Economic Outlook
As indicated by the National Minister for Finance in his budget speech two weeks ago, the South African economy is still growing at a very slow pace. Although a moderate recovery is forecast over the 2017/18 MTEF, National Treasury expects the South African economy to remain fragile, growing at 1.3% in 2017 and 2% in 2018.
Our provincial economic growth performance has not been that different from the rest of the country and globally. We predict a 1.5% growth rate in 2017. This sluggish provincial economic performance is, to a large extent, influenced by the contractions in the agriculture, forestry and fishing industries, mining and quarrying, electricity, as well as trade.
Fiscal Consolidation and Additions
As a result of this subdued economic outlook, as well as the need to provide additional funding to new social spending priorities, it was necessary for National Treasury to intensify the fiscal consolidation programme, alongside additions to the budget, while protecting basic social services as far as possible.
While the 2016/17 MTEF saw significant fiscal consolidation budget cuts implemented against provinces, the 2017/18 MTEF sees these fiscal consolidation cuts being kept to a minimum. Similarly, some fiscal consolidation cuts are also implemented against the conditional grant allocation to provinces, but these have also been kept to a minimum.
KwaZulu-Natal has suffered substantial budget cuts over the last few MTEF periods. Some of these cuts related to the annual data update of the equitable share formula, while others relate to National Treasury’s fiscal consolidation plan. Unfortunately we are not spared from budget cuts over the 2017/18 MTEF.
There are two types of budget cuts effected against the Provincial Equitable Share, as well as reductions made in terms of the Provincial Own Revenue budgets. Besides this, there are also fiscal consolidation cuts effected against the province’s conditional grant allocation.
The first Provincial Equitable Share cut relates to the data updates of the Provincial Equitable Share formula. The second Provincial Equitable Share cut relates to National Treasury’s continued roll-out of their fiscal consolidation plan. Besides these Provincial Equitable Share cuts, departments are, in aggregate, anticipating to reduce their Provincial Own Revenue budgets, mainly due to lower interest revenue anticipated to be collected, as well as lower health patient fees due to the National Department of Health widening of income scales for free services, translating into an increased number of patients who qualify for free public health care.
The province loses a total of R439.632 million, R488.993 million and R789.110 million over the 2017/18 MTEF. These reductions on the revenue side directly impact on the resources that are available for allocation to all departments.
On the other hand, National Treasury is adding some funds to the provincial baseline for Education and Health. In this regard, Education receives R634.605 million in 2018/19 and R686.110 million in 2019/20 to assist with personnel spending pressures. KZN is currently funding learners at below the national norm and these funds will assist us to begin to correct this anomaly.
Health receives R211.111 million in 2019/20 for the exchange rate pressures in the procurement of medicines and medical supplies as a result of the weakened Rand/Dollar exchange rate.
National Treasury provides an amount of R1.498 billion in 2019/20 and this offsets the budget cuts in the outer year meaning that the budget cuts effected against departments as a result of lower revenue expectations are offset in the outer year.
Provincial Reprioritisation
The other major impact on the provincial fiscus is the remuneration of Izinduna in this province. This is a matter that the province has grappled with over the past few years since the first Presidential proclamation was signed in February 2014 that Izinduna should be remunerated. While this proclamation was signed determining the amounts at which the Izinduna should be remunerated, no funds were added to the provincial fiscus to pay for this and this, therefore, remains an unfunded mandate. All efforts to secure funding for this unfunded mandate from the national fiscus have failed, and it is clear that the province is expected to deal with this unfunded mandate from within the provincial fiscus. It was agreed by the Provincial Executive Council that the Department of Co-operative Governance and Traditional Affairs (COGTA) will fund 50% of the amount needed for the remuneration of the Izinduna from within their baseline through reprioritisation, while the balance of 50% is proportionately cut from all remaining Votes. The amount that is required to fund the Izinduna is calculated at R252.328 million, R266.206 million and R280.847 million over the 2017/18 MTEF.
Protection of Key Government Programmes
As a result of the budget cuts and the provincial reprioritisation exercise, all departments’ budgets are cut but, interesting to note is that, while the budget cuts are significant in 2017/18 and 2018/19, there is a positive allocation to all departments in the outer year, albeit a small increase for most. Education sees good increases in 2018/19 and 2019/20, while Health receives a good increase in 2019/20. The Provincial Executive Council directed departments to protect government’s priority programmes as far as possible from these cuts and to continue to focus on cost-cutting and efficiency gains rather than cutting key programmes.
