4,0% 2,3% 1,8% 1,7% 1,5% 1,4% 1,4%
of GDP
- personnel spending as per - 39% 54% 50% 58% 57% 55%
cent of defence spending
Personnel estimates 81 703 100 198 103 395 101 371 95 503 88 715 76 615

The reduction in defence spending in the 1990s has been possible due to the
decline in domestic political and social disorder associated with the political
transition and the end to regional conflicts.

Spending for the next three years will increase from R9,959 billion in 1998/99
to R10,987 billion in 2000/01. This will bring defence spending in 2000/01 to
1,4 per cent of GDP.

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 Chapter 5: The Medium Term Expenditure Framework

Despite the decline in spending, there has been an expansion in the size of the
force in recent years as a result of the integration of the SADF and the former
non-statutory forces. Expenditure reduction has been achieved through
substantial cutbacks in defence procurement and capital spending.

The Government has undertaken a Defence Review aimed at setting strategic

objectives and long-term goals for force design and transformation.

The sectoral work team addressed the issue of personnel spending, linked the
overall size of the defence budget to questions of force design, and identified
areas for increased cost savings and improved budgetary transparency.

Trends in Defence In 1989/90 defence spending amounted to R9,937 billion, 4 per cent of GDP.
spending Total permanent personnel (excluding national service men) numbered
75 469, accounting for 19 per cent of total budget expenditure, while
operational and capital spending accounted for 37 per cent and 44 per cent of
the total budget. By 1995/96 the defence budget amounted to 2,3 per cent of
GDP, while personnel numbers had increased to 100 198. This meant that
approximately 39 per cent of the budget was spent on personnel, leaving 61
per cent for both operational and capital spending. By 1997/98 personnel
spending had increased to 50 per cent of the total defence budget.

The Defence Review proposes a reversal of this trend of increasing personnel

and operating expenditure, to allow for increased capital expenditure. The
Review therefore proposes that personnel levels be cut by approximately
30 000 to 70 000 by 2000/01. This would reduce personnel expenditure to 40
per cent and operating expenditure to 30 per cent of the total defence budget,
allowing capital expenditure to increase to 30 per cent of the budget, a level
last achieved in 1993/94.

Functions of the The Constitution sets out the functions for which the South African National
SANDF Defence Force (SANDF) may be employed. In addition to protection against
military threats, these include:

♦ regional peace-keeping;

♦ land and sea border patrol;

♦ support to the South African Police; and

♦ disaster relief.

Improved budgeting Defence has undertaken a detailed costing of its force design and operational
requirements. This exercise will be repeated for the support side of the
Defence Force, recognising that significant cost savings could be achieved on
these functions. As highlighted by the Auditor General, more efficient
inventory control could also play a part in achieving savings and cost-effective
use of resources.

Implications of MTEF The MTEF allocations to the SANDF will stabilise and bring greater certainty
allocation to defence spending. Once the envisaged personnel restructuring has been
undertaken, a phased enhancement of equipment and capital resources of the
armed forces will be able to be accommodated within the expenditure
envelope.

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 Chapter 5: The Medium Term Expenditure Framework

Personnel management
The reprioritisation of budgets requires the reallocation of personnel.
Rigidities and inefficiencies in personnel management practices represent a
potential obstacle to reprioritisation of the budget and the transformation of
the public service.

Table 5.9 Trends in personnel budgets

1996/97 1997/98 1998/99 1999/00 2000/01
National personnel budgets 26,1 28,8 31,0
Provincial personnel budgets 57,2 60,3 63,3
Total personnel spending 67,6 73,8 83,3 89,1 94,3
- nominal per cent growth 19,2% 9,1% 12,9% 6,9% 5,8%
- real per cent growth 9,8% 0,6% 6,5% 1,4% 0,8%
- per cent of total non-interest spending 45,6% 47,1% 51,4% 51,0% 49,2%

Trends in personnel Over the past five years, spending on wages and salaries has risen from 42 per
spending cent of non-interest spending to close to 50 per cent in 1997/98. International
comparisons suggest that government expenditure on wages is a substantially
higher proportion of the budget than other middle-income economies.

Given that such a large share of public spending is absorbed by personnel

costs, it is essential that public sector pay should be well-managed and kept
under central control. Within the total affordable level of spending, increases
in salaries and personnel numbers reduce the funds available to invest in
infrastructure and improve service levels.

The budget projections indicate an increase in the real wage bill of

6,5 per cent in 1998/99, followed by real reductions in the total wage bill in
the subsequent two years. Over the three years as a whole, the real wage bill
is expected to increase by 4,2 per cent, and to decline as a share of total
spending from 51,4 per cent to 49,2 per cent.

