Introduction to Financial
Management and Budgeting
STATUTORY FRAMEWORK
©National School of Government
What is financial management?................................................................................................. 1
What is the purpose of financial management? ....................................................................... 1
What makes up the statutory framework? ................................................................................. 4
The Financial and Fiscal Commission ........................................................................................................ 4
The Intergovernmental Fiscal Relations Act ............................................................................................. 4
The Division of Revenue Act (vertical, horizontal, conditional grants) .................................................. 5
The Public Finance Management ............................................................................................................. 5
The Municipal Finance Management Act ............................................................................................... 7
©National School of Government
What is financial management?
Financial management in the public service can be defined as all decisions and activities
of management, as directed by the accounting officer and advised by the chief financial
officer, that impacts the control and utilisation of financial resources entrusted to achieve
specified and agreed-on strategic outputs. Financial management is also intended to
inculcate relevant knowledge, skills, and values that will promote the responsible and
effective use of public funds.
The aim of financial management is to manage financial resources with the purpose of
ensuring economy of scale and efficiency gains in the delivery of outputs required to
achieve desired outcomes (effectiveness) that will serve the needs of the community.
Financial management ranges from daily cash flow management through to the
formulation of long-term financial objectives, policies and strategies in support of the
strategic and operational plans of a department. It includes the planning and control of
capital expenditure, working capital management, interaction with the relevant treasury,
and funding and performance decisions. Financial management supervises the
supporting financial and management accounting functions, which are predominately
concerned with the collection, processing, and provision of financial information and the
planning, operation, and control of the supporting financial information systems.
What is the purpose of financial management?
Financial management in the public sector is a crucial discipline central to service
delivery. However, audit reports continue to point out expenditures made in vain, which
would have been avoided if prudent judgment had been exercised. Audit reports include
findings on unauthorised and irregular expenses, which are incurred in contravention of
legislation. The extent of unqualified reports highlights the importance of the promulgation
of the Public Finance Management Act (Act No. 1 of 1999) (as amended by Act No. 29 of
1999) (PFMA) and the Municipal Finance Management (Act No. 56 of 2003) (MFMA) as a
conduit that will ensure that public funds are effectively controlled, managed, and
compliance enforced.
The three spheres of government, that is, national, provincial, and local, and various
public entities registered in terms of the PFMA and constitutional bodies, are responsible
and accountable for prudent financial administration and management.
The public finance management system in South Africa is informed by the 1996
Constitution of the Republic, the PFMA, the MFMA, various regulations, guidelines, and
procedure manuals. The Constitution lays down the constitutional obligations that must
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be fulfilled. Other legislation or executive decisions are required to give effect to the
guidelines contained in the Constitution.
Public revenues and expenditure allocations happen through national, provincial, and
local budgeting processes that include:
▪ Setting of the Medium Term Strategic Framework (MTSF) of the country;
▪ Setting of budget priorities by all levels of governments, in particular national and
provincial government, given their common financial years (commencing 1 April);
▪ Presidential State of the Nation Address (SoNA) and Premiers’ State of the Province
Address (SoPA);
▪ Establishing of the Medium-term Expenditure Framework, informed by the SoNA/SoPA
and MTSF, and budget priorities from various spheres of government, public entities, and
constitutional structures;
▪ Drafting of the Estimates of National Expenditure (ENE) and Estimates of Provincial
Revenue and Expenditure (EPRE); and
▪ Drafting of the budget review that is commonly considered as the budget of the country
with supporting documents such as the ENE, Division of Revenue Act (DORA), and various
pieces of conditional grants.
These activities are critical in the formalisation of the national and provincial budget, but
also in the dynamics and features of the public finance system. It is also the context within
which public finances are managed within the South African government and
governance system.
The constitution and associated legislation, including regulations and procedures, obligate
each sphere of government, public entities and constitutional structures to take
reasonable measures that do not prejudice any individual or group in the equitable
allocation of financial resources of the State.
The table below outlines typical roles associated with financial management. You, as an
operational manager, who operationalises your budget, are dependent on a financial
manager to provide relevant information to assist you with analysis. However, remember
that the financial manager is not accountable for your financial management practices
but merely fulfils a facilitation and advisory role.
