Division of Revenue Bill 2004 [B4-2004]

1. Division of Revenue Bill 2004[B4-2004] Select Committee on Finance NCOP Ismail Momoniat, Nompilo Sidondi, Sandra Sooklal, Musa Ndimande 25 February 2004

2. Intergovernmental Fiscal System • Section 214 of Constitution and IGFR Act • Requires an annual Division of Revenue Bill • Section 10(5) of the Intergovernmental Fiscal Relations Act gives effect to Constitution • Consultation processes for all allocations • Explanatory memorandum (Annexure E) • Budget Council and Budget Forum • FFC • Consultations with Budget Council and Budget Forum • Extended Cabinet with provincial Premiers and chairperson of SALGA

3. 2004 Budget Timeframes • Tabling of Division of Revenue Bill with National Budget (DoR) 18 Feb 2004 • Tabling of provincial budgets • 24 Feb to 2 March in terms of PFMA • Consolidated spending function figures only in Budget Review Table 7.6, and this is an initial projection • Final consolidated and provincial figures in IGFR, to be published in May • Provincial departments also strategic plans • To precede portfolio committee hearings on departmental budget

4. 2004 Division of Revenue Bill • Section 76(4) Bill and has to start in NA • Most important Budget Bill, not a s75 money bill! • Clauses 1-35 of the Bill • Schedules 1-7 divides revenue bet 3 spheres • Memo on the objectives of bill • Explanatory attachments • Annexure E (also part of Budget Review) • Appendix E1 & E2: Frameworks on all conditional grants (provincial and local) • Appendix E3 to E6: LG allocations by municipality for both national & municipal financial year • Appendix E7 Demographic data for Local Government Equitable share and Municipal Infrastructure Grant

5. DOR: Schedules • Schedules 1 to 7 • Equitable Share allocations (Schedules 1-3) • Schedule 1 divides eq share between 3 spheres • Schedules 2 divides provincial equitable share between 9 provinces • Schedule 3 divides local equitable share between 284 municipalities • Conditional Grant allocations (Schedules 4-6) • Schedules 4 and 5 on provincial grants, by province • Schedules 6 on LG grants (no division by muni) • Allocations by municipality in explanatory attachments • Allocations-in-kind (Schedules7)

6. Budget Review: Chap 7 & Annex E • Chapter 7 summarise fiscal framework • Provides equitable share and conditional grant allocations to provinces and local government • Annexure E provides greater detail . • Six parts to Annexure E • Part 1: deals with how 10 factors in s214(1) of Constitution were taken into account • Part 2 Govt’s response to FFC proposals • Part 3 deals with fiscal framework, • Part 4 and 5 provide details on prov/local allocations • Part 6 concludes with brief analysis of IG grants

7. Appendices E1 and E2 • Grant frameworks in Appendix E1 & E2 • Gazette by 1 April makes it legally binding • Measurable outputs & conditions • Allocation criteria • many use sector data, not nec certified by Stats SA (eg enrolment) • Past performance • 2002/03 audit outcomes • many with material non-compliance with DOR • 2003/04 three quarter projections • Transferring dept quarterly reports?

8. Appendices E3 to E7 • Local govt allocations per municipality in Appendices E3 to E5 • Total allocation per municipality in E6 • National AND municipal financial year • Good summary of table E6 in Table E22 or E17 in Annexure E • Appendix E7 provides demographic data for LG equitable share and MIG formulae

9. Review of Provincial and LG Fiscal Framework • Census 2001 results released in 2003 • Update formulae with new data for 2004 • Comprehensive review of formula for provincial and LG equitable share grants for 2005 MTEF • Review of all conditional grants • Review of LG Fiscal Framework • Restructuring of electricity distribution • Division of functions 3 Jan 2003 • Review of RSC and municipal service levy

10. Corrections to DoR in NA • Schedule 1 -minor rounding errors • Schedule 3, p22 - division btw district and local munis uMgundgundlovu • Schedule 3 - page 29, figures for NW and NC swopped, for National Tertiary Services Grant • Changes in total per province allocations • Corrections to clauses

11. Response of National Government to FFC Proposals Part 2 of Annexure E

12. Process to consider FFC proposals • FFC Submission: DoR 2004/05 • Focus is on two main sets of issues • First set deals with DOR issues pertaining to each sphere of government • Second set focus on the intergovernmental system • Response should be viewed against the review of LG and Provincial fiscal review • Budget Council considered prov proposals • Budget Forum considered LG proposal • Premiers invited at Extended Cabinet • Cabinet decides on div of revenue thereafter

13. FFC Provincial Recommendations • HIV and Aids funding and health conditional grants • Equitable share formula • Education component • Health component • Welfare component • The FFC also made overall proposals regarding the equitable share formula • Framework for Comprehensive Social Security Reform

