Budget Analysis Tools

Using budgets for CSO advocacy Cape Town, 6 August, 2003 IDASA Budget Information Service Provincial Fiscal Analysis Unit
Alex Vennekens-Poane

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Objective of the module Budget Analysis Tools

After this module participants are expected to be able to apply basic calculations to budget information and interpret the results

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Contents
1. Recap: What are again those figures and why do budget analysis? 2. Priority: percentage share of the budget 3. Growth in the budget (nominal): progress 4. Adjusting for inflation: real budget figures

5. Real growth in the budget: progress in real terms

6. Annual average growth 7. Per capita budgets (nominal)

8. Real growth in per capita budgets

9. Comparing budgets to costs 10. Tools can be applied to all types of budgets
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1.1 How does budget analysis fit in the monitoring and advocacy role of CSOs?
Policy Budget Structures and institutions for implementation Service Delivery Impact of programme or policy

budget inputs: funds, resources Indicators? How budget outputs: medicine,

vaccinations, HIV tests do we measure inputs, outputs and outcomes?

budget outcomes: improved

child health
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1.2 What are again those figures?

O A budget is: a plan for acquiring resources (revenue) and deploying them in order to achieve policy objectives. O This plan shows how revenue will be raised (where will the money come from) and the broad allocation of resources to objectives and activities for the coming years (what will we buy with it), for which spending departments or business units can be held accountable. O It involves prioritisation, strategising, allocation of resources and providing a system of accountability and controls.

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1.3.1 How were the figures arrived at?

Approaches to budgeting, see also Budget Dictionary

Incremental Budgeting: taking a previous years budgeted amount and add an additional amount to each budget item / programme (often the same % for each item).
- Advantages: simple & fast - Disadvantages: budgets do not reflect political prioritisation, neither do they reflect the present costs of providing a particular service (no accountability & efficiency).

Zero-based Budgeting: costing each activity => programme => vote from scratch every year.
- Advantages: budgets reflect priorities, accountability & efficiency, good for setting baselines - Disadvantages: too time-consuming, requires lots of information, and it is not always necessary to cost each programme from zero every year for ongoing programmes.
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1.3.2 How were the figures arrived at? (cont.)

Approaches to budgeting, see also Budget Dictionary

Programme-based budgeting: After initial zero-based budget has been drawn up, programme budgets are reviewed and adjusted each year in the light of policy changes & priorities, and changes in activity levels and input costs.
- Advantages: Enables monitoring whether programmes are in line with priorities, inputs are costed and efficiency reviewed every year, budgets are realistic, improving accountability. - Disadvantages: Lots of information required

Performance budgeting: Based on programme budgeting, but uses performance criteria as the basis for budget allocations.
- Advantages: Same as programme-based, and allocations are based on the outputs that a department wants to achieve. - Disadvantage: lots of information required.
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1.4.1 What can we learn by looking at a budget?

1. Adequacy: How much is budgeted?
Nominal terms can tell us if the allocation is enough (compare to cost of intervention) Real terms tell us if the allocation is keeping up with inflation.

2. Priority: How does the budget for this purpose compare to resources spent in other areas? To determine what governments priorities are as stated in budget To ask if stated policy priorities match priorities in budget To determine if government is keeping its promises (policy commitments) 3. Progress: Is governments response on this issue improving? To monitor government commitment
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1.4.2 What can we learn by looking at a budget? (Cont.)

4. Equity: Are resources allocated fairly?
Per capita spending across geographic regions Spending on programmes that benefit disadvantaged groups in particular

5. Efficiency: Is the money spent? And is it spent on the right inputs & programmes?
Allocated vs. actual expenditure Comparing funding channels or mechanisms Is the right mix of inputs & services used to deliver the outputs in the most efficient way?

