THE FINANCIAL AND FISCAL COMMISSION’S SUBMISSION ON THE DIVISION OF REVENUE BILL 2005

1. THE FINANCIAL AND FISCAL COMMISSION’SSUBMISSION ON THE DIVISION OF REVENUEBILL 2005 2 March 2005

2. INTRODUCTION • Mandate and Objectives: • Legislative Mandate from IGFR Act of 1997 involves consultation with Minister of Finance 14 days prior to introduction of D.o.R.B. • This takes form of comment and analysis of division of revenue (1994 – 2004) compared to 2005 M.T.E.F.

3. Outcome of Process • Preliminary observations • Recommendations Recommendations Fully Accepted Accepted in Principle Not Accepted Institutional Capacity Availability of Data Further work Elaborated Recommendations New Recommendations

4. METHODOLOGY • Evaluation against criteria in S 214 a-j, progressive realization of CMBS and other principles of IGFR raised by F.F.C. • Continuous development through stakeholder consultation (Legislatures and Government departments). • Undertaking own research

5. INTRODUCTION • Document Structure and Analytical Framework: • Introduction and Methodology • Review of Dialogue with Government on Commission Recommendations • Macroeconomic Policy • Trends in the Division of Revenue • Provision of Basic Social Services • Provision of Basic Infrastructure Services.

6. INTRODUCTION CONT • Analytical framework links national policy objectives with performance indicators against variable norms & standards. • Document does not deal with in-year disbursement & reporting procedures.

7. REVIEW OF THE PROVINCIAL EQUITABLE SHARE (PES) • Augmenting provincial revenue • Exploiting the opportunities of the PTRPA (2001) • Gives provinces a strategic opportunity to plan & alter their spending patterns in line with their needs • Reduction of economic activity weighting may represent an indirect incentive for provinces to increase own revenue

8. REVIEW OF THE PROVINCIAL EQUITABLE SHARE (PES) • Performance of individual components reviewed against: • Set policy objectives, norms and standards • Improvement of equity in access to basic services; and • Efficiency in utilizing public resources

9. Economic Activity • Economic Activity • Public infrastructure tends to come under pressure in areas with high economic activity • FFC requires more information on the choice of the weight • Not clear how the weight was arrived at • Trade-off with the poverty component?

10. Poverty components • Poverty issues • Introduction of 3% poverty component in the new formula • Need for a proper definition of what this component seeks to achieve, as well as the method (empirically tested) used to determine relative weight • Consideration of socio-economic status for different beneficiary groupings • Political imperatives and government priorities • FFC will conduct a review of all transfers aimed at targeting poverty

11. Services Components • In Health key issues relates to: • Medical aid vs. non-medical aid population • Demographic group utilization rates and appropriate data • In Educationkey issues relate to: • Adjustment of learner to school going age children, and the inclusion of ECD • In the case of Conditional Grants • PCGM - a flexible tool to financing provincial infrastructure needs • Advantage of allowing provinces to prioritise according to own circumstances

12. Services Components • In the case of Social Development key issues are: • Shifting of social security grants to national sphere • The financing of welfare services • Need to respond more directly on defining a basket of services • With respect to Backlogs component • Creation of a separate CG to deal with infrastructure • FFC concern addressed but no agreement on implementing the PCGM

13. Review of the Local Equitable Share (LES) • Funding Windows • Government agrees with the abolition of the ‘windows approach’ • Cost Disabilities • Government agrees that cost disabilities require a differentiated delivery approach

14. LES cont • Revenue Raising & Spill over components • Government agrees to incorporating revenue raising capacity in the LES • Further work with respect to design and definition of the spill over component • Measuring Basic Municipal Expenditure Needs • Government should define a basket of basic municipal services • Protecting the LES from being ceded by municipalities

15. LES Cont • Structure of the formula • Government agrees with FFC’s components based approach • Needs further guidance on how spillovers can be taken into account • FFC will address this as soon as it has clarity on reformed RSC levies • Basic service costs can not be used for determining allocations although research on these is welcomed • FFC notes that the research that it carries out is aimed at informing resource allocations

16. LES Cont • Pledging of LES for loans • Government will not amend MFMA • Government agrees that delivery of basic services should not be compromised • FFC obtained legal advice on the matter and only wanted to ensure that basic services are protected either through amendment to the Act or other treasury regulations

17. ECONOMIC AND FISCAL POLICY • Growth, Investment and Savings Policy: • Government wants to increase rate of investment from 16% to 25% of GDP to lift average growth rate from 2.8% p.a. to between 5% and 6% p.a. required to reduce unemployment. • Public infrastructure spending is projected to increase from 5.5% in FY 2004 to 6.25% of G.D.P. over 2005 MTEF. • Employment and Labour Policy: • Employment growth less than GDP growth. Public sector employment has declined. • Government targeting 1 million EPWP jobs but insufficient to halve unemployment by 2014. • 80 000 learners target of SETAs has been exceeded.

18. ECONOMIC AND FISCAL POLICY • Fiscal and Financial Policy: • National norms of 25% tax : GDP and international target of 3% deficit : GDP ratio established. Similar norms not set for general government or public sector. • Improved national revenue raising capacity and constrained spending enabled deficit to be reduced from 6 to 1% of GDP by FY 2001. 3% government deficit projected over 2005 MTEF, whilst PSBR rises to 4% of GDP. • Since FY 2002, government investment has exceeded deficit financing. • Debt servicing costs have declined from 19% to 12.5% of nationally raised revenue enabling real growth of funds available for spending on CMBS.

19. ECONOMIC AND FISCAL POLICY • Monetary Policy: • Gradual development towards an inflation targeting regime. Since its formal adoption in 2003, inflation has kept below 6% target. • Persistence in inflation targeting may reduce high real interest rates which discourage fixed investment and encourage speculative inflows. Exchange rate has been very volatile, though appears to be stabilizing. • From 2005, Government is monitoring administered prices for compliance with the inflation target.

