The 2005/2006 People's Budget is the fourth annual publication of the People's Budget Campaign, a coalition of COSATU, the SA Council of Churches (SACC) and the SA NGO Coalition (SANGOCO).

The People's Budget Campaign aims to ensure that debates on the budget are not left to business and technical inputs, but rather reflect the needs of the majority of our people. To that end, it produces an annual document presenting key proposals for improving the budget; inputs into the budget process through comments on the MTBPS and the annual budget; and conducts educational work amongst members, in unions, church groups and communities. Practically, it aims to locate fiscal policy within an integrated development perspective, explain our proposals for job creation and rapid poverty eradication, and provide revenue and expenditure proposals that translate our vision into practice.

A broad approach to poverty eradication

While government has made some advances in overcoming the legacies of apartheid by establishing democratic institutions and extending government services, much more needs to be done. The People's Budget Campaign shares government's view, expressed in the Presidency's Ten Year Review, that one of our greatest current challenges is high unemployment. The problems of HIV/AIDS, poverty and inequality must also be seen as areas for priority action.

Unemployment has risen from 16% in 1995 to over 30% today, using the narrow definition. The more accurate definition which includes "discouraged workers" puts our unemployment rate at over 40% or 8 million people. While some jobs were created between 1996 and 2002, 90% emerged in the informal sector. At the same time, the numbers seeking work have soared. As a result, unemployment in SA is now far higher than in comparable middle-income countries, where joblessness typically runs closer to 10%.

Rising unemployment and slow growth reflected systemic distortions left by colonialism and apartheid.

On the one hand, the state historically deprived the majority of the population of productive resources, skills and access to formal economic services, including the financial institutions and marketing. These measures, designed to compel black people to work for lower wages, meant that if the formal sector did not create jobs, most people were left poorly equipped to earn income in other ways.

On the other hand, the formal sector has generally been rooted in minerals production and refining. These activities tend to be highly capital intensive, creating few jobs and doing little to meet the basic needs of the poor.

The budget and fiscal policy have a central role to play in addressing these problems. For example, public spending can increase the resource base of the poor through land reform, provision of infrastructure and skills, programmes to support SMEs and co-operatives, and the introduction of a comprehensive social security system. At the same time, the government can direct spending in ways that support the growth of relatively labour-intensive industries in the formal sector, including the service sector and light manufacturing. Finally, a more expansionary fiscal policy can stimulate overall economic growth.

The People's Budget Campaign welcomes the relatively expansionary fiscal policy adopted in the past three years, when compared to the highly contractionary fiscal approach of the preceding period. The budget cuts of the late 1990s fuelled a recession and constrained critical efforts to restructure government services. Yet more can still be done to expand basic infrastructure and social services; and to ensure that government programmes prioritise sustainable employment creation. In addition support should be shifted from a one-sided focus on exports to include industries and services that meet local needs and create jobs.

Specific proposals

The People's Budget 2004 builds on earlier documents from the People's Budget Campaign. It focuses on three key areas for addressing poverty and growing employment: land reform, infrastructure and housing, and social security.

Land reform has, to date, had disappointing outcomes. The recent requirement that rural families pay R2500 for land is likely to undermine the process even further. Instead, the programmes must be substantially expanded and accelerated to meet the Ministry's target of redistributing 30% of land by 2015.

The lowest estimate for achieving the 30% objective comes to R22 billion over the next 11 years. That would, in turn, require a threefold increase in the 2004 budget for buying land, to almost R1 billion a year. In addition, to settle even half the outstanding restitution claims by 2010 would require that the programme's budget be more than doubled, to R1,7 billion.

The RDP expected provision of housing and infrastructure to contribute to home-based production and employment creation. Instead, government has provided these services at a relatively low level, and often at unaffordable cost. As a result, while they have certainly improved living standards, they have done little to facilitate job creation or stimulate more equitable economic growth.

At the current rate, state-subsidised housing is barely keeping pace with the growth in the homeless population. But in real terms, the housing budget has declined in the past eight years. At 1,4% of the budget in 2003/4, it is very low by international standards. Most developing countries spend 2% to 5% of the budget on housing.

Despite relatively small budgets, housing is plagued by underspending. Reasons include the requirement that poor families either pay R2500 themselves or provide "sweat equity" through the People's Housing Programmes; new requirements for housing quality, without an equal increase in government funding; and the failure to increase the means test in line with inflation.

