Division of Revenue Bill [B5-2002] 25 February 2002 Budget Hearings

1. Division of Revenue Bill [B5-2002] 25 February 2002 Budget Hearings Portfolio Committee on Finance Ismail Momoniat, Malijeng Ngqaleni, Vuyo Kahla

2. Intergovernmental Fiscal System • Intergovernmental system evolving • provinces developing • municipalities have a long way to go • Section 214 of Constitution and IGFR Act • Section 10(5) Of the IGFR Act • Processes for consultation for allocations • Budget Council and Budget Forum • FFC • Total allocations • Equitable share plus conditional/other grants • Add own revenue and borrowing for total budget

3. IG Budget Documents • Chapter 7 & Annexure E of Budget Review • Division of Revenue Bill • Bill and Schedules to be passed as an Act • Memo of objectives (usual as for any bill) • Annexure E of Budget Review • Appendices for each allocation in Schedules 3-6 • Further explanation on LG grant framework • Interim Framework for LG infrastructure • Interim Framework for LG capacity-building • Still to come • Allocations by municipality within 14 days • Gazettes when Bill is enacted

4. Chapter 7 and Annexure E • Chapter 7 summarises fiscal framework • Provides equitable share and conditional grant allocations to provinces and local govt • Annexure E provides greater detail • Explanatory memo required by IGFR Act • Five parts to Annexure E • Part 1: Govt’s response to FFC proposals • Part 2 deals with fiscal framework, Part 3 with how how 10 factors in s214(1) of Const taken into account • Covered in detail in Budget Review, esp in ch 3, 6 and 7 • Part 4 and 5 provide details on prov/local allocations • Read with appendices (and Schedules) in Div of Revenue Bill

5. Fiscal Framework Part 2 of Annexure E

6. Fiscal framework • 2001/02 outcome • Additional R15 billion in revenue • Spending R4,3 billion over 2001 Budget • Deficit of 1,4% • 2002/03 Budget • Revenue base for estimates revised upwards • Debt services costs decline from 4,8% of GDP in 2001/02 to 4,1% by 2004/05 • Deficit up to 2,1% in 2002/03 • Real growth in non-interest spending of 4,1%

7. National budget framework

8. Additional allocations • R13,4 billion in 2002/03 and R17,9 billion in 2003/04 • Positive real growth in all three spheres: • National R6,6 and R8,5 billion • Provincial R5,3 and R7 billion • Local R1,6 and R2,4billion • National share includes restructuring SA Post Office, UIF, currency depreciation and fight against crime • Provincial priorities - social security grants, education, capital investment and maintenance • Infrastructure and capacity building at local government level

9. Fiscal capacity and functions • Provinces • Raise 3.5% of own revenue • Social services (85%) and roads are public goods • Local Government • Raise over 90% of own revenue • Only one third of functions are public goods • Two thirds of functions are user charge services • National Government • Over half actual spending on protection services • Other national functions: higher education, admin, policy or regulatory

10. Division of Revenue • Strong growth to provinces (7,9% a year) and local government (18,3% a year) over MTEF • Priority pro-poor, social and housing: • Extension of basic municipal services • Higher social grants and increased take-up of child support grant • Social, municipal, housing and economic infrastructure • Bolster health system against the impact of HIV/Aids • Extending tertiary health services and training • Early childhood education programme

11. Division of Revenue

12. Division of Revenue • Revenue to be shared: • Revenue plus borrowing, exc RDP & social security funds • National share • Remains stable, from 40,6% in 2001/02 to 40.5% in 2002/03 to 40,2% in 2004/05% • Provincial share • Decreases from 56,4% in 2001/02 to 55,8% in 2002/03 • Decline due to once off R2 bn payment for social security grants • Static over MTEF • Local share • Increases to 4% in 2002/01 from 3,6% in 2001/02 • Double the 2000/01 Budgeted share 2,0% • Static over MTEF

13. Reconciliation with DoR Bill • Schedule 1: legal vs economic/functional • National share- • National allocation (appropriated and some direct charges) • Debt servicing and contingency reserve • Conditional grants (provincial and local) • Provincial share • Equitable share only, excludes cond grants • Local share • Equitable share only, excludes cond grants

