V Social Spending Policy and the Budget
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

A major challenge to budgetary policy in the new South Africa will undoubtedly lie in the area of social spending. In particular, policymakers will need to address the question of how far and how fast to move to a more equitable pattern of social spending across racial groupings and to extend social services to those who currently do not receive social benefits. This chapter attempts to outline the principal issues facing policymakers in this area.

A major challenge to budgetary policy in the new South Africa will undoubtedly lie in the area of social spending. In particular, policymakers will need to address the question of how far and how fast to move to a more equitable pattern of social spending across racial groupings and to extend social services to those who currently do not receive social benefits. This chapter attempts to outline the principal issues facing policymakers in this area.

The first part of the chapter reviews the recent trends in social spending in South Africa and compares the current level of social spending with that prevailing in countries at a similar stage of development. The main conclusion of this analysis is that social spending in South Africa—net of social security payments—has risen to levels that are relatively high by international standards. Correspondingly, the scope for addressing social problems through raising further the share of these expenditures in the budget appears to be limited. Rather, a basic reordering of priorities within the present social spending budget is required if South Africa’s social problems are to be addressed without resorting to either deficit financing or to increased fiscal revenues.

The second part of the chapter attempts to quantify, in a medium-term framework, the implication of moving toward equal rates of spending per capita across racial groups in the education, health, and social welfare sectors of the budget while at the same time maintaining overall fiscal discipline. The broad conclusion of this analysis is that a move in such a direction, while likely to result in a substantial decline in benefit rates for nonblacks, would entail only limited increases in benefit rates for blacks from relatively low levels, especially in view of the rapid population growth of the least privileged sectors of society and the need to incorporate the large segment of the population that currently falls beyond the reach of the budget. The corollary to this finding is that redistribution policies alone will not be sufficient to ensure a sustained overall improvement in living standards, but will need to be supported by policies aimed at placing the economy on a higher growth path that would generate employment for a growing population and provide the budgetary base for raising the level of social spending.

Social Expenditure Trends in an International Context

Recent Trends

As shown in Table 10, there has been a trend increase in the relative share of central government social spending to its present level of about 39 percent. In the past two budgets, in particular, the shift toward social spending—largely on education and health—has been facilitated by cuts in defense spending.

Table 10.

Functional Expenditure of the State Revenue Account

(In percent of total expenditure)

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Source: South African Department of Finance.

As shown in Table 11, at the general government level, social expenditures in relation to GDP increased by over 2 percentage points between 1983 and 1988.24 This rise was largely accounted for by expenditures on education, particularly for the construction and staffing of new schools. The increase in social spending was made possible by a reduction in outlays on transport and communications as several major projects were completed. Spending on defense remained roughly constant as a proportion of total expenditure, while outlays on public order and safety registered some increase. Although data are not available after 1988, the shift in spending from defense to social areas at the central government level should also be reflected in the general government accounts.

Table 11.

Functional Classification of General Government Expenditure1

(Fiscal years ended March 31)

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Sources: South African Department of Finance (1991).

Excludes the sale of goods and services by government departments.

Additional resources for social expenditure could potentially be obtained from the category of expenditures for the public administration. Moving to a unified South Africa and consolidating the ten homelands—four of which are nominally independent and six of which are “self-governed”—would seem to offer scope for savings. Furthermore, if bureaucratic redundancies could be eliminated in South Africa’s tricameral parliamentary system and “own affairs” departments for the four main racial groups (Asian, black, colored, and white), budgetary savings would result.25

Administrative costs, however, are difficult to measure. While it is clear that consolidation of administrative structures would eliminate certain top administrative positions, such as ministers and director-generals, the potential savings in this area are relatively small compared with total expenditure. At lower levels, the scope for significant savings in terms of personnel or the wage bill is harder to measure. Indeed, more comprehensive and careful administration of social expenditure programs may involve expanding rather than reducing the net public sector work force.