The People's Budget proposes overcoming these problems, starting by increasing the housing budget to 5% of the total budget to permit a substantial increase in subsidies. This action, combined with measures to accelerate land release, could permit more densification. In addition, housing projects must be situated in overall development strategies to ensure they are economically, socially and environmentally sustainable; and must be accessible to lower income households who have previously been excluded from accessing financial sector support.

Ensuring affordable housing for poor families is meaningless if services remain unaffordable. The People's Budget Campaign has long supported the national policy of free basic water and electricity. However, case studies commissioned by the People's Budget Campaign of three municipalities demonstrate that many are not implementing the policy. Often they lack the necessary funds, capacity and understanding of national proposals. Where they rely on means testing to identify poor families, the administrative obstacles effectively bar many eligible households.

These case studies point to the need, first, to ensure that all municipalities have the resources they need to provide free basic services. This is particularly important for poverty-stricken areas in the former homelands. Second, free basic services must be provided as a universal minimum, recovered through higher tariffs on large consumers of electricity or water.

On social security, the People's Budget Campaign agrees with the government's Committee of Inquiry into a Comprehensive Social Security System (known as the Taylor Committee) on the need to introduce a basic income grant, or BIG. The BIG would provide a small amount of cash to each adult South African every month, providing some protection against poverty for all our people. The Committee argued that a BIG was needed to address gaps in the current system of social grants in a viable and administratively simple way.

The People's Budget Campaign welcomes the recent increase in the budget for social grants, much of which went to extend the Child Support Grant on a large basis. However, we find the decision to exclude children between the ages of fourteen and seventeen arbitrary and constitutionally dubious. Moreover, nearly 12 million poor people, including most unemployed adults, are still effectively unable to access state support. A BIG would give them resources to engage more effectively with the economy.

A comprehensive study on financing the BIG concluded that it is both affordable and necessary. Four well-known economists, brought together to assess the cost of the BIG, found that it would be fiscally viable as well as effective and efficient in reaching poor households. It could be funded through a combination of various types of tax.

Building participation

Currently, despite efforts at transparency, the budget process is still driven by the Executive. The People's Budget proposes ways to ensure greater participation by both Parliament and civil society. In particular, it recommends:

1. Rapid action to give Parliament power to amend the budget, as required by the Constitution. In particular, we propose measures to improve interaction around fiscal policy through structured debates on the MTBPS and to enhance Parliament's technical capacity.



2. A stronger role for NEDLAC in considering the draft MTBPS and budget proposals. Currently, the parties at NEDLAC really only react to government's published proposals. Civil society organisations should have greater opportunities to take part in budget debates through NEDLAC, as well as through a system of public hearings.

In addition, local budgets should be a site for participation and debate. This requires a closer linkage between municipal Integrated Development Plans (IDPs) and budgeting processes. Ward committees should also provide an avenue for discussing local budgets.

Financing an integrated development strategy

Government funds its budget through taxation and borrowing. More efficient and expansionary policies are possible in each area.

Government has repeatedly cut personal income tax at a cost to the fiscus of more than R45 billion in the past four years, in addition to a reduction, post-1994, in corporate tax. But it has not reformed VAT, even though VAT has a regressive impact - that is, it requires poor people to pay a larger share of their income. To address this problem, the People's Budget proposes a 1% cut in VAT, together with the introduction of a tiered VAT, with higher rates on luxuries and exemption of more necessities. Worldwide, most countries have a tiered VAT.

With respect to debt, South Africa has a relatively low debt to GDP ratio, and small deficits. Moreover, most of its debt is owed to local institutions, with comparatively low foreign debt by international standards. But the costs of this debt are high because of relatively high real interest rates. To release more funds for expenditure on people's needs, government should:

• Review its monetary policy to promote sustainable reductions in interest rates;
• Re-introduce requirements that financial institutions invest a prescribed portion of investments in relatively low-interest government bonds and do more to support unions' efforts to identify developmental investments for pension funds;
• Ringfence apartheid-era debt and negotiate cheaper ways of financing it;
• Decline the option to buy 19 more fighter planes as part of the 1999 arms deal and redirect the R8 billion saved to more socially desirable programmes.

The way forward

While the People's Budget Campaign recognises and supports government's more expansionary fiscal stance of recent years, more can and should be done to meet the needs of our people and to overcome the backlogs left by apartheid.

For this reason, the Campaign will continue to engage with government around the fiscal and spending proposals in the People's Budget throughout the coming budget cycle. But we will also expand our educational work with our members, increasing the capacity of civil society to engage at provincial and local level.

Read the People's Budget