6. Effectiveness: Is the money being spent on the right outputs in order to achieve the desired outcomes?
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Are the interventions which are funded the most appropriate (i.e. do they lead to the desired outcome) and cost effective?
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1.5 Ratios, Rates and Inflation

Because provinces, departments and programmes differ in size, you cannot compare amounts straight away. Therefore, one needs to convert the information to rates or ratios:
Share of the total Growth in budgets Per capita amounts Proportion of the budget that has been spent

Furthermore, inflation reduces purchasing power of a rand over time, I.e. 1 rand last year buys you less than 1 rand this year, because everything has become more expensive. This makes straight comparison of amounts between different years invalid. We convert nominal amounts into real amounts to adjust for inflation.
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2.1 Priority: percentage share of the total budget

We saw earlier that Health, Education and Welfare (safety net) are WC provincial priority policy areas. How is this reflected in the % that they take of the provincial budget in 2003/04? P. 33. And how does this change over the MTEF? Amount / Total * 100 = %
Policy Area 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Actual Actual Est. Act Voted MTEF MTEF R'000 R'000 R'000 R'000 R'000 R'000 Education 4068995 4379080 4835071 5208358 5518312 5742800 Health 3468378 3731208 3996564 4509920 4711901 4901132 Social Services 2214279 2391258 3218925 3775957 4331386 4739820 Total Idasa 14804149 16399986 17607492 18957172 11 Provincial 11497824 12506446 Budget Information Service

2.2 Priority: percentage share of the budget - Activity

Calculate the percentage share that Education, Health and Social Services take in the WC provincial budget based on the amounts given in the previous slide (2.1). Amount / Total *100 = %
Policy Area 2000/01 Actual % Education 35 Health 30 Social Services 19 Total social spending 85 2001/02 Actual % 35 30 19 2002/03 Est. Act % 33 27 22 2003/04 Voted % 32 27 23 2004/05 MTEF % 31 27 25 2005/06 MTEF % 30 26 25

84

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82

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3. Growth in the Budget (nominal): progress

When we want to see whether the province is progressively rolling out services of a particular type, we can look at the nominal (no adjustment for inflation) change in the budget over time. We mostly express this change as a percentage of the previous years budget: Nominal growth rate = (Y2 - Y1) / Y1 *100 = ..%

Activity: Calculate the nominal growth rates for the amounts given in the table below
Total Provincial Expenditure Nominal amount (R'000) Nominal growth rate (%) 2000/01 Actual 2001/02 Actual 2002/03 Est. Act. 2003/04 Voted 2004/05 MTEF 2005/06 MTEF

11497824 12506446 14804149 16399986 17607492 18957172

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3.b Growth in the Budget (nominal): progress

When we want to see whether the province is progressively rolling out services of a particular type, we can look at the nominal (no adjustment for inflation) change in the budget over time. We mostly express this change as a percentage of the previous years budget: Nominal growth rate = (Y2 - Y1) / Y1 *100 = ..%

Calculate the nominal growth rates for the amounts given in the table below
Total Provincial Expenditure Nominal amount (R'000) Nominal growth rate (%) 2000/01 Actual 2001/02 Actual 2002/03 Est. Act. 2003/04 Voted 2004/05 MTEF 2005/06 MTEF

11497824 12506446 14804149 16399986 17607492 18957172

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8.77

18.37

10.78

7.36

14

7.67

4.1 Adjusting for inflation: Converting a nominal amount to real terms

Nominal: amount given Real: adjusted for inflation to reflect purchasing power of money at a particular time 1. We want to convert everything to 2002/03 rands, so we make 2002/03 the base year. 2. Divide each nominal allocation by the deflator for that year Activity: calculate the real amounts based on the figures in the table below. Compare the real amounts to the nominal amounts.
Total Provincial Nominal amount Deflator Real amount 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Actual Actual Est. Act Voted MTEF MTEF R'000 R'000 R'000 R'000 R'000 R'000 11497824 12506446 14804149 16399986 17607492 18957172 0.846 0.902 1.000 1.061 1.115 1.172
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4.1b Adjusting for inflation: Converting an allocation from nominal to real terms
Nominal: amount given Real: adjusted for inflation to reflect purchasing power of money at a particular time 1. We want to convert everything to 2002/03 rands, so we make 2002/03 the base year. 2. Divide each nominal allocation by the deflator for that year Activity: calculate the real amounts based on the figures in the table below. Compare the real amounts to the nominal amounts.
Total Provincial Nominal amount Deflator Real amount 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Actual Actual Est. Act Voted MTEF MTEF R'000 R'000 R'000 R'000 R'000 R'000 11497824 12506446 14804149 16399986 17607492 18957172 0.846 0.902 1.000 1.061 1.115 1.172 Idasa Budget Information Service 16 13592659 13869649 14804149 15457103 15789901 16175315

