2. Budget Analysis Tools

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Idasa Budget Information Service 1

Budget Analysis Tools

Using budgets for CSO advocacyCape Town, 6 August, 2003

IDASA Budget Information ServiceProvincial Fiscal Analysis Unit

Alex Vennekens-Poane


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After this module participants are expected to beable to apply basic calculations to budget

information and interpret the results

Objective of the moduleBudget Analysis Tools


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1. Recap: What are again those figures and why do budgetanalysis?

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

Contents


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1.1 How does budget analysis fit in themonitoring and advocacy role of CSOs?

Policy Budget

budget inputs: funds, resources

budget outputs: medicine,

vaccinations, HIV tests

ServiceDelivery

budget outcomes: improvedchild health

Structures andinstitutions forimplementation

Indicators?Howdo we measureinputs, outputs and

outcomes?

Impact ofprogrammeor policy


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1.2 What are again those figures?

O A budget is: a plan for acquiring resources (revenue) anddeploying them in order to achieve policy objectives.

O This plan shows how revenue will be raised (where will themoney come from) and the broad allocation of resources to

objectives and activities for the coming years (what will webuy with it), for which spending departments or businessunits can be held accountable.

O It involves prioritisation, strategising, allocation of resourcesand providing a system of accountability and controls.


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1.3.1 How were the figures arrived at?

Incremental Budgeting: taking a previous years budgeted amountand add an additional amount to each budget item / programme (oftenthe 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 => votefrom scratch every year.

- Advantages: budgets reflect priorities, accountability & efficiency, good forsetting baselines

- Disadvantages: too time-consuming, requires lots of information, and it isnot always necessary to cost each programme from zero every year forongoing programmes.

Approaches to budgeting, see also Budget Dictionary


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Programme-based budgeting: After initial zero-based budget hasbeen drawn up, programme budgets are reviewed and adjusted eachyear in the light of policy changes & priorities, and changes in activitylevels and input costs.- Advantages: Enables monitoring whether programmes are in line with

priorities, inputs are costed and efficiency reviewed every year, budgets arerealistic, 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 theoutputs that a department wants to achieve.- Disadvantage: lots of information required.

Approaches to budgeting, see also Budget Dictionary

1.3.2 How were the figures arrived at? (cont.)


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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 toresources spent in other areas?

To determine what governments priorities are as stated in budgetTo ask if stated policy priorities match priorities in budgetTo determine if government is keeping its promises (policy commitments)

3. Progress: Is governments response on this issueimproving?

To monitor government commitment

1.4.1 What can we learn by looking at abudget?


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4. Equity: Are resources allocated fairly? Per capita spending across geographic regions

Spending on programmes that benefit disadvantaged groupsin particular

5. Efficiency: Is the money spent? And is it spent onthe right inputs & programmes? Allocated vs. actual expenditure

Comparing funding channels or mechanisms

Is the right mix of inputs & services used to deliver theoutputs in the most efficient way?

6. Effectiveness: Is the money being spent on the rightoutputs in order to achieve the desired outcomes? Are the interventions which are funded the most appropriate

(i.e. do they lead to the desired outcome) and cost effective?

1.4.2 What can we learn by looking at abudget? (Cont.)


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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 randover time, I.e. 1 rand last year buys you less than 1 rand thisyear, because everything has become more expensive. This

makes straight comparison of amounts between differentyears invalid. We convert nominal amounts into real amountsto adjust for inflation.


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We saw earlier that Health, Education and Welfare (safety net) are

WC provincial priority policy areas. How is this reflected in the % thatthey take of the provincial budget in 2003/04? P. 33. And how doesthis change over the MTEF?