With these important caveats, some useful information may, nevertheless, be derived from examining the evolution of public wages and salaries relative to GDP (see Table 12). Table 12 indicates that expenditures on wages and salaries at the general government level rose sharply in the early 1980s, when the homelands were established. Furthermore, the increase in the wage bill at the central government level coincided with the inception of the tricameral system of government. Although these trends suggest that, with the streamlining of government in a new South Africa, there might be some scope to reduce administrative expenditures, international comparisons suggest that the savings may be limited (see discussion below).

Table 12.

Public Expenditures on Wages and Salaries

(In percent of GDP)

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Source: IMF, Government Finance Statistics.

More recent data are not available.

International Comparisons of Expenditure

Although every country is unique, it is nevertheless informative to compare South Africa’s expenditure pattern with that of other countries. Such a comparison provides some indication of the scope for further reshuffling of expenditure priorities if spending patterns are to converge to international averages.

As shown in Table 13, general government expenditure in relation to GDP in South Africa in 1987 was at about the same level as in the other upper-middle-income countries. At the same time, overall spending on social programs, at about 14 percent of GDP in South Africa, was somewhat below the average of the other middle-income countries, mainly reflecting relatively low expenditures on pensions and social welfare payments in South Africa. In contrast, South African public spending on education and health was relatively high in relation to GDP.

Table 13.

South Africa and Comparator Countries: Social program and Defense Expenditures1

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Sources: South African Department of Finance (1991); and IMF, Government Finance Statistics.

Fiscal years ending March 31; general government expenditure (based on a sample of ten middle-income and ten industrial countries for which data were available).

Includes tertiary education.

Includes community service and recreation and culture.

In the period under consideration, South Africa’s expenditure on education, both as a share of total outlays and in relation to GDP, substantially exceeded not only that of middle-income countries but also that of the industrial nations. To some extent, this reflects the wide variation in the sources of funding for education, particularly in the industrial nations, many of which rely on the private sector to provide schooling. A further interesting feature of South African expenditure on education is that it was high by international standards as early as 1982/83, before the issue of social backlogs had come to the fore. However, this relatively high level masks a large difference in expenditure per capita between the races.

In relation to GDP, South Africa’s spending on health care was relatively constant during the 1980s and significantly exceeded that for the other upper-middle-income countries. As with education, there is a wide disparity in the provision of health care between the races, with the standard of health care provided for the white population being very high by international standards.

Expenditures on social security and welfare have lagged behind those of other countries, largely reflecting South Africa’s limited social safety net. It is interesting to note that general government social security and welfare expenditure tend to be positively correlated with income. Thus, for 1983–87, the share of GDP spent in this area was 2 percent for the lower-middle-income group, over 8 percent for the upper-middle-income group, and over 13 percent for industrial countries for which data were obtainable. Industrial countries spent more than a third of total government expenditure on social security and welfare. This would imply that, as the disadvantaged groups are brought into the industrial process in South Africa, the resources devoted to this category of spending are likely to rise sharply.

The need to meet social backlogs will greatly strain South Africa’s limited budgetary resources. It is useful, therefore, to compare nonsocial spending categories with those of other countries. The discussion below focuses on defense and wages and salaries as two nonsocial expenditures that are potential candidates for significant budgetary savings. These savings might flow from the “peace dividend” to be reaped as South Africa’s political situation is normalized and from administrative savings to be made as the duplications of bureaucracy along racial lines in the apartheid system are eliminated.

As regards defense spending, South African defense outlays averaged 13 percent of general government expenditure or 4.3 percent of GDP during the 1980s. In comparison, in 1983–87, defense expenditure as a share of GDP in the lower-middle-income, upper-middle-income, and industrial countries averaged 2.8 percent, 2.3 percent, and 5.0 percent, respectively. From this point of view, South African defense expenditure exceeds that in the upper-middle-income group of which it is a member. Using the average of the upper-middle-income countries as a standard suggests the potential to reduce defense expenditure by about 2 percentage points of GDP.26

Another category of expenditure that is likely to be scrutinized in a post-apartheid South Africa is that of administrative costs, which are boosted as a result of duplicated bureaucracies along racial lines. Using spending on wages and salaries as a proxy for such administrative costs, Table 14 suggests that, at the central government level, South Africa’s wage bill exceeds that of the industrial and lower-middle-income countries but falls below that of the upper-middle-income group. The implication of this comparison is that, even though the current South African system involves duplication of administrative duties, the scope for saving may not be particularly high.

