The national Department of Finance deserves hard won praise for the improvement in transparency and information crowned by the second National Expenditure Survey and the Budget Review. We anticipate that the Department's focus on improving the effectiveness and efficiency of services will bear fruit shortly. We can quibble about the rates of adjustment, but praise should also be extended to the Department for its efforts in curbing expenditure, particularly in the provinces, thereby holding the country to achieving a rapid decline in the deficit that will eventually decrease our draining interest bill.

While we are encouraged by the Department's performance at many levels, we remain concerned with the impact of the 2000 Budget on certain categories of poor people. In this submission we will evaluate the 2000 Budget from the perspective of a systematic framework for poverty reduction, rather than merely listing the implications of individual aspects of the budget to the poor.

Recent poverty research shows that people are not only poor because they lack income. Their access to and returns on assets such as skilled labor, land and infrastructure also play an important role in their poverty. Furthermore, the participation of the poor in government policy processes has an impact on directing pro-poor spending. The definition of poverty has thus broadened from a simple consideration of income to include literacy and health (in the 1980s) and vulnerability, powerlessness and lack of voice (in the 1990s).

Table 1: A Framework for Evaluating Budget from a Poverty Perspective

This submission is a first effort at evaluating budgets systematically through the lens of a coherent poverty framework.

1) Increasing the Income Security of the poor

1.1 Social Security and Public Works Schemes

The table above indicates that Government can increase the income of the poor directly through Social Security grants (Old Age pensions etc.) and Public Works programs. If we evaluate the 2000 Budget on this part of the Poverty Framework we see that all categories of Social Security payments are projected to decline in real terms. Table 2 shows that Old Age Pensions and Disability grants have only kept up with inflation in two of the last 6 years (1997/98 and 1999/00). The nominal value of the Child Support Grant has also not changed since its introduction in 1998, thus losing to inflation in both 1999 and 2000.

Table 2: Nominal and real changes in Old Age Pensions and Disability Pensions

Turning to the second mechanism for increasing the income of the poor. Public Works programmes are often used to create short-term employment for the poor and thus increase their income. The most important poverty relief programs in the National Public Works Programme are the Community Based Public Works Programme (CBPWP) and the Construction Industry Development Programme (CIDP).

The key activities of the Community Based Public Works Programme comprise creating productive assets such as community gardens, access roads, day care centres and sport complexes. It aims to empower the poor and particularly rural communities, create jobs, and promote rural economic viability. Table 3 below shows that the value of the programme is projected to decrease substantially over the Medium Term Expenditure Framework (MTEF) period. The National Expenditure Survey 2000 (NES) also highlights problems of the roll-over of unspent funds in 1998/99 and 1999/00.

Table 3: National Public Works Programme

Source 2000 NES p.66

Government can also boost the income of the working poor on the revenue side of the budget by making the tax regime more progressive. Table 4 below shows that the adjustments in Income Tax proposed in the 2000 Budget will benefit the rich disproportionately. Someone earning R200 000 can expect to pay 3.8% less income tax than in 2000 while someone earning R25 000 will only pay 1.4% less. Such changes increase the gap between the income of the rich and the working poor.

Table 4: The Effect of the Income Tax on different Income Tax categories

Source: 2000 Budget Review Annexure C page 2

1.2 Protecting the Poor from Macro-Economic Shocks

The Income security of the poor can also be improved by protecting them from the effects of macro-economic shocks. Such shocks impact on the poor via increased unemployment and reduced government spending. According to the 2000 Budget Review (page 28), employment in the non-agricultural, formal sector has decreased by 7.3% between 1994 and 1999.

On the other hand, as we indicated above, the very programs that are designed specifically to protect the income levels of the poor, such as Social Security and Public Works were under pressure over this same period. In developing countries, such as South Africa, there is a need to manage the impact of national-level economic shocks on the poor. This translates into a need to coordinate government protection of the income of the poor with macro-economic indicators such as employment levels. For example the levels of social grants and employment should not be allowed to decline at the same time.