Amount / Total * 100 = %

2.1 Priority: percentage share of thetotal budget

Policy

Area

2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

R'000 R'000 R'000 R'000 R'000 R'000

Education 4068995 4379080 4835071 5208358 5518312 5742800Health 3468378 3731208 3996564 4509920 4711901 4901132

Social

Services 2214279 2391258 3218925 3775957 4331386 4739820

Total

Provincial 11497824 12506446 14804149 16399986 17607492 18957172


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Calculate the percentage share that Education, Health and SocialServices take in the WC provincial budget based on the amountsgiven in the previous slide (2.1).

Amount / Total *100 = %

2.2 Priority: percentage share of thebudget - Activity

Policy

Area

2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

% % % % % %

Education 35 35 33 32 31 30

Health 30 30 27 27 27 26Social

Services 19 19 22 23 25 25

Total

social

spending 85 84 81 82 83 81

Policy

Area

2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

% % % % % %

Education

HealthSocial

Services

Total

social

spending


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When we want to see whether the province is progressively rolling out

services of a particular type, we can look at the nominal (noadjustment for inflation) change in the budget over time. We mostlyexpress 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 amountsgiven in the table below

3. Growth in the Budget (nominal):progress

Total Provincial

Expenditure

2000/01

Actual

2001/02

Actual

2002/03

Est. Act.

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

Nominal amount

(R'000) 11497824 12506446 14804149 16399986 17607492 18957172

Nominal growth rate

(%)


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Idasa Budget Information Service

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When we want to see whether the province is progressively rolling out

services of a particular type, we can look at the nominal (noadjustment for inflation) change in the budget over time. We mostlyexpress 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 thetable below

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

Total Provincial

Expenditure

2000/01

Actual

2001/02

Actual

2002/03

Est. Act.

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

Nominal amount

(R'000) 11497824 12506446 14804149 16399986 17607492 18957172

Nominal growth rate

(%) 8.77 18.37 10.78 7.36 7.67


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4.1 Adjusting for inflation: Converting anominal amount to real terms

Nominal: amount given

Real: adjusted for inflation to reflect purchasing power of money at aparticular time

1. We want to convert everything to 2002/03 rands, so we make2002/03 the base year.

2. Divide each nominal allocation by the deflator for that year

Activity: calculate the real amounts based on the figures in thetable below. Compare the real amounts to the nominal amounts.

Total Provincial2000/01Actual

2001/02Actual

2002/03Est. Act

2003/04Voted

2004/05MTEF

2005/06MTEF

R'000 R'000 R'000 R'000 R'000 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


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4.1b Adjusting for inflation: Converting anallocation from nominal to real terms

Nominal: amount given

Real: adjusted for inflation to reflect purchasing power of money at aparticular time

1. We want to convert everything to 2002/03 rands, so we make2002/03 the base year.

2. Divide each nominal allocation by the deflator for that year

Activity: calculate the real amounts based on the figures in thetable below. Compare the real amounts to the nominal amounts.

Total Provincial2000/01Actual

2001/02Actual

2002/03Est. Act

2003/04Voted

2004/05MTEF

2005/06MTEF

R'000 R'000 R'000 R'000 R'000 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


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4.2 Graphic comparison: amounts innominal & real terms

WC Provincial Expenditure

8000000

10000000

12000000

14000000

16000000

18000000

20000000

2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

R'000

Nominal Real

5 1 G th i l t


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Same calculation as nominal growth rate, but then applied tothe real amounts (Y)

Real growth rate = (Y2 -Y1) / Y1 *100 = ..%

Activity: Calculate the real growth rate for the amounts givenin the table below & compare to the nominal growth rates

Total

Provincial

2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

R'000 R'000 R'000 R'000 R'000 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

(%)

5.1 Growth in real terms

5 1b G th i l t


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Total

Provincial

2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

R'000 R'000 R'000 R'000 R'000 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

(%) 2.04 6.74 4.41 2.15 2.44

5.1b Growth in real terms

Same calculation as nominal growth rate, but then applied tothe real amounts (Y)

Real growth rate = (Y2 -Y1) / Y1 *100 = ..%

Activity: Calculate the real growth rate for the amounts givenin the table below & compare to the nominal growth rates


