2001 MTBPS Division of Revenue 6 November 2001 Presentation to Budget Committee

1. 2001 MTBPSDivision of Revenue6 November 2001Presentation to Budget Committee

2. MTBPS covers... • Budget reform agenda • Macroeconomic developments • Fiscal framework • Tax policy • Medium term expenditure framework • Intergovernmental finances 2002 Budget theme Reducing poverty, inequality and vulnerability

3. Fiscal framework • Fiscal policy shift in 2001 will continue • Real growth in spending of 3,7% a year • Strong growth in spending on local government services, social services, criminal justice and infrastructure • Continuing reduction in tax rates for low and middle-income groups • Declining debt and debt service costs as a percentage of GDP • Increase in deficit to 2,6% next year from 2,3% this year

4. Fiscal framework

5. Fiscal framework • Total expenditure of R282.6 bn, R304.8 bn and R327.3 bn • Top-slice first deductions • Debt servicing of R48 bn, R50.6 bn and R53.1 bn • Contingency reserve of R2bn, R4bn and R8bn • Total available R234.6 bn, R254.3 bn and R274.2 bn compared to R213 bn in 2000/01 • 10.2% increase in 2000/02 over 2001/02

6. Vertical Division • Division between the three spheres • Recommendations of FFC • Process of consultation with provinces and organised local government • Section 214(2) (a) to (j) of Constitution • 10 criteria to be taken into account • fiscal capacity and expenditure efficiency • development needs and economic disparities

7. Powers, Functions and Expenditure Needs • Provinces raise 4% of budget • Provide tax-funded services (education, health, welfare) that do not raise significant revenue • Local govt raises over 90% of revenue • Two third of budget: user-fee services (elec, water) • One third of budget: public goods streets, street lights, refuse removal, emergency services • National govt • Over half its budget is for protection sector • Economic (Roads, rail), Administrative (SARS) • Small budgets for social services, Higher education • Different spheres, diff expenditure needs

8. Principles of Intergovt Fiscal Relations • Accountability and autonomy • Good governance • Division of responsibilities between political and administrative office-bearers • Redistribution • Broadened access to services • Revenue-sharing • Vertical division • Each govt responsible over own budget • No bail-out to reduce moral hazard

9. New allocations • Three year baseline allocations • Additional allocations in revised framework • 2002/03 R8,9 billion • 2003/04 R11,8 billion • 2004/05 R13,3 billion • In line with priorities, strong growth for: • Municipal services and infrastructure • Social security, HIV/Aids action plan and early childhood education • Capacity in criminal justice sector • Administrative departments that play a role in delivering social services • Step up in infrastructure projects

10. Changes from 2001 Budget

11. Total allocations

12. Division of revenue • Shift in resources to local and prov sphere • Local govt. funding grows faster than other spheres • Prov share increases to 56.4%, LG to 4% • Provincial share takes account of: • Increased social security payments (mainly CSG) • Funding of HIV/Aids action plan • Local share takes account of: • Free municipal services • Expansion of municipal infrastructure provision • Fiscal stress due to new municipal boundaries

13. Which budget rises fastest? • Depends on new priorities • Is provincial transfer rising fast enough? • Social grant pressures (take-up and size of grant) • HIV/AIDS • Health • Housing • Is local government transfer rising fast enough? • Free Basic Services • Is national government rising fast enough? • Operating subsidies to the Post Office and UIF • Upward adjustment to costs in foreign affairs and on strategic defence packages due to currency depreciation

14. 2001 FFC Recommendations • 11 provincial proposals • 13 local govt proposals • Broad agreement with approach • Differ on costing of services • Difficulties in measuring, esp in LG • 2001 IGFR indicates much to be done still • Agree on provincial own revenue, but not on surcharge on PIT • Agree on capital grant, but not on formula • Further work on contingency reserve

15. 2001 FFC Recommendations • LG FFC proposals new and to be commended • Fiscal framework • Role of Equitable Share • Role of Borrowing • Issue of division of functions • Equitable share • Need more info and stabilisation in new munis • Premature to amend structure of formula • Agree on introducing tax capacity measure in MT • Tariffs, RSC levy, borrowing, district health