14. Future changes to Fiscal Framework • Provinces • Provincial Tax Regulation Act • Takes effect for 2003/04 Budget • Borrowing • Subject to further discussion by Budget Council • Local Government • Transformation process still in progress • Mergers completed for 2003-04 mun budgets • Division of Functions finalised between cat Bs and Cs • Three year allocations to be announced • Significant new legislation still to be passed • MFM Bill, Property Rates, RSC levies

15. Response of National Govt to FFC Proposals Part One of Annexure E

16. Process to consider FFC proposals • FFC Submission: DoR 2002/03 -2004/05 • Proposals on budget process • 9 provincial and 13 LG proposals • LG govt proposals are new • Budget Council considered prov proposals • Budget Forum considered LG proposal • Premiers invited at Extended Cabinet • Cabinet decides on div of revenue thereafter • Draft DoR Bill published with attachments • Published 6 Dec based on MTBPS allocations

17. FFC process recommendations • National govt responsibility: • manage economic, fiscal affairs • determine tax bases, level and cost of servicing national debt, overall borrowing requirement • deduction of debt servicing and contingency • National govt and FFC agree on process and approach to what funds are available to be shared between the spheres

18. FFC recommendations on use of sub-national revenue • FFC notes that provinces and local govts must prioritise spending on constitutionally-mandated obligations • prioritisation of basic services • use of both own revenue and equitable share • Changes to existing equitable share formula should reflect priorities determined by political process • National govt & FFC agree on revenue use

19. Limitations of costing approach • FFC suggests const obligations should be in terms of a costing formula • Detailed response in 2001/02 Budget • Methodologically difficult for allocation process • Demand for funds exceeds supply • Prioritisation and pressures drives choices • Division is for marginal (additional) allocations • Costing useful for analysis, not allocations • Practically, data not available for costing approach • 2002 IGFR indicates data difficulties • BUT activity-based costing is the objective

20. FFC recommendations for provincial and local spheres • Institutional component for each sphere • Equitable share takes account of constitutionally mandated obligations • Other obligations funded with cond grants • Need for separate infrastructure funding • National govt agrees with all four above • Increasing fiscal capacity may affect equitable share formula • Limit in number of conditional grants • Developing defns, norms and standards complex and will take time

21. FFC provincial recommendations • FFC on Own Revenue Proposals • Surcharges on Personal Income Tax, fuel levy • Making Tax Room for provincial taxes, and allow choice within tax bands • National Govt agrees with broad approach, but differs on feasibility of surcharge on PIT • FFC on use of contingency reserve • Govt has an open consultative process, and not sure every province should have own contingency, but will explore further with FFC

22. FFC recommendations on LG • FFC on definitions and costing of mun services • NG reservations on approach outlined earlier • FFC recommends alterations to eq share formula • National Govt agrees important to evaluate and improve fiscal capacity factor • Poor info on new municipal budgets, so premature to make significant changes now • Increase discretion of LG over use of RSC levy • NG agrees, but wait until functions sorted out, and new municipal budget formats rolled out • Agree on FFC recommendations on borrowing • Well-developed capital markets in SA mean rules-based approach not necessary

23. FFC recommendations on LG • Areas of further work • Scope for cross-subsidies and effect on efficiency • Devolution and funding for district health services • Complex process • Agree on need for more disaggregated info first • Many issues to resolve, including definitions, different systems of remuneration etc

24. Provincial Allocations Part 4 of Annexure E

25. Total transfers to provinces

26. Provincial Allocations • Total provincial share grows at 7,9 % pa over MTEF • Equitable share grows at 8,5% pa • Includes shift from supplementary grant • Biggest transfer to KZN at R26,4 bn, followed by EC (R22 bn), Gtg (R21,7bn) • Smallest grant to NC at R3,2 bn

27. 2002/03 Composition of total transfers

28. Equitable share formula • Jointly recommended by FFC and govt • Adopted in 1998, full phase-in 2003/04 • System takes into account fiscal imbalances • Seven factors taken into account • Two changes to current formula • Increase in welfare weighting by one, at cost of economic weighting • IGFR showed welfare weighting averages 19% • Update on education enrollment data • Three year average for 1998, 1999 and 2000

29. Components of the formula • Education share - 41 per cent • Health share - 19 per cent • Social security share - 18 per cent • Basic share - 7 per cent • Backlog component - 3 per cent • Economic component - 7 per cent • Institutional component - 5 per cent