4.2 Graphic comparison: amounts in nominal & real terms

WC Provincial Expenditure
R'000 20000000 18000000 16000000 14000000 12000000 10000000 8000000 2000/01 Actual 2001/02 Actual 2002/03 Est. Act 2003/04 Voted Real
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2004/05 MTEF

2005/06 MTEF

Nominal
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5.1 Growth in real terms

Same calculation as nominal growth rate, but then applied to the real amounts (Y)
Real growth rate = (Y2 - Y1) / Y1 *100 = ..% Activity: Calculate the real growth rate for the amounts given in the table below & compare to the nominal growth rates
Total Provincial 2000/01 Actual R'000 2001/02 Actual R'000 2002/03 Est. Act R'000 2003/04 Voted R'000 2004/05 MTEF R'000 2005/06 MTEF R'000

Nominal amount 11497824 12506446 14804149 16399986 17607492 18957172 Deflator 0.846 0.902 1.000 1.061 1.115 1.172 Real amount 13592659 13869649 14804149 15457103 15789901 16175315 Real growth rate Idasa Budget Information Service 18 (%)

5.1b Growth in real terms

Same calculation as nominal growth rate, but then applied to the real amounts (Y)
Real growth rate = (Y2 - Y1) / Y1 *100 = ..% Activity: Calculate the real growth rate for the amounts given in the table below & compare to the nominal growth rates
Total Provincial 2000/01 Actual R'000 2001/02 Actual R'000 2002/03 Est. Act R'000 2003/04 Voted R'000 2004/05 MTEF R'000 2005/06 MTEF R'000

Nominal amount 11497824 12506446 14804149 16399986 17607492 18957172 Deflator 0.846 0.902 1.000 1.061 1.115 1.172 Real amount 13592659 13869649 14804149 15457103 15789901 16175315 Real growth rate Idasa Budget Information Service 19 (%) 2.04 6.74 4.41 2.15 2.44

5.2 Graphic comparison: nominal and real growth rates

Growth in WC provincial allocation

20 15 % 10 5 0 2000/01 Actual 2001/02 Actual 2002/03 Est. Act 2003/04 Voted 2004/05 MTEF

Nominal grow th rate (%)

Real grow th rate (%)

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6. Average annual growth: Summarising

Take the real growth rates over the MTEF, and divide by the number of growth rates to get the average Average annual real growth rate = ( GR1 + GR2 + GR3 ) 3 Activity: calculate the average annual real growth rate over the 2003/04 MTEF
Total Provincial Real amount Real growth rate (%) Average Annual growth rate over 2003/04 MTEF 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Actual Actual Est. Act Voted MTEF MTEF R'000 R'000 R'000 R'000 R'000 R'000 13592659 13869649 14804149 15457103 15789901 16175315 2.04 6.74 4.41 2.15 2.44

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6.b Average annual growth: Summarising

Take the real growth rates over the MTEF, and divide by the number of growth rates to get the average Average annual real growth rate = ( GR1 + GR2 + GR3 ) 3 Activity: calculate the average annual real growth rate over the 2003/04 MTEF
Total Provincial Real amount Real growth rate (%) Average Annual growth rate over 2003/04 MTEF 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Actual Actual Est. Act Voted MTEF MTEF R'000 R'000 R'000 R'000 R'000 R'000 13592659 13869649 14804149 15457103 15789901 16175315 2.04 6.74 4.41 2.15 2.44

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3.00

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7. Per capita budgets

Take the budget figure, and divide by the population number. (Check the zeros!)
Per capita budget = ( Budget ) Population