Table 14.

Central Government Expenditures on Wages and Salaries

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Source: IMF, Government Finance Statistics.

Implications of Equalizing Benefit Rates in Social Programs

While South Africa devotes a significant share of its national resources to meeting social needs, allocation of expenditure is highly uneven across the various racial groupings. This section analyzes the implications of redressing existing imbalances in the provision of social services and of extending coverage to those who do not currently participate in social programs. The discussion focuses on the main categories of spending—education, health, and social pensions.27 In addition, the resource cost entailed in addressing the housing needs of the more disadvantaged groups of society is examined.

The highly uneven provision of social services is reflected in education expenditure. As shown in Table 15, in 1990, per pupil expenditure for whites was more than four times higher than for blacks. In addition, the pupil/teacher ratios in public ordinary schools (primary and secondary) were sharply higher for nonwhites than for whites. Table 15 also includes estimates, based on a methodology first discussed by van der Berg (1989b), of the share of GDP that would be absorbed if spending were equalized at the per capita rates of the various racial groups. With actual education expenditure in 1990 at 5½ percent of GDP, these estimates clearly illustrate the potential pressures that will come to bear on the budget as the more advantaged groups try to protect the existing quality of their education and the less advantaged strive to equalize spending at higher rates. In particular, it is apparent that equalizing per capita spending on education even at the present Asian and colored levels, which are approximately double the average overall level, would be beyond the capacity of the budget.

Table 15.

Education Indicators Along Racial Lines in 19901

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Sources: South African Department of National Education; and IMF staff estimates.

Including public ordinary schools, secondary schools, and technical and teacher training colleges.

Given the limited scope for increasing social expenditures in relation to GDP, the key policy question is how the system of education might evolve over the medium term as spending rates are equalized. In analyzing this question as it pertains to education, one must take account of the estimated 1½ million children eligible for schooling who currently receive no formal education.28 The authorities have stated that their aim is to achieve a uniform student/teacher ratio of 30:1 and to provide teachers of comparable quality in the public ordinary schools. This would involve upgrading the qualifications of teachers at black schools and reducing somewhat the postsecondary training of those currently at white facilities.

The staff has prepared a number of estimates to examine the implications of the authorities’ targets (see Table 16). These estimates are based on the assumption that the share of GDP devoted to education will stay at its 1990 level and that, over the five-year horizon, the backlog of those potentially not in school will be reduced by one half. The growth rates of the student population vary across racial groups, from an annual rate of increase for black pupils of 4.4 percent compared with an annual rate of decline for Asian, colored, and white pupils of 0.1, 0.4, and 0.9 percent, respectively.29 To analyze the implications of equalizing spending rates within the current budget total, benefits are disaggregated into cost per pupil in terms of teachers’ salaries and of other expenditures, which would include spending on structures and equipment.

Table 16.

Estimated Expenditure on Education in 1995

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Sources: South African Department of Education; and IMF staff estimates.

Assuming 30:1 pupil-teacher ratio and standardized teacher salary of R 26,229 (in 1990 rand).

Table 16 shows that the more rapid the growth rate of GDP, the greater the amount that can be spent on education while maintaining the relative share of such spending in overall output. However, given the different racial demographics and the need to absorb the large numbers of black pupils that are currently outside the education system, the calculations show that, under reasonable assumptions about growth, the scope for raising education expenditures on black pupils is relatively limited. Thus, whereas overall education expenditure per capita on whites would be reduced to one third of its former level, that on blacks would be increased by only about 50 percent, to a level that must still be considered relatively low. Even more striking would be the limited scope for increasing non-teacher expenditures per black pupil.