1.3 Reducing the income risk of the poor

The third and last method of supporting the Income Security of the poor is to reduce the risks that the poor are exposed to. Governments can decrease the long-term income vulnerability of the poor by improving access to financial services such as micro-finance and health insurance. Governments should not simply help the poor to cope with lack of income security, it should also help the poor to reduce the risk of sudden fluctuations in income. In the absence effective risk-reducing instruments, the poor prefer to remain in low paying but secure jobs.

Microfinance programs and Health Insurance are examples of programmes that can help the poor smooth consumption during a crisis. Access to such credit may prevent the need for distress sales of assets and help the poor to retain and reacquire productive assets destroyed during a natural or economic disasters. Microfinance helps the poor diversify their sources of income and reduce their vulnerability to income shocks.

Such 'risk-management tools' allow the poor to take the risks necessary to escape from the cycle of poverty. This is arguably the most neglected aspect of poverty relief in South Africa. The Medical Scheme Act, 1998 is a good example of giving some of the poor access to Health Insurance. One of the purposes of the Act is to provide for wider access to medical schemes by the poor and elderly. It remains to be seen how effective this strategy will be.

Just over R1 billion was allocated to Poverty Relief and Job Summit Programmes in the current budget. The intended beneficiaries of these programmes are rural women, young people and the disabled have fewer economic opportunities and lower access to social services. The likely impact of this expenditure on poverty is however difficult to assess at the moment since the bulk of it is still unallocated. The NES also chronicles numerous problems of implementation and unspent funds in many of these projects, clouding the likely impact.

2) Improving access to and returns on human assets.

Income security is only one dimension of poverty alleviation. The next two sections will deal with the impact of government spending on non-income poverty (the need to improve access to physical and human capital). The most important human asset of the poor, their labor, can be improved primarily by spending on Education and Health services. Government social services in the 2000 Budget, will remain stable and show small real increases. In addition a series of targeted initiatives promise to improve the human capital of the poor (Umsobomvu Trust etc.). Conversely, the 2000 Budget has no good news for the neglected areas of Adult Education and Literacy training. Such programs could make a significant difference in the life-chances of especially the unemployed.

Table 5: Consolidated national and provincial expenditure for health and education

Source: 2000 Budget Review p.140

2.1 Skills Development

Two of the most important targeted programs address the issue of skills development. The Skills Development Act of 1998 mandates the establishment of sectoral training authorities (Setas) and the National Skills Fund (NSF). The sectoral training authorities are responsible for developing a sector skills plan within the framework of the national skills development strategy. Some of the functions of these sectoral authorities include the identification of workplaces for practical work experience and the allocation of grants to employers and the education and training providers. All private sector employers with monthly remuneration of more than R250 000 must pay a levy grant in terms of the Skills Development Levies Act of 1999. This constitutes 0.5 per cent of payroll from April 2000 and 1 per cent from April 2001.

The Skills Development Act requires that 80 per cent of this levy be paid to the Setas and the remaining 20 per cent to the National Skills Fund. The funds that are generated for the Setas are used almost exclusively for the education and training of those workers who are employed in the public and private sectors. This accords well with the stated policy aim of improving the skills of the existing labour force, but it leaves a small slice of the cake for those who are not employed or who do not work in the formal sector. It is the task of the National Skills Fund to undertake the education and training of the latter category of persons. The receipts of the new Skills Levy Act to finance the NSF and Setas are R1.5 billion for 2000/01 and R3 billion for 2001/02. The National Skills Fund would have roughly R300 million for the fiscal year 2000/01 and R600 million for 2001/02 to train the unemployed and those who do not work in the formal sector.