14. Response of N Govt to FFC provincial proposals • Governments current approach to HIV and Aids funding is largely in line with FFC recommendations • The proposal to consolidate all HIV and Aids grants will be explored during the review of provincial fiscal framework • It is difficult to evaluate ES spending on HIV and Aids • On health conditional grant proposals • national Departments of Health and Education and the National Treasury review the funding of academic and tertiary hospitals • PSNP to be administered by education in 2004/05

15. Response of N Govt to FFC provincial proposals • Health component of ES formula • Regular updates not possible due to lack of updated data • Replacement of current datasets used in component with alternative data being explored • Education component of ES formula • ‘out-of-school’ enrollment retained as stabiliser • ECD phase into ES formula by adjusting the age co-hort to 5-17 • ABET proposal will form part of the broader review • On welfare component of ES formula • Should be viewed against current developments pertaining to the shifting of social security function • Two Bills before parliament • Increasing the weight of welfare component will not address FFC concerns as other areas of spending are crowded out

16. FFC proposals on LG • Revenue capacity and the ES formula • Municipal institutional capacity • Financing development nodes • Differentiated approach to municipalities

17. Response of NG to FFC on LG • On the revenue capacity of LG and the ES formula • Government supports the FFC proposals • Recognise the need for a review of LG fiscal framework • On I-element • Will form part of the broader LG fiscal framework review • Capacity building CG • Will form part of LG fiscal review and steps are to be taken to minimise the number of CG in system • Grants will be assessed in terms of outputs and outcomes

18. Response of NG to FFC on LG • On financing development nodes • FFC is raising valid issues on ISRDS and URP • The current ES transfers still fund transitional programmes and can only be phased out in a few years time • Funding for nodes will be explored with the fiscal framework review • Gov agrees that the programmes be evaluated • On the differentiated approach to municipalities • Legislation provides for a differentiated approach • Consideration is being given to a differentiated approach based on capapcity

19. FFC proposals on intergov system • Bulk of proposals are work-in-progress • Proposals related to CBS, expenditure assignment, costed-norms,performance management,building institutional capacity, funding instruments for poverty-alleviation • Gov response just an initial response • Gov welcomes the emphasis on the need for certainty in functions • Expenditure assignment is complex and calls for greater cooperation • Re-assignment of social grants underway • CBS taken account of in vertical and horizontal DOR

20. Fiscal Framework Part 3 of Annexure E

21. 2004 Budget priorities Increasing investment in infrastructure, industrial capital (16 to 25% of GDP) Improving education, training and skills development to raise productivity Fighting poverty and inequality through work opportunities, income support and empowerment Improved regulation of markets & public entities, and efficient public service delivery

22. Fiscal policy • 2003/04 deficit estimate of 2,6% • Expansionary stance from in 2001 continues • Strong real growth in non-interest spending, averaging 4,8% a year • Stable tax burden at 24,7% • Debt service costs decline from 3,9% of GDP in 2003/04 to 3,6% in 2006/07 • Deficit of 3,1% in 2004/05 declining to 2,8% by 2006/07 • Significant surpluses in social security funds

23. Summary of tax proposals • Income tax on individuals reduced by R4 billion • Provision made for share transfers • Interest exemption raised to R11 000 for taxpayers under age 65 and to R16 000 for taxpayers age 65 and over • Transfer duty threshold on property transactions increased to R150 000 • Duties on some products abolished • Increase in fuel levy (15c/l) and RAF (5c/l) • Increase in exercise tax (tobacco, and alcohol)

24. Fiscal framework

25. Key MTEF priorities • Renewed focus on employment creation • Deepening the skills base • Stepping up investment, esp. in infrastructure • Strengthening the social security • Reinforcing security and crime prevention • Improving core admin services to citizens • Land reform and post settlement support to farmers • Promoting multilateral cooperation, incl. AU and NEPAD

26. Division of revenue

27. Provincial Allocations Part 4 of Annexure E

28. Provincial priorities • Comprehensive HIV and Aids prevention and treatment plans • Providing for social security expansion • Non-personnel inputs into education • Post-settlement support for farmers • Infrastructure investment • Special focus on labour-intensive projects • Hospital revitalisation programme • Provinces receive R19,7 billion extra over MTEF

29. Provincial Budget Reforms • Uniform budget and programme structures extended to more depts • Education, Health,Social Development, PW, Transport and Roads, Housing, Agriculture, Local Government, and Sports • Uniform measurable objectives and outputs per programme or main division developed • To develop performance indicators for each measurable objective

30. Provincial Budget Reforms • Introduction of sectoral Quarterly performance reports – piloted in 2004/05 and mandatory in 2005/06 • New economic reporting format • New standard chart of accounts • Migration to BAS to be completed • Supply chain framework finalised