Conditional Grants
In terms of the province’s conditional grant allocation, some reductions are made as a result of National Treasury’s fiscal consolidation efforts. In addition to fiscal consolidation, a number of grants benefit from additions, while two new grants are incorporated into the fiscal framework as part of the expansion of social spending. Reductions to conditional grants over the 2017/18 MTEF have focused on poor performing grants, as well as grants which have higher than average growth rates.
The two new grants are:
- The Learners with Profound Intellectual Disabilities grant and Education receives R5.558 million, R14.739 million and R17.545 million over the 2017/18 MTEF in this regard. The purpose of the grant is to provide educational opportunities to learners with severe and profound intellectual disabilities.
- The Social Worker Employment grant is introduced in the Social Development sector. The aim of the grant is to address the need of social workers in the sector and reduce the backlog in the number of social worker graduates that remain unemployed after completion of their government subsidised education. The department receives R53.459 million, R58.855 million and R62.522 million over the 2017/18 MTEF with regard to this new grant.
The Education Infrastructure grant and the Health Facility Revitalisation grant see increases of R149.166 million and R R53.445 million in 2017/18, respectively. KZN benefits from the incentive nature of this grant in 2017/18 having scored above 60% in terms of the assessment.
The National School Nutrition Programme (NSNP) grant under Education increases over the MTEF to provide for inflationary pressures related to food prices. The addition is made to alleviate this pressure and to ensure that the programme can continue to provide a nutritious meal to qualifying learners on school days.
Although the Comprehensive HIV, AIDS and TB grant is reduced over the MTEF due to fiscal consolidation, the grant still shows good growth. To make provision for the continued expansion of ARV coverage in response to the national universal test-and-treat policy, substantial additional funds of R556.599 million are added to the grant in 2019/20. The allocation to this grant is R4.852 billion, R5.486 billion and R6.112 billion over the MTEF.
Infrastructure
The development of a Provincial Infrastructure Master Plan for the province is well underway and is being developed with all the infrastructure related authorities. The key infrastructure areas to be focused on are harbours, airports, road, rail, water, sanitation, electricity, ICT, school and health facilities, human settlements, as well as specialist infrastructure to support lead economic sectors in the province. Infrastructure development is the foundation for poverty reduction and economic growth in developing countries.
The province is budgeting to spend R15.084 billion in 2017/18, R15.541 billion in 2018/19 and R16.799 billion in 2019/20. This is a considerable injection of funds into the economy and acts as a major stimulus to growth and development.
Having said this, it is important that departments do not construct new infrastructure facilities unless they have sufficient funds to operationalise these when the facilities are completed. Departments are urged to ensure that existing facilities are well maintained and rehabilitated to ensure that our existing government assets, which are essential in delivering government services at grassroots level, do not become dilapidated.
Conclusion
The largest portion of the provincial budget still goes to the Department of Education which receives 41.2%. The second largest portion of the provincial budget goes to the Department of Health which receives 34.3%. These two budgets therefore make up 75.5% of the provincial budget.
Despite the budget cuts, our commitment to the people of KwaZulu-Natal is that we will protect government’s key priority programmes that are aimed at bringing a better life to all. This is in line with the province’s commitment to achieving the vision of KwaZulu-Natal as a “Prosperous province with a healthy, secure and skilled population, living in dignity and harmony, acting as a gateway to Africa and the world”. As we have always said, the growth and development of the province is a shared responsibility among government and key social partners, namely organised business, organised labour and the organised community sector. This becomes even more succinct in view of the impact that the fiscal consolidation programme continues to have on our equitable share and conditional grant allocations.
Our proven fiscal discipline will help us deal with the budget cuts while remaining focused on our key priority programmes. The cost-cutting measures are not only the responsibility of Provincial Treasury – we all have a role to play to ensure that these cuts are first directed at ‘nice-to-have’ spending areas and thereby try to avoid cutting core service delivery areas. We must improve efficiencies in our spending so that we can re-direct more and more funds to core service delivery programmes for the benefit of our people.
