FFC’S RESPONSE TO THE MTBPS

1. FFC’S RESPONSE TO THEMTBPS 29 October 2009 Standing Committee on Appropriations

2. BACKGROUND AND AIM • This submission is made in terms of Part 1 (3) (1) of the FFC Act (2003) as amended. • which provides for the Commission to act as a consultative body for and to make recommendations to organs of state all spheres of government on financial and fiscal matters. • W.r.t MTBPS, Section 4 (4)(c) of the Money Bills Amendment Procedure and Related Matters Act (2009), requires Committees of Parliament to consider the Commission’s recommendations when dealing with money bills and related matters • To highlight key issues from MTBPS 2009 that the Commission believes needs consideration by Committees w.r.t matters and factors that will inform the budget for the 2010 fiscal year. • To make specific reference to matters that have a bearing on the Commission’s recommendations for 2010 Division of Revenue (consultations are still on going with the government through the National Treasury) that the Committee may wish to consider.

3. Economic outlook & the fiscal framework over the MTEF • The global financial crisis has strongly influenced the MTBPS • These lead government to forecast significant revenue reductions as compared to the February Budget 2009. • The Commission recognizes the serious impact that the economic downturn has had on budgets • thus a need to ensure investment in (public) infrastructure and need for a comprehensive infrastructure maintenance strategy.

4. Medium Term Spending Priorities • The spending priorities over the MTEF are: • Expanding employment and safeguarding social security through skills building and the new phase of the EPWP (Expanded Public Works Programme) • Improving the quality of education and skills development • Enhancing quality of Health Care • Rolling out of Comprehensive rural development strategy • Creating a built environment to support economic development, and • A broad based approach to fighting crime

5. Vertical Division • Share of revenue to national government continues to decline steadily over the MTEF • Revenue shares to local government and provinces rise steadily Source: MTBPS 2009

6. Assumptions underpinning MTBPS • The Commission broadly agrees with this fiscal easing proposed in the 2009 MTBPS given the sharp recession and weak economic outlook • The substantially bigger borrowing requirement is linked to large infrastructural investment projects that would be key for long term growth and well being of future generations. (Eskom& Transnet) • Commission’s own modelling forecast raises the possibility that the anticipated recovery in industrial economies may not come as early as predicted meaning that the recession may take longer than expect and things may be worse before they get better.

7. Fiscal response to the economic outlook • The Commission though is concerned over the unanticipated wage bill. • There should be a deliberate attempt to synchronise the centralized bargaining process of the public sector with the budget process to reduce undue burden to sub-nationals by decisions over which they have no direct control • There is a needs for a collective responsibility that needs to be taken if we were to strike a balance between bargaining chamber’s agreements and investments that creates more jobs • The Commission recommends that government should target specific employees and retrain those in possession of the requisite skills in their employment, so as to improve efficiency

8. FISCAL FRAMEWORK 8

9. Provincial fiscal framework • A larger portion of the R39.9 billion added to the provincial framework sees the equitable share raise by an additional R32.7 billion (or 8.6 percent) off its baseline of the revised R236.9 billion in 2009/10 budget • Conditional grants increase by R7.1 billion ( or 28.3 per cent), of the revised baseline of R58.4 billion 2009/10 budget

10. Provincial fiscal framework …. • The Commission has noted the pressure on the provincial budget, especially from personnel. • That provinces tent to redirect funds away from what they deem “non core” to education and health within which the main cost drivers are personnel. • The consequence of this is that service delivery can be expected to slow down in preference to wage settlements. • Commission notes in particular the revision in the Provincial Equitable Share (PES) baseline due to the shifting of the Further Education Training (FET) colleges funding to national. • cautions that such shift should not disrupt budget of provinces and service delivery in general. • The principles underpinning the indicative amounts to be transferred to provinces should be clear, objective and transparent

11. Local government fiscal framework • Transfers to local government grows by a resilient 14.5 per cent over the MTEF. • The biggest increase is in the equitable share (16 per cent) mainly to assist municipalities deal with electricity increases. • Conditional grants grow at 14.8 per cent mainly to expand the basic infrastructure services to households.

12. Impact of economic downturn • Like the provincial framework whilst the LES allocation illustrates positive growth over the period, • the pace of growth becomes progressively slower, particularly over the outer years of the medium term as a result of the economic down turn • Increasing levels of grant dependency, • Payments for services may put pressure on budgets.

13. Key principles for LG • In making allocation to this sphere, the commission would like to caution against increased allocation to non-performing grants, including the MIG. • The commission would like to re-iterate its previous recommendation that there be link between MIG and the LES. • This is such that, as infrastructure is rolled out through MIG allocations to municipalities, and those from the LES reflect the need associated with the infrastructure that is been rolled out. • The performance of the Neighborhood Development grant needs to be reviewed.