30. 2001 IGFR actual budget shares • Comparing actual spending share to eq formula • Education share - 39 per cent • Two per cent less than formula • Social security share - 19per cent • One per cent more than formula • Health share - 24 per cent • Five per cent more than formula • Tertiary services funded from conditional grant • 19 per cent share in formula higher than share for provinces with no academic hospitals • Social service share 82% • Excluding academic hospital and training grant, this is closer to 78%, which is same as formula

31. Division of provincial equitable share

32. Conditional grants • Legally from the national equitable share • To fund: • National priority programmes • Compliance with national norms and standards • Cross-border spill-overs • Two types: • General or Assigned function (R6,8 bn) • Provincial infrastructure, health tertiary & training • Specific purpose conditional grants • Housing subsidy R3,8 bn, other health R1.5 bn • Total R13 bn in 2001/02 • R14,3 bn and R15,2 bn in outer years • National Treasury R2,2 supp grant phased out

34. Provinces: Major grants 2002/03 • Health - R6,4 billion, mainly for tertiary hospitals, training, rehab and nutrition (7) • Treasury - R1,9 billion for provincial infrastructure (1) • Housing - R3,8 bn billion (2 grants) • Education - R418 million (3 grants) • New grants: • R274 mil for 2 grants to prov and local govt • Agriculture and poverty-alleviation (grants-in-kind) • HIV/AIDS grant spread in 3 depts

36. Tertiary and Training Health Grants • Some provinces providing tertiary with no extra funds, using own revenue & eq share • Shift in funding from 10 central hospitals to 27 hospitals providing tertiary services • Widening scope of health professional training to provinces without academic hosp • Exciting reforms that should increase no. and distribution without adverse effects • Challenge to medical schools to take advantage of more funding for new specialist posts in poor provinces

37. National tertiary services grant

38. Actual Provincial Expenditure • Wait for provincial budgets over coming 10 days • Detailed report in 2002 IGFR • Provincial capital expected to be R12,8 bn • Growth of 17,9% pa over MTEF • Table is a guesstimate at this stage • Challenge is on efficiency of spending

39. Guesstimate of prov expenditure

40. Projected Trends: Prov Revenue

41. Local Govt Allocations Part 5 of Annexure E

42. Local government transfers

43. National transfers to Local Government • Rising rapidly by 18,3% from R6,5 bn in 2001/02 to R10,8 bn in 2004/05 • Increases by R1,1 bn. R1,8 bn and R2,3 bn over MTEF • Totals over 10% of LG budget • Smaller municipalities receive larger share • Include transfers to category C municipalities • Municipal infrastructure development, especially in poor nodes identified in ISRDS and URP

44. Addressing Local Government Challenges • Establishment of new municipalities • Restructuring service delivery • Delivery of free basic services • Expanding infrastructure • Co-ordination of capacity building • Financial management reforms based on Municipal Finance Management Bill

45. Allocations to Local Govt

46. Local Govt Equitable Share • Water operating and transition grant ultimately part of formula-driven equitable share • Two components in formula-driven eq share • Institutional I and Basic Services S • Page 60-64 in Annexure E in DoR Bill • I grant extended to poor category C municipalities • contribution towards cost of governance in categ B and C • Category A too rich to qualify • 42% increase over original 2001/02 budget

47. Local Govt Equitable Share • S basic services grant • Targets poor households • Share of households earning below R1100 per month • Stats SA estimates on imputed household expenditure by municipality adjusted from last year • New nodal component for 13 rural and 8 urban nodes • R200 mil, R212 mil and R220 mil over MTEF • All municipalities qualify, but no duplication • Require info division of fncs between category B and C • Equitable share per muni to be published next week

48. Municipal Infrastructure Grant • 8 different grants totalling R3.3 bn rising to R4 bn over MTEF • Biggest are CMIP and Water at R2.5 bn • Interim Framework for Mun Infrastructure • Objective is to consolidate 8 grants into one • Expect 3 or 4 windows within one grant • Allocation is by formula, rather than by project • Three-year allocations by municipality • Slow take-up in 2001-02 due to start-up delays

49. Municipal Capacity-building and Restructuring Grants • Many grants, not clear which is effective • Objective is to have one consolidated grant • Two grants shifted to provinces as spending is by province • Financial mngt grant includes a component to gear in World Bank programme • Restructuring grants also available

50. Consolidated Mun Expenditure