Personnel management Personnel management includes not only administration but the long-term
vision management of human resources and investment in people. Within the public
service, greater attention needs to be given to resource planning, career
management and performance evaluation.

Government is increasingly moving away from central regulation and control

of personnel policies. New legislation is being introduced which accepts the
increasing need to devolve greater autonomy and responsibility for the control
and management of personnel resources from the centre to line departments,
in line with overall budgetary requirements. This will enable agencies to
allocate resources more efficiently and flexibly, to respond rapidly to the
needs of the services they deliver, and to reallocate resources from services
which are being scaled down to the nation's new priorities.

An efficient public service requires appropriate incentives. Government’s

wage policy must balance the costs of an effective, adequately skilled and
motivated labour force against other demands on government. Government's
objective is to ensure that public sector pay enhance efficiency and services by
giving incentives for improved performance.

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 Chapter 5: The Medium Term Expenditure Framework

Public sector employment should not be seen primarily as a cost. Public

services are often labour-intensive. Improvements in the quantity and quality
of service delivery depend crucially on recruiting, retaining and motivating
public servants and managing them to produce high quality services.
Personnel management reform is therefore a fundamental prerequisite for the
transformation of the public service.

Public service The Department of Public Service and Administration (DPSA) has tabled
regulations proposals for negotiation on new public service regulations. The intention is to
eliminate unnecessary and inefficient regulations, simplify necessary
regulation and related procedures and lower the cost of regulatory compliance.

DPSA is leading the process of modernisation of human resource management

in the public service so that it can deal in an integrated way with:

♦ managing and rewarding good performance and dealing with poor

performance across the public service; and

♦ selection, motivation and development of people.

This represents a radical overhaul of the personnel management system. It

will empower political and administrative heads of departments to make
decisions about the organisation and staffing of their organisations, within
their total budget. It will give them more flexibility to allocate resources to
where they are needed.

Improving budgeting Budgeting for personnel costs has been greatly improved by the completion of
for personnel the PERSAL system, which now covers all national and provincial
government employees. This provides a comprehensive data source to enable
the government to model the effects on individuals, particular departments and
provinces, and the public service as a whole, of alternative public sector pay
systems and rates.

In the past, personnel budgets drawn up by departments and provinces have

been framed on the assumption of constant wage rates. The cost of pay
increases has been carried on a separate vote, Improvement of Conditions of
Service, which has been allocated to departments during the course of the
financial year.

This system creates a number of problems. It does not sufficiently involve

national and provincial service providers in judgements about the level of pay
increases that are needed to recruit, retain and motivate high quality staff. It
disempowers managers from taking responsibility for their personnel budget
and the trade-off between their personnel and other expenditure. It makes it
difficult to compare medium term budget projections between different
services, since non-pay inflation must be accommodated within budgets, but
personnel cost inflation is handled separately.

From 2000/01, the costs of improvements in conditions of service will be

vested on the individual votes of departments and provinces. Central
bargaining will continue, in keeping with the framework established by the
Labour Relations Act, but the Government team will be mandated by budget
holders who will take cognisance of the effect on their services of the pay
increases that are proposed. Between now and 2000/01, the Department of

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 Chapter 5: The Medium Term Expenditure Framework

Public Service and Administration will work with departments and provinces
to ensure that they have the capacity to take on this responsibility.

CONCLUSION
The Medium Term Expenditure Framework initiated a process for
transforming the annual, incremental and ad hoc budgetary process to a
system of transparent, effective and efficient multiyear budgets. By linking
inputs to outputs the MTEF creates an environment conducive to more
effective policy planning. This ensures that Government's policy priorities are
met within the country's overall financial framework.

Moving to a new system of budgeting and public finance management brings

with it an inevitable degree of uncertainty and confusion. A successful
transition to this new system will require the focus, time and support of all
spending agencies and spheres of government. The MTEF will be developed
and extended over time to ensure that Government has the necessary tools to
deliver its policy priorities effectively.

The 1999 MTEF (1999/00 - 2001/02) will build on the baselines provided by
this year's MTEF. Any adjustments to priorities and programmes which are
agreed by Government will be reflected as changes from the base, thereby
ensuring that the trade-offs between programmes, additional resource
requirements and efficiency savings become an explicit part of the budget
process. In future, inputs will be evaluated against outputs delivered. The
MTEF will facilitate this process and ensure that policies are developed within
the available resources. The introduction of the MTEF represents a significant
improvement in South Africa's budget system. It ensures transparency,
stability and links spending plans to Government's political priorities. It is the
tool by which Government delivers its reconstruction and development
objectives.

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