20. TRENDS IN THE DIVISION OF REVENUE • Vertical Division and Balance: • Reprioritization of spending towards social assistance and household infrastructure increased provincial and municipal share of spending 7% and 10% respectively. • The proportion of general government revenue raised by national and provincial governments has fallen 4% and 3 % respectively, whilst the municipal share has increased 7%. • National Fiscal Framework: • Composition of nationally raised revenue shifting away from PIT & VAT. • National government spending shifting towards finance & admin, I.J.S. Policy drive to increase infrastructure spending has recently reversed declining capital spend trend.

21. TRENDS IN THE DIVISION OF REVENUE • Provincial Fiscal Framework: • Provincially collected revenue constitutes a very small proportion of provincial budgets. Between FY 1994 and 2003, an average and stable 85% of funding was derived from PES and 12% from conditional capital and capacity building grants. This ratio shifts 2/3 to 1/3 with the conditionalizing of social assistance grants from 2005 onwards. • Provincial spending has shifted to social development (+10%) and away from education (-6%), economic services (-3%) and health (-1%). Capital spending has been growing faster than average since FY 2001 and projected to continue over 2005 Medium-term. Maintenance spending declining. • Provincial budget allocations and spending patterns have served to reduce economic disparities between provinces.

22. TRENDS IN THE DIVISION OF REVENUE • Municipal Fiscal Framework: • Over 85% of revenue is derived from own sources. Municipalities are deriving a greater proportion of funds from intergovernmental grants. Conditional grants are being reduced in favour of the LES. • Rural municipalities derive between 60% and 90% of their budgets from intergovernmental grants, whilst metropolitan authorities derive between 3% and 8%. • Operational spending rising faster than capital or maintenance spends. • Municipal spending patterns neither reduce nor exacerbate economic disparities between municipalities.

23. PROVISION OF BASIC SOCIAL SERVICES • Social Development: • Since the introduction of the Child Support grant, the take up rate has averaged 18% p.a. Real spending has grown by 8% p.a. More recently, HIV-AIDS providing incentive for rapid take-up of disability and foster care grants. • Social assistance grant values rising somewhat faster than CPI. • Official income surveys have not isolated the impact of social assistance spending on income poverty.

24. PROVISION OF BASIC SOCIAL SERVICES • Education: • Despite average growth of school-going age children of 1.74% p.a. between 1996 and 2001, learner enrolment and spending declined, possibly due to policies to reduce errors of inclusion. • Since then, learner enrolment has been rising by 1.27% p.a. Enrolment targets have been set for all education programs. Real spending growth of 2.3% projected for 2004 MTEF. • Adult literacy improved 83% to 89% between 1996 and 2001 whilst proportion of adults with post-secondary education increased 23% to 29%.

25. PROVISION OF BASIC SOCIAL SERVICES • Health Care: • Since 2001, real growth has increased to 4% p.a. but spending on hospital services has lagged that of PHC provision in clinics. • Municipalities have traditionally provided nearly half government’s PHC services. • Improvements in antenatal, TB care and immunization coverage. Rising mortality rate related to the HIV-AIDS epidemic. • Food Adequacy: • The CNG targets 4.58 million poor scholars and is projected to grow 4% in real terms over 2005 MTEF. Changes in nutritional status not yet measured.

26. The consolidation of Schedule 4 conditional grants have provided incentives to increase spending on infrastructure. Housing: The delivery rate of housing has exceeded the rate of household formation. On average, 161 400 houses have been delivered p.a since FY 1994. A delivery target of 338 000 p.a. has been set. Until FY 2001, the value of the housing subsidy declined in real terms. Qualifying household income brackets have not been adjusted for inflation. Municipalities reluctant to seek accreditation. This may be due to increasing pressure to top-up the capital grant and take on operational implications. PROVISION OF BASIC INFRASTRUCTURE SERVICES

27. Water: Full access to water targeted for 2008. Between 1996 and 2001, coverage of households with reticulated water increased from 60% to 62% (but declined in the Metros). Census definitions not consistent with norm of 50 l per person day within 200m of dwelling. While Water Boards reduced their capital spend since FY 2001, municipalities have increased theirs. Sanitation and Waste Disposal: Full access to sanitation targeted for 2010. Between 1996 and 2001, coverage of households with water-borne sewerage or VIPs increased from 50% to 55% and receiving municipal refuse removal services from 53% to 57%. Metros have struggled to keep pace with demand. PROVISION OF BASIC INFRASTRUCTURE SERVICES

28. PROVISION OF BASIC INFRASTRUCTURE SERVICES • Electricity: • Government has targeted full household coverage by 2012. Coverage improvements between 1996 and 2001 have been most marked from 57% to 70% of households with access to the grid. • REDs operational from 2005. Distribution of electricity surpluses and implications for municipal billing systems being addressed. • Transport: • Over half the capital and maintenance spending on roads is undertaken by provinces and nearly 1/3 bby municipalities. • Since FY 2000, real spending on roads increased by 11% p.a., whilst that on bus, train and taxi subsidies increased by 6.5% p.a.

29. CONCLUSION AND WAY FORWARD • Develop “costed norms” based budget analytic methodology to further the object of DoRB of coordinating policy and budget planning. • Consideration can be given to process of norm and target setting in relation to capacities. • Indicators can be developed for data availability, stability, institutional capacity, asset and accessibility poverty. • Greater consideration could be given to DoRB budget management procedures pertaining to disbursements, adjustments, virements and reporting which stabilize allocations while allowing flexibility in the event of emergencies. • IJS should also be evaluated as a CMBS.

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