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Financial manager Operational Manager
The provision of financial Management of strategic
Accountability
information that assists the objectives and activities that
operational manager with lead to the department’s
the implementation of units, branches, and overall
policies departmental outputs and
possible outcomes
Provision of resources for this
purpose
The effective, efficient, and
economical achievement of
outputs to achieve desired
outcomes
Promotes costing systems Responsible for key decisions
Costing
and skills to support the on costing, such as the type
operational manager in this and quality of services to be
regard provided
Supports the operational Monitors and evaluates
Monitoring and
evaluation manager in monitoring and expenditures in relation to
evaluating expenditure in budgets and objectives
relation to budgets and through a monthly early
objectives warning system (EWS)
Monitors and interprets
inputs, output, and, where
possible, outcomes of
service delivery
Provides information to Takes corrective
Revenue and
expenditure enable the operational management decisions
manager to manage where financial information
resources effectively and reveals possible deviations in
efficiently revenue and expenditure
projections and plans
Monitors cash and Provides information on
Cash flow
procurement cash-flow implications for
programmes and projects
and manages procurement
Prepares monthly and Prepares monthly and
Reports
annual financial reports annual non-financial reports
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It is within the context of the public service regulatory practices that there is a need to
distinguish, from a financial management perspective, the operational and financial
managers’ responsibilities. Successful management of the public service and its finances
requires not only adherence to regulatory prescripts and the integration of strategic plans
and budgets but also a need to keep operational or line managers responsible and
accountable for the resource inputs that are allocated to deliver on their strategic plans.
Better budgeting, in terms of the PFMA, extends accountability not only to the expenditure
of inputs but, more importantly, to the efficient and effective achievement of outputs to
achieve strategic outcomes.
Letting managers manage entails considerable changes to the customary functions and
responsibilities of public sector financial and operational managers, as illustrated in the
previous table.
What makes up the statutory framework?
Several other pieces of legislation and structures exist that either regulate or impact the
public finance management system, processes, and budget policy priorities. The various
pieces of legislation contribute to a wider strategy for improving financial management in
the public sector. These include:
The Financial and Fiscal Commission
The Financial and Fiscal Commission (FFC) is an independent body established in 1994 in
terms of the Intergovernmental Fiscal Relations Act. The FFC was established as a
legislative body to make recommendations on the national budget, equitable share
formula and distribution, and related intergovernmental financial matters to Parliament,
provincial legislatures, and the budget council. In terms of Section 9 of the
Intergovernmental Fiscal Relations Act, the FFC should more specifically make
recommendations on the division of revenue in May of every year (ten months before the
tabling of the budget). The FFC consists of 22 members, that is, nine people nominated by
the executive council of each of the provinces, two members nominated by the SA Local
Government Association (SALGA), and 11 members appointed by the president.
The Intergovernmental Fiscal Relations Act
The Intergovernmental Fiscal Relations Act aims to promote cooperation between
national, provincial, and local spheres of government on fiscal, budgetary, and financial
matters. It also prescribes the process undertaken in the determination of the
intergovernmental transfers: equitable share (ES) allocation, conditional grants and
agency transfers, and allocation of nationally raised revenue.
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The Division of Revenue Act (vertical, horizontal, conditional grants)
The Division of Revenue Act allocates the equitable division of revenue raised nationally to
the national, provincial, and local spheres of government. The Division of Revenue Act is
passed each year for the division of revenue for a specific financial year. The Act also
provides for specific responsibilities of all three spheres after the division has been made.
The Public Finance Management
The PFMA is one of the most important pieces of legislation passed by the first democratic
government in South Africa. The Act promotes the objective of good financial
management to maximise service delivery through the effective and efficient use of
limited resources. The PFMA adopts an approach to financial management that focuses
on outputs and responsibilities rather than on the rule-driven approach of the previous
exchequer acts.
Key objectives of the PFMA are to:
Modernise the system of financial management in the public sector;
Enable public sector managers to manage but at the same time be held more
accountable;
Ensure the timely provision of quality information; and
Eliminate the waste and corruption in the use of public resources.
The Act, which came into effect on 1 April 2000, gives effect to Sections 213 and 215 to
218 of the Constitution for the national and provincial spheres of government as outlined
below.