31. Provincial Allocations • Total provincial share allocation increases from R161,5 bn in 2003/04 to R181,1 bn 2004/05 and to R216 bn at end of MTEF • Biggest allocation to KZN at R36,9 bn in 2004/05 (compared to R32,2 bn 2003/04) • Next highest EC (R30 bn), Gtg (R29 bn) • Lowest to NC (R4,4 bn) • Equitable share R159,9 bn, or 88,3% • Conditional grant R21,2 bn

32. Total transfers to provinces 2002/03 to 2006/07

33. National transfers to provinces(1) • National transfers make up 97% of total provincial revenue in 2004/05 • Equitable share makes up 88,3% of national transfers to provinces • Rises from R144,7bn in 2003/04 to R159,9bn in 2004/05 and will peak at R186,4 bn by 2005/06 • R19,7 bn added to ES over the next three years, a growth rate of 8,8 %

34. National transfers to provinces(2) • Conditonal grants grow from R16,7 bn in 2003/04 to R21,2bn in 2004/05, and will rise to R30bn by 2006/07 • Growth in CGs largely linked to • Child support extension grant • R3,7bn, R6,9bn and R9,3bn • Food relief of R388m each MTEF year • HIV and Aids in health • R782 million, R1,1bn and R1,7bn • R750 million for CASP • Growing infrastructure grants • 19 Conditional grants • 2002/03 Audit concerns

35. Provincial revenue:2004 MTEF

36. Equitable share allocation 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 • Dual approach to review of formula • For 2004 Budget structure retained and education,basic and economic activity components updated for data • Comprehensive review for 2005 MTEF

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

38. Summary of provincial ES formula

39. Actual allocations vs formula • Social security share - • 26,5% total budget (exc CSG) in 2003/04 • 29,3% total eq share (inc CSG) in 2003/04 • Substantially more than original formula, will be even higher at end of MTEF • Started at 17% three years ago • Education share –38,7 per cent • Almost 2,3 % less than formula • Health share – 19,9 per cent • Excludes all conditional grants worth R7,6 bn. Total health share is 22,3% • Health CGs is 0,9% higher than formula

40. ES transfers to provinces 2002/03 to 2006/07

41. Conditional grants • Legally from the national equitable share • National priority programmes • Compliance with national norms and standards • Cross-border spill-overs • Two types: • General or Assigned function • Provincial infrastructure, health tertiary & training • Specific purpose conditional grants • Housing subsidy, Other health • Total R21,2 bn in 2004/05 • Total Health R7,7 bn, Housing R4,6 bn, infras R3,3 bn • Child Support Extension R3,7bn • HIV/Aids in health R782 million • Formula differ for each grant (see App E1 & E2)

44. Local Government Allocations Part 5 of Annexure E

45. Local Government priorities • Bulk of pro-poor spending is in provinces and local government • Accelerate the rollout of free basic services • Electricity, water and sanitation, refuse removal • Municipal infrastructure development • MIG to provide the infrastructure to rollout free basic services • Contributing to job creation • Capacity building grants to support MIG implementation • MFMA implementation • Building in-house capacity in planning, budgeting and financial management

46. Local government priorities • Increasing basic service provision • Step up in infrastructure spending • Complements EPWP • Rolling out free basic services • Municipal financial management reforms • Implementation of Municipal Finance Management Act • Local government receives R3,9 billion extra • R2,2 billion for equitable share • R1,7 billion for infrastructure

47. Local Government Reforms • LG grant system is being rationalised • to ensure simplicity, flexibility and certainty • Three-year allocations for all grants are published per municipality • to facilitate proper budget planning • The next phase focus mainly on financial management reforms (MFMA) • Modernisation of budgeting and reporting • Accountability and good governance • Consolidation of LG infrastructure spending (MIG) • To improve coordination and integration at a local level in line with IDPs • Restructuring of the electricity industry

48. Local Government Allocations • National allocations an important and growing source of revenue for municipalities • Comprise about 14,4 per cent of total LG budgets, but can be as high as 92 per cent in some municipalities • Increases by R2,9 bn over the next 3 years • Total allocations grows to R17,1 billion in 2006/07 from R12,4 billion in 2003/04 • Equitable share is most significant comprising 54 per cent of allocations in 2004/05 • allowing greater discretion at local level • Equitable share increase to R9,4 billion in 2006/07 from R6,4 billion in 2003/04

49. LG Allocations (continued) • R21,6 billion earmarked transfers made to LG over the MTEF • Infrastructure grants also receive a major boost to address backlogs • Grow to R6,0 bn in 2006/07 from R4,1 bn in 2003/04 – R1,7 bn increase over baseline • Capacity building and restructuring grants are allocated R2,2 bn over the three years • Mainly to support the implementation of MIG and the MFMA • Support municipal restructuring

50. Analysis of Grants