The Umsobomvu trust was established in 1998 and forms part of government's overall employment strategy framework (ESF). The key objective of this framework is to boost employment growth in the short- and medium term and encourage sustainability of employment. The trust was financed from a R855 million charge that resulted from the demutualisation of Sanlam and Old Mutual. The employment strategy framework of the Department of Labour foresaw further budget support for this trust. The 2000/01 budget does not give any indication of additional financial support for the trust, and it would appear as if government largely depends on the funding contributions of labour and business to boost this trust. Mention is made in the budget speech of supplementing the funds of the poverty-relief programs with that of the Umsobomvu trust.

2.2 The Integrated Nutritional Programme

The Integrated Nutritional Programme (formerly known as the primary school nutritional programme), funds projects providing assistance to undernourished children. Given the likely decline in the grant (-10%), the department's strategy is to spend proportionally more on the poorer provinces. This program has experienced massive problems with the spending of grants at provincial level, and the rollovers for the Integrated Nutrition programme amounts to R241.6 million (2000 Budget Review page 154).

Table 6: The Integrated Nutritional Programme for 1999-2002/03 (R million - Nominal)

Source: 2000 Budget Review p.140

This program could play a vital role in improving both the health and education status of poor children. Such an improvement could have a dramatic impact on their access to and returns on their labor once they start working.

2.3 An Integrated Aids Strategy

Cabinet has approved a special allocation on the national budget to support an integrated strategy to address the issue of HIV/Aids. The allocation will comprise R75 million in 2000/01, increasing to R125 million in 2001/02 and R250 million in 2002/03. The Department of Health will still act as the lead department in joint co-operation with the Education and the Welfare departments.

The 2000 Budget Review also introduces income tax exemptions on donations to pre-primary schools and primary schools, organisations involved in preventing HIV infection, children's homes and those who care for the aged. This provision will serve as an incentive to organisations and individuals to alleviate the plight of these institutions. There is however no guarantee that such donations will go to organisations in real need.

3) Access to physical assets

The access of the poor to physical assets such as electricity, water, land and housing is key to alleviating their situation. In this part of the submission we concentrate on two examples of such assets.

3.1 Land

The Department of Land Affairs has two key programmes, which aim to improve the access of the poor to land. The restitution programme aims at returning land to and compensating victims of forced removal, while the land reform programme focuses on land redistribution and land tenure reform in former homeland areas.

Table 7: Department of Land Affairs

Source: National Expenditure Review p 235 and own calculations

Land Affair's budget has grown substantially in real terms over the last four years and is projected to increase more in the MTEF period. This is largely due to the growth in the Restitution Programme's allocation (868%). To date the restitution process has however been very sluggish due to the legalistic manner in which claims were processed. Every claim had to pass through the Land Claim's Court and claims were frequently handed back for technical corrections to the involved parties. The claims process has recently been simplified and allows for agreements between state, claimants and landowners to be reached out of court. This reform has sped up the process considerably. The Department argues that Restitution's MTEF allocation may still be too small to cover the expected case load, but given the programme's poor performance it would have to prove that it could use the additional resources effectively.

Land Reform's budget is projected to decline over the MTEF period, despite a sharp increase in the 2000/01 financial year. The Tenure Reform subprogramme has yet to get underway due to lack of legislative reform. The redistribution element of the programme has reportedly increased dramatically and the Department has reached its capacity in the number of cases it can handle. The Department reports that the programme's capacity is curtailed by the tight controls on increasing personnel numbers.

3.2 Housing

The importance of housing to poverty reduction can be most readily ascertained by the examining the cross-linkages with other elements in the poverty reduction framework we are using. For instance:

• good quality housing will improve the health status of residents;
• the education of children is facilitated by having home environments conducive to studying and playing;
• housing construction stimulates economic growth and can lead to increase in employment in the SMME sector;
• adequate financing of community facilities can lead to a situation where education and communities can be co-financed and the burden on education relieved.

Within the National Housing Department, the SA Housing Fund programme most directly effects the physical asset status of the poor, as it is from this fund that housing grants are drawn. As a portion of total budget, the Housing Department's allocation peaked at 2.4% of total budget, about half of what the government committed itself to before it came to power (5% of total expenditure).

