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Common cents: How the national Budget and expenditure are determined

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Ben Cronin is an advocate of the high court and a state law adviser. He writes in his personal capacity and his views do not represent those of any other party.

The Budget is just a special kind of act of Parliament called an ‘appropriation’, which, like any statute, has to be passed before it acquires the force of law. Until then, it is not cast in stone.

Every year we wait in anticipation for the minister of finance to announce the annual Budget. This “announcement” is often discussed as if it were final. This is, however, a misrepresentation of the constitutional framework within which the government spending is determined. The proposed Budget has to be presented to Parliament, which is the ultimate body to determine the quantum and allocation of national government spending.

The Budget is, in fact, just a special kind of act of Parliament called an “appropriation”. An appropriation, like any statute, has to be passed by Parliament before it acquires the force of law. Once the minister introduces the bill, members of Parliament discuss its contents, invite comment from the rest of society and amend the proposed law at their discretion. A critical component of our constitutional dispensation and a core tenet of the rule of law is that changes to the law should be debated in public and benefit from a process of broad public participation.

It is noteworthy that non-governmental organisations, commentators and constitutional bodies such as the Financial and Fiscal Commission are reinforcing this important principle and opening up public discussion regarding the final Budget. Just this week an interesting aspect of the Budget was brought to the fore by the commission – whether there is a maximum or minimum limit placed on Parliament’s discretion to approve government spending.

The simple answer is no. Parliament only has procedural limitations placed on its open discretion to increase government spending. The Constitution imposed the obligation on Parliament to set out its own process in a bespoke statute – the Money Bills Amendment Procedure and Related Matters Act 9 of 2009 (Amendment Act). In terms of the Amendment Act, when considering an appropriation, Parliament is subject to a set of processes and specified substantive considerations.

It must, for instance, provide the minister with an opportunity to comment and it must show that it has considered the principles laid out in the statute, that is, the potential economic consequences of the proposed amendment.

The open discretion afforded Parliament to determine government expenditure was recently questioned by the International Monetary Fund (IMF). In the IMF’s Country Report of July 2020 it raised the prospect of a Budget/spending ceiling being introduced. Given the empowering provisions in the Constitution any agreement entered into between the South African government and the IMF could never lawfully impose a binding limit on Parliament’s discretion to approve increases in government spending.

Even if Parliament were to pass into law a cap on government spending, it is likely that the provisions of such a statute would constitute an unlawful delegation or assignment of what is in effect a core legislative function.

As the former Chief Justice Arthur Chaskalson set out in the seminal Constitutional Court judgment of the Executive Council of the Western Cape Legislature v President of the Republic of South Africa 1995 (4) SA 877, there is a distinction to be drawn between “delegating the authority to make subordinate legislation within the framework of a statute… and assigning plenary legislative power to another body” including the power to amend our laws. In this regard an appropriation must take the form of a law passed by Parliament, in terms of section 77 of the Constitution, and this “plenary power” cannot be delegated or assigned to any other body.

In 2018, a new procedural step was introduced to the Amendment Act. Now Parliament is obliged to adopt a “fiscal framework” which must be used when evaluating any proposed amendment to an appropriation in terms of section 10(5). Correctly understood, this is not a Budget/spending cap limiting the ability of Parliament to increase spending at its discretion, but rather a procedural step which provides a degree of publicity regarding the set of estimates and assumptions upon which the proposed Budget is based.

Does Parliament have to wait to collect taxes before it can spend?

Again, the answer is an unambiguous no. The reason for this can be gleaned not only from the practical mechanics of our public finance model, but also from the express provisions of our laws. The chronology of events is: first the government will spend and then it will collect tax receipts denominated in the currency it spent.

This is specifically recognised in the Public Finance Management Act (PFMA) 1 of 1999, where the budgeting process, to determine the scope for spending, is completed before taxes will be collected. Indeed, the Budget is announced even before the final tally of taxes are collected from the previous financial year.

As part of this process the minister of finance, in terms of section 27(3)(a) of the PFMA, announces an “estimate” of the future collection of taxes in the forthcoming tax year – which is yet to commence. Even the Amendment Act when introducing the concept of a “fiscal framework”, in section 1, merely requires “estimates of all revenue proposals”.

At this point, you might think that due to the common use of the phrase “taxpayer’s money” that Parliament is nevertheless financially constrained by tax collection. The truth, however, is that government spending is determined and implemented without knowing what future tax receipts will be and is not constrained by tax collection. The process for implementing government spending is:

  • The final appropriation is passed into law by Parliament;
  • The Reserve Bank, as the issuer of our national currency, is legally bound to issue this amount of money on instruction from the government;
  • Payments are made to the reserve accounts of the relevant commercial banks;
  • Tax receipts will be returned to the Reserve Bank via the commercial banks’ reserve accounts during the course of the year; and
  • Where the government determines there is a shortfall it may on an ad hoc basis issue Treasury bonds (the need for such a step is a topic for another day).

Is there a minimum floor to government spending?

Unlike the absence of a legally binding expenditure ceiling, there is no question that there are minimum spending requirements to which Parliament must apply its mind. The PFMA in section 26 sets out that “Parliament… must appropriate money for each financial year for the requirements of the state”.

Two obvious categories indicating the existence of a minimum floor to government spending are those set out in existing statutes. These include where a claim is approved directly against the National Revenue Fund (the claim of Treasury bondholders) and future financial commitments (multiyear agreements entered into under the PFMA).

In the case of both categories of spending, our legal system already recognises legal claims prior to the appropriation being passed. If, for instance, Parliament failed to accommodate an existing multiyear financial commitment it may face a negative judgment in court. In this regard all eyes will be on the Constitutional Court when, in 2021, it determines an appeal from the Labour Appeal Court regarding the disputed wage agreement between civil servants and the state.

The Financial and Fiscal Commission raised the prospect on Tuesday, 2 March, of a third category arising from the responsibility to finance the ongoing constitutional obligations of the state (to provide education and healthcare). While our courts have often considered specific instances relating to the allocation of state funding, often in the context of perceived fixed limits, the judiciary has yet to be asked to seriously consider the potential macroeconomic obligations of the state as they relate to the Budget.

The question of minimum spending requirements relating to the state’s obligation to meet socioeconomic needs is likely to be an area of renewed interest. It is possible that we will see a growth in new legal challenges given the commission’s express concern that the current formulation of the “Budget is not… consistent with the provisions of the Constitution”. The commission specifically cites the “obligation to ensure a rising floor of access to health services” as reflected in section 27 of the Constitution, but similarly this might apply to the absolute obligation placed on the state to ensure “the right to basic education” in terms of section 29(1).

With only procedural limits on increased spending, and fundamental minimum obligations to meet, Parliament will need to carefully apply its mind to the proposed Budget. DM

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  • Very helpful article, thank you. So government always has financial powers similar to those described by the phrase ‘quantitative easing’, even if the term is not used?

    The payments ‘made to the reserve accounts of the relevant commercial banks’ – are those to the accounts of govt depts?

  • > Where the government determines there is a shortfall it may on an ad hoc basis issue Treasury bonds (the need for such a step is a topic for another day).

    Please do write about it.