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5.2 Graphic comparison: nominal and realgrowth rates

Growth in WC provincial allocation

0

5

1015

20

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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Take the real growth rates over the MTEF, and divide by thenumber of growth rates to get the average

Average annual real growth rate = ( GR1 + GR2 + GR3 )3

Activity: calculate the average annual real growth rate overthe 2003/04 MTEF

6. Average annual growth: Summarising

Total

Provincial

2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

R'000 R'000 R'000 R'000 R'000 R'000

Real amount 13592659 13869649 14804149 15457103 15789901 16175315

Real growthrate (%) 2.04 6.74 4.41 2.15 2.44

Average

Annual growth

rate over

2003/04 MTEF


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Take the real growth rates over the MTEF, and divide by thenumber of growth rates to get the average

Average annual real growth rate = ( GR1 + GR2 + GR3 )3

Activity: calculate the average annual real growth rate overthe 2003/04 MTEF

Total

Provincial

2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

R'000 R'000 R'000 R'000 R'000 R'000

Real amount 13592659 13869649 14804149 15457103 15789901 16175315

Real growthrate (%) 2.04 6.74 4.41 2.15 2.44

Average

Annual growth

rate over

2003/04 MTEF 3.00

6.b Average annual growth: Summarising


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Take the budget figure, and divide by the populationnumber. (Check the zeros!)

Per capita budget = ( Budget )Population

Activity: Calculate the WC per capita provincial budgetsbased on the budget and population figures in thetable below

7. Per capita budgets

Total Provincial Unit

2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

Nominal amount R'000 11497824 12506446 14804149 16399986 17607492 18957172

Population WC 000 4271 4354 4421 4482 4539 4594

Per capita

(nominal) R

b P i b d


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Take the budget figure, and divide by the populationnumber. (Check the zeros!)

Per capita budget = ( Budget )Population

Activity: Calculate the WC per capita provincial budgetsbased on the budget and population figures in thetable below.

7.b Per capita budgets


2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

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

8 R l h i i b d


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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 budgetand population figures in the table below.

8. Real growth in per capita budgets


2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

Nominal amount R'000 11497824 12506446 14804149 16399986 17607492 18957172Deflator 0.846 0.902 1 1.061 1.115 1.172

Real amount R'000 13590809 13865239 14804149 15457103 15791473 16175061

Population WC 000 4271 4354 4421 4482 4539 4594

Per capita (real) R

Real per capita

growth rate %

8 b R l h i i b d


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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 budgetand population figures in the table below.

8.b Real growth in per capita budgets


2000/01

Actual

2001/02

Actual

2002/03

Est. Act

2003/04

Voted

2004/05

MTEF

2005/06

MTEF

Nominal amount R'000 11497824 12506446 14804149 16399986 17607492 18957172Deflator 0.846 0.902 1 1.061 1.115 1.172

Real amount R'000 13590809 13865239 14804149 15457103 15791473 16175061

Population WC 000 4271 4354 4421 4482 4539 4594

Per capita (real) R 3182 3184 3349 3449 3479 3521

Real per capita

growth rate % 0.07 5.15 2.99 0.88 1.20


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Due to the aggregate nature of budget figures, you would needbudget 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 = numberof outputs that are underfunded.

However: one needs to take into account efficiencies of scale andscope: fixed costs may remain stable to some extent whenactivity levels are increased, or certain costs can be sharedacross programmes. Furthermore, costs are not always the

same in different settings. Method requires lots of information.

9.1 Comparing budgets to costs

9 2 A ti it Si l i i t t b d


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9.2 Activity: Simple exercise in output-basedor performance budgeting

In order to improve the health of the population as stipulated inhealth policy, the department wants to implement programme Z(strategy).

If the output target of programme Z for 2003/04 is 75% ofcitizens 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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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!!!!!

10. All the tools / calculations can beapplied to:


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