The current housing need is estimated to be as high as 3.7 million units and grows at a rate of 20 000 units per year. The Department estimates that since 1994, 750 000 units have been or are presently being constructed. Given the current construction rate, in no small way predicated on the housing budget, the 10-year target for eliminating the backlog will not be reached.

Table 8: National Department of Housing:

Source: National Expenditure Review p 124

Despite a cut in real budgeted expenditure in this year's budget seen in table 8, the Housing Fund has grown substantially in the preceding period and is projected to level out in the medium term after a slight increase next year.

Table 9: Comparison of nominal housing grant increase with annual inflation rates

Source: Personal communication Housing Department (City of Cape Town); Construction Economics (UCT)

Importantly, the highest value grant, which goes to the poorest households, has lost substantial value since 1994 (Table 9). The grant was effectively increased by 14% in 1996/97 when a VAT exemption was extended to housing grant expenditure. In 1999/00 the nominal value of the grant was increased by R1 000. Together with the VAT exemption, the grant has a current nominal value of R18 240. Table 9 compares the year-on-year nominal increase with the annual headline inflation. Only in the years in which increases were made did the nominal increase outweigh inflation.

A number of commonly raised concerns related the public funded construction of houses can be traced back to the value of the grant:

• The poor quality of housing - including the small size and inflexible design of houses
• The poor location of housing
• The slow consolidation in incremental projects

4) Participation

The third aspect of poverty that we take into account is the participation of the poor in government policy processes and the impact that these can have on the extent of pro-poor spending. This aspect of poverty can be addressed by formal democracy (elections etc.) and increasing the participation of the poor in policy-making. In this context such participation would refer directly to the budget process.

Budget drafting is considered the preserve of the government in most countries and is therefore a relatively closed. The Public Finance Management Act will ensure more frequent and useful publication of information on the implementation of the budget. This information is crucial to support the intervention of parliament in the budget process. However, committees represent the strongest and most appropriate potential avenue of intervention for the poor and civil society organisations that represent their interests. Unfortunately, parliament is not yet empowered to play an effective role in the budget process. Despite constitutional recognition of the legislatures right amendment power, enabling legislation has yet to be tabled. The absence of a legislative budget research office compounds this problem.

International research shows that, over and above the oversight function, legislatures are increasingly playing a greater role in the budget process and are responsible for contributing to improved policies. The intervention of the Finance Committee in the Public Finance Management Act is testimony to the potential role of the legislature in improving policy outcomes and the commitment to of citizens to trade-offs.

The efforts of the Finance Committee in making the legislative budget process more transparent and open to participation are exemplary. We have repeatedly called for legislature amendment powers and research capacity, as has the Committee, for several years. We refer the committee to our research on these topics and our availability to participate in discussions on these issues. It may be understandable that the Finance Department should prioritise some of the building blocks of budget reform, such as the Public Finance Management Act. However, an effective role for committees in the budget process is a key element to support the accountability and policy aims of budget reform. It should also be the most direct access to the budget process for the poor.

Conclusion

From the above, it is clear that while the results of the current budget for the poor are generally mixed, the major weakness of the budget is that it does not adequately support the income and income risks of the poor and unemployed.

The government does significantly better in improving the access of the poor to programs that increase the value of their labor and their access to physical assets. Education and Health spending is projected to remain stable over the medium term and a number of targeted Skills and Health improvement programs are being initiated and continued. Many of the projects that are designed to give the poor access to physical resources are however bedeviled by implementation problems. In addition many poverty projects are funded by conditional grants to provincial and local government. The Budget Review and NES both refer to problems of coordination and roll-overs with these grants.

In the medium term attention should be paid to ironing out these delivery problems. The greatest challenge to government is however to maintain and expand the social safety net. Some effort should be made to tie its levels to macro-economic indicators that impact on the poor. More broadly the reduction of the income risks that the poor are exposed to should be investigated. It is only once people feel relatively free from risk that they turn their minds to entrepreneurship.