Health, like education, is a challenge for the authorities. However, as Table 17 shows, per capita public spending on health is less skewed than it is on education, because the spending rate on blacks is roughly one half that on the other population groups.30 If it were possible to equalize spending at the rates for whites (or Asians), the cost would be 4¾ percent of GDP compared with actual budgetary spending of 2¾ percent of GDP. Thus, equalizing spending over a medium-term horizon within the current budget allocation implies that the non-black population groups would have to take a large cut in services. As Table 17 shows, even if GDP growth were to average 4 percent a year over the period through 1995, spending rates on the non-black group would fall by over 30 percent.

Table 17.

National Public Health Expenditures

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Sources: South African Department of National Health and Population Development; and IMF staff estimates.

The projections assume that the population would grow by 2.3 percent a year (estimates provided by the Department of Manpower).

As with other categories of social spending, the welfare system is less generous for blacks than for the other racial groups. For the category of spending discussed here—old age and disability pensions—equalizing benefits at the white rate would consume over 3 percent of GDP, compared with the 1990 budget allocation of 2 percent of GDP (see Table 18).31 Even if GDP were to grow by 4 percent a year through 1995, continuing to devote the same relative budget allocation to pensions as in 1990 would result in a sharp reduction in benefit levels for nonblacks and only a small improvement for blacks.

Table 18.

Expenditures on Social Pensions1

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Sources: South African Department of Finance; and IMF staff estimates.

Old age and disability pensions.

The elderly population is assumed to grow at 2.4 percent a year; however, the relative proportion of old people eligible for pensions is assumed to remain at its 1990 level.

Unlike other types of social expenditure, until recently the funds available for the provision of housing were very limited. In the past year, off budget funds totaling R 2 billion (0.8 percent of GDP) were established to develop the necessary infrastructure, secure the plots, and erect structures for the underprivileged. The authorities estimate that providing acceptable shelter for the entire population in 1990 would have required approximately 1½ million new homes. Furthermore, official estimates suggest that migration to urban centers and population growth would increase the needed housing stock by 150,000 a year. The cost of meeting these needs is very high: based on estimates that infrastructure development and construction costs per house are about R 12,000, reducing the backlog by 10 percent a year while continuing to meet new orders would require expenditure of about 6 percent of GDP.32

24

The general government in this context includes the TBVC states as well as the central government. Data on a general government basis are available only through 1988.

25

Under the apartheid system, the affairs of each racial group are administered by a separate “own affairs” department, with black “own affairs” being administered under statutes of the white House of Parliament. Thus, the combination of separate administrative structure in each homeland, and for each racial group in the Republic of South Africa, typically gives rise to more than a dozen departments dealing with the same function. There are, for example, 18 departments that deal with housing.

26

In this discussion, it would be preferable to consider expenditure on “protective services,” that is, including the police and related activities as well as national defense expenditure. While these data exist for South Africa, not enough comparator data are available to make a meaningful comparison.

27

The expenditure totals presented in this section are not strictly comparable to those discussed previously inasmuch as estimates for the TBVC states are included here. Further, the demographic patterns needed to analyze benefit rates were not available for the entire budgetary classification of each spending category; therefore, only the relevant subset will be discussed. For the most part, however, a sizable proportion of each social spending category is analyzed.

28

Estimate prepared by the Department of National Education.

29

Growth rates of the population groups provided by the Department of National Education.

30

In this respect, it is to be noted, however, that medical spending outside the public sector is predominantly devoted to the needs of the white sector of the community.

31

The large difference that arises between equalizing at the rates for blacks and for whites is attributable not only to the difference in benefit rates but also, because old age pensions are means-tested, to the significantly higher proportion of older blacks than whites that are involved in the program.

32

Based on output growth of 4 percent a year. If GDP were to rise by only 3 percent a year, meeting the housing need would claim 6½ percent of national output.

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