Activity: Calculate the WC per capita provincial budgets based on the budget and population figures in the table below
2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Total Provincial Unit Actual Actual Est. Act Voted MTEF MTEF Nominal amount R'000 11497824 12506446 14804149 16399986 17607492 18957172 Population WC 000 4271 4354 4421 4482 4539 4594 Per capita (nominal) R
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7.b Per capita budgets

Take the budget figure, and divide by the population number. (Check the zeros!)
Per capita budget = ( Budget ) Population

Activity: Calculate the WC per capita provincial budgets based on the budget and population figures in the table below.
2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Total Provincial Unit Actual Actual Est. Act Voted MTEF MTEF Nominal amount R'000 11497824 12506446 14804149 16399986 17607492 18957172 Population WC 000 4271 4354 4421 4482 4539 4594 Per capita (nominal) R 2692 2872 3349 3659 3879 4127
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8. Real growth in per capita budgets

Convert nominal to real budget figures Take the real budget figure, and divide by the population number. (Check the zeros!) Then calculate the growth rates (Y1-Y2) / Y1 *100 Activity: Calculate growth in the WC per capita provincial budget in real terms, based on the budget and population figures in the table below.
2000/01 2001/02 Actual Actual 11497824 12506446 0.846 0.902 13590809 13865239 4271 4354 2002/03 2003/04 2004/05 2005/06 Est. Act Voted MTEF MTEF 14804149 16399986 17607492 18957172 1 1.061 1.115 1.172 14804149 15457103 15791473 16175061 4421 4482 4539 4594

Total Provincial Unit Nominal amount R'000 Deflator Real amount R'000 Population WC 000 Per capita (real) R Real per capita growth rate %

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8.b Real growth in per capita budgets

Convert nominal to real budget figures Take the real budget figure, and divide by the population number. (Check the zeros!) Then calculate the growth rates (Y1-Y2) / Y1 *100 Activity: Calculate growth in the WC per capita provincial budget in real terms, based on the budget and population figures in the table below.
2000/01 2001/02 Actual Actual 11497824 12506446 0.846 0.902 13590809 13865239 4271 4354 3182 3184 2002/03 2003/04 2004/05 2005/06 Est. Act Voted MTEF MTEF 14804149 16399986 17607492 18957172 1 1.061 1.115 1.172 14804149 15457103 15791473 16175061 4421 4482 4539 4594 3349 3449 3479 3521 2.99 0.88
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Total Provincial Unit Nominal amount R'000 Deflator Real amount R'000 Population WC 000 Per capita (real) R Real per capita growth rate %

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9.1 Comparing budgets to costs

Due to the aggregate nature of budget figures, you would need budget information for a specific activity / programme from the department. Plus output targets for the activity. You would furthermore need costing information for the specific activity / programme. Multiply average cost per unit of service delivery (for example, cost of one immunisation, one Nevirapine course for PMTCT etc.) by the number of outputs (target) to get the requiredbudget. (Required budget - actual budget) / cost per output = number of outputs that are underfunded.

However: one needs to take into account efficiencies of scale and scope: fixed costs may remain stable to some extent when activity levels are increased, or certain costs can be shared across programmes. Furthermore, costs are not always the Idasa 27 same in different settings. Budget Information Service Method requires lots of information.

9.2 Activity: Simple exercise in output-based or performance budgeting

In order to improve the health of the population as stipulated in health policy, the department wants to implement programme Z (strategy). If the output target of programme Z for 2003/04 is 75% of citizens immunised

AND
If the province has 4 citizens AND If it costs on average R 10 to immunise 1 citizen (incl. personnel, syringe, admin, facility, vaccine, etc.), How much should the 2003/04 budget for programme Z be?
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10. All the tools / calculations can be applied to:

National budgets and expenditure Provincial total budgets and expenditure

Consolidated national and provincial budgets and expenditure Any provincial or national departments budgets Programme and sub-programme budgets Input item budgets (personnel, equipment, etc.) Geographic, District, Local Government, Service Provider etc. budgets
ANY BUDGET OR EXPENDITURE FIGURES!!!!!
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Lunch

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