16. Intergovernmental finances • Provincial equitable share changed to reflect… • Increased importance of social security payments • Data changes including school enrolment figures • Provincial conditional grants • New structure for hospital grants • Increase in HIV/Aids grant • Housing programme increased • Local government • Equitable share formula takes account of free basic services, fiscal capacity and councilor salaries • Infrastructure grants grow rapidly • Capacity building grants being consolidated

17. Equitable Share and Conditional grant allocations • Provincial equitable share increases to R116.1 bn, R124.9 bn and R133 bn • Local govt equitable share (and operating grants) increases to R4.2 bn, R5.2 bn and R5.7 bn • Provincial conditional grants R14.6 bn, R16 bn and R17 bn • Health grants total R6.2 bn, R6.6 bn and R7 bn • Infrastructure, housing, supplementary, education • LG cond. grants R4.1 bn, R4.8 bn and R4.9 bn

18. Horizontal Division of Eq share • Provincial equitable share • Formula indicative • Education, health, welfare, economic, basic, institutional and backlog components • Adjustment of formula: Increase in welfare by one, decline in economic by one • Adjusting of education data • Local govt equitable share • Institutional I grant and basic services S grant • Adjust institutional I grant, for fiscally-weak munis (including category C)

19. Provincial equitable shares • Equitable share is 89% of transfers to provinces • Total equitable share is R105,3 billion in 2001/02 • Rises to R116,1 billion in 2002/03 and to R133 billion in 2004/05 • Annual average growth of 8% over MTEF (average annual real growth of 3% over MTEF) • Strong growth to • Address provincial priorities in education, health and social development (CSG, ECD, HIV/Aids) • Provide for stronger spending on infrastructure development

20. Provincial equitable shares formula • Formula used for horizontal division • Based on relative needs of provinces • Based on 1996 FFC recommendations • Changes for 2002 Budget • Weighting for welfare component increased by 1% taking into account greater spending in this sector • Economic component decreased by 1% • Data updated for latest education data (average enrolment for last three years)

21. Provincial equitable shares

22. Conditional Grants to Provinces • Enables provinces & local govt. to implementation national priorities • Reforms introduced over the past years aim to: • Enhance accountability & transparency • Better planning and budgeting for grants • Draft 2002 Division of Revenue Bill to be published early • Conditional grants increase from R13,6b in 2001/02 to R14,7b in 2002/03 and R17 b in 2004/05 • Major increases in • Housing subsidy grant • Provincial infrastructure grant • HIV/Aids grant • Health administers major grants >40%

23. Conditional grants • Are there too many? • Poverty alleviation fund is creating more! • Fewer and and more effective, with no undue admin burden • Consolidation and rationalisation of grants • Spending info is poor • non-transfers and underspending • LG cond grants rationalised • Infrastructure: CMIP, Water Capital, CPWP, LED • Capacity-building and restructuring: Fin mgt, LG support, Mun Systems Improvement, other

24. Health Grants • Review of tertiary services and training grants • Need to improve equity and access to tertiary services • Central hospitals, training and redistribution of specialised services phased into new grants • National tertiary services grant will fund 27 hospitals in all 9 provinces as opposed to 10 hospitals in 4 provinces • Health professional training and development grant will aim to increase number of post-graduates and specialists working in poorer provinces • This change will be phased in over 5 years

25. Health Grants

26. Other provincial grants

27. Local government • This sphere grows fastest over MTEF period reflecting a commitment to: • Deliver free basic municipal services • Expand infrastructure network to provide basic services to more people • Provide adequately for governance costs • Cater for municipalities and district councils with weak fiscal bases • New municipal boundaries adding to fiscal stress: • Hence increased transfers from national required

28. Local government • Equitable share and operating grants • transition grant (one year more) • water and sanitation operating grant • R293 • Infrastructure grants • Electrification grant • Restructuring and capacity building

29. Local government transfers

30. Further work • Draft Division of Revenue Bill to be published later this year • Will include explanatory memorandum • Response to FFC proposals • Further work on conditional grants • Provinces informed of all grant allocations this week • Publishing of three-year allocations by municipality by Budget Day