Section Purpose
Establishes the National Revenue Fund and limits exclusions
213
and withdrawals from the Fund through an Act of Parliament
Prescribes that budgets and the budgetary process must
215
“promote transparency, accountability and the effective
financial management of the economy, debt and the public
sector" and for national legislation to determine the form and
contents of budgets, as well as the time-frame for tabling
budgets
Establishes a national treasury and prescribes measures to
216
ensure transparency and expenditure control by introducing:
▪ Generally Recognised Accounting Practice;
▪ Uniform expenditure classifications; and
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Section Purpose
▪ Uniform treasury norms and standards
Prescribes that procurement must be “in accordance with a
217
system which is fair, equitable, transparent, competitive and
cost-effective”
Lays down the conditions for the issue of guarantees by
218
government
Establishes a Provincial Revenue Fund and limits exclusions and
226
withdrawals from a Fund through an Act of Parliament
Covers intervention by the national government when an
100 and 216
organ of state fails to perform an executive function related to
financial management and circumstances under which funds
may be withheld
The PFMA confirms that the minister or provincial Member of the Executive Council (MEC)
of a department is the executive authority, and the Director-General or Chief Executive
Officer is the accounting officer. As such, the minister or MEC is responsible for sector-
specific public policy, legislation, and regulations. The head of a department (the
Director-General of a national department or Provincial Head of Department) is
responsible for inputs, outputs, and implementation. The accounting officer or head of a
department is accountable to the minister or MEC and to Parliament or the provincial
legislature for the prudent management of the budget. This approach is in line with the
approach of the new public service regulations, which are dependent on a performance-
driven system based on measurable outputs.
The PFMA applies to the national and provincial spheres and public entities under their
ownership control. Parliament, provincial legislatures, and independent institutions
established by the Constitution are also covered by this Act. The Municipal Finance
Management Act (No. 56 of 2003) covers local government (see more about this Act later
in this document).
A key objective of the PFMA is to put in place a more effective financial accountability
system in respect of public entities. All entities are required to be listed. The major public
entities listed in Schedule 2 enjoy full managerial autonomy. National government can
only intervene in its capacity as a majority or sole shareholder. Other public entities are
listed in Schedule 3 and enjoy lesser degrees of autonomy.
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Chapter 5 of the PFMA defines the head of a department as the accounting officer. It
also provides for his/her general responsibilities as well as the responsibilities related to
budgetary control and reporting. Section 44 of the PFMA stipulates that the accounting
officer may delegate certain powers and duties to other officials in the department.
Parliament has oversight responsibility on behalf of the public over the executive authority
and, therefore, requires acceptable processes for reporting by the executive. Parliament,
as the legislative authority, must evaluate and eventually promulgate all legislation. A
parliamentary portfolio committee, consisting of the various political parties, has been
established for each government department. The committee must evaluate the policies
of a department through a process of public hearings. It also considers the budget
allocations and the alignment of the policies with the budgets. The committee visits the
department to oversee the functions and the execution processes and may make
recommendations for the adjustment of processes. The committee also evaluates the
annual report and the performance of the department in relation to the objectives and
outputs as determined at the start of the financial year.
A parliamentary committee on finance has been established to advise Parliament on all
matters relating to financial management. This committee ensures that the overall
financial principles that are set in policy documents are reflected in the budgets, that the
budget structures are intelligible to parliamentarians, that the macroeconomic and fiscal
policies are acceptable, and that the budget processes are practical. The committee
also evaluates the recommendations of the Financial and Fiscal Commission (FFC) on the
revenue-sharing formula between national and provincial levels as well as between
provinces.
Similar committee structures exist at the provincial level, e.g., the Standing Committee on
Public Accounts (SCOPA), as well as various portfolio committees established by the
provincial legislatures.
Your responsibilities with regard to financial management are dealt with in
Chapter 5, Section 45 of the PFMA. This section stipulates that all officials are
responsible for their own areas of responsibility.
While financial management and budgeting in national and provincial government is
guided by the PFMA, the MFMA fulfils the same function at local government level.
The Municipal Finance Management Act
The National Treasury has played a pivotal role in the introduction of financial
management reforms across government since 1994 and in local government since 1996.
The cornerstone of the reform initiative within local government has been the MFMA,
which became effective in July 2004 and was supported by the annual Division of
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Revenue Act. These pieces of legislation have been aligned with other local government
legislation, such as the Structures Act, Systems Act, Property Rates Act and their
regulations, to form a coherent package.
The National Treasury's primary objective is to secure sound and sustainable management
of the financial affairs of government – national, provincial and local – and to lead public
finance policies and reforms. This entails supporting the development of a coherent
approach to improve the delivery of services to communities. The mechanisms used for
this support include regulatory interventions, manuals, guidance, circulars, workshops,
seminars, training, internship programmes and hands-on support to municipalities.
To fulfil this responsibility in the local government sphere, the National Treasury has
developed a phased implementation strategy of financial and technical support for local
government, underscored by the MFMA. The multiple-phased intervention includes
conditional grants, subsidies, technical guidelines, policy advice and the placement of
international advisors with various municipalities. This strategy considers the diverse
capacity of municipalities for implementing the reforms and the requirements for
institutional strengthening, building municipal capacity and improving municipal
consultation, reporting, transparency and accountability. The implementation strategy
requires close cooperation with other departments in national and provincial spheres.
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