B RIEFING TO THE S TANDING C OMMITTEE ON A PPROPRIATIONS FFC S UBMISSION ON THE 2011 M EDIUM T ERM B UDGET P OLICY S TATEMENT For an Equitable Sharing of National Revenue 1 November 2011

B ACKGROUND Submission: response to requests from Standing Committee on Appropriations for FFC to comment on the 2010 MTBPS – In terms of Part 1 (3) {1} of the FFC Act (2003) as amended Provides for Commission to act as a consultative body and make recommendations to organs of state in all spheres on financial and fiscal matters – And Section 4 (4c) of the Money Bills Amendment Procedure and Related Matters Act (MBAPRMA)(2009) Requires Committees of Parliament to consider the FFC’s recommendations when dealing with money bills and related matters FFC Submission on the 2011 MTBPS 2

O UTLINE OF THE S UBMISSION FFC’s Submission on the 2011 MTBPS is divided into following sections: I.Macroeconomic Outlook and Fiscal Framework II.Medium Term Spending Priorities III.Division of Revenue and Provincial Policy Issues IV.Proposed Adjustments to Conditional Grants V.Local Government Fiscal Framework FFC Submission on the 2011 MTBPS 3

I. M ACROECONOMIC O UTLOOK AND F ISCAL F RAMEWORK

B ACKGROUND Little has changed over the last year in terms of the vulnerability of South African economy to interruptions in global recovery 2011 MTBPS: downward revision of 2011 GDP figure (as expected) Major trading partners’ slow recovery may impact sectoral composition of GDP – Finance, real estate and business services, manufacturing and wholesale, retail, motor trade and accommodation – likely sectors to be affected 5 FFC Submission on the 2011 MTBPS

F ISCAL C ONSOLIDATION Fiscal consolidation still important in SA context – Government debt set to rise to 40% of GDP by 2015 after which it is expected to stabilise and decline How realistic is this assumption (e.g. rising future interest rates, rising debt service costs, etc.)? Debt service ratio is increasing pointing towards increasing state debt burden and towards expenditure increases being financed by debt Sharp increase in foreign indebtedness, though its share remains fairly constant over the medium term 6 FFC Submission on the 2011 MTBPS

II. M EDIUM T ERM S PENDING P RIORITIES

Job Creation – FFC welcomes priority shift in government expenditure towards infrastructural investment as critical vehicle for job creation Health and MDG’s – SA: slow progress in achieving health MDGs Based on current trends, SA will not reach MDG4, MDG5 and MDG6 – NHI-Need for government to come up with an interim financing mechanism that is credible – Social Security – 2011 MTBPS: strengthening selected child welfare programmes – early childhood development services and home and community based child care and protection 8 FFC Submission on the 2011 MTBPS

III. D IVISION OF R EVENUE AND P ROVINCIAL P OLICY I SSUES

D IVISION OF R EVENUE AMONG THE S PHERES 10

MTEF AND D O R B ETWEEN S PHERES OF G OVERNMENT An additional R48 billion is proposed to be added in the 2012 MTEF Total expenditure is revised from R811 billion in 2011/12 to R1 Trillion in 2014/15 ̶ Assuming a 5% CPI at 2011 prices, this represents an average real growth of 2.3 % growth over the 2012 MTEF ̶ Provinces and LG each grow moderately by 1.4% and 4% to respectively deal with the shortfall in compensation of employees and sustain the provision of FBS to the poor ̶ LG share of revenue increases marginally from 8.4% to 8.6%, national share remains stable at 46.8% while provincial share declines slightly from 44.9% to 44.6% over the MTEF. ̶ The impact of austerity measures sees only R48 billion added to the fiscus and the adjustment for 2011 funded partly (R2b) from national Joint Meeting of the Standing and Select Committees on Appropriations 2 November

E DUCATION AND H EALTH Education remains largest priority in government spending – accounts for over 20% of non-interest allocations, and will rise to R232 billion in 2014/15 – Expenditure should be directed towards hiring of quality teachers, subsidies for transport, supplies teaching aids, builds new safer schools, and prioritisation of learners with special needs Health spending is set to increase by 7.4% a year, from R113 billon this year to R140 billon over MTEF – Mainly driven by the NHI pilot projects in ten districts – Focus given to primary health care is in line with the FFC’s recommendation for 2012/13 Annual Submission on DOR 12 FFC Submission on the 2011 MTBPS

P ROVINCIAL G OVERNMENT F ISCAL M ANAGEMENT P ERFORMANCE In line with a national need for fiscal tightening policy, provincial governments are, on average, decelerating expenditure growth – Reflected in a projected under spend budget of -3.11% half way through (compared to an under-spend of % last financial year) NW and WC are projected to potentially under spend by more than 8% this year. GP, KZN and MP contribute disproportionately to fiscal discipline Limpopo is the only province to project over-expenditure – barely posted savings last year and recorded the highest provincial deficit NC, KZN and FS recorded increases in spending of over 10% between FY 2010 and FY FFC Submission on the 2011 MTBPS

P ROVINCIAL E DUCATION F ISCAL M ANAGEMENT P ERFORMANCE Despite higher than average growth of provincial education spending (at 12.43%), education departments are projected to over-spend their budgets slightly (0.83%) in FY 2011 (contrasted with an overall saving in FY 2010 of -1.6%) – Under-spending against budget is most marked for NW, WC and NC – By contrast, KZN, LIM, MP and EC are projected to over-spend their education budgets this year Last year, only Limpopo over-spent it’s budget and contributed to deficit burdens of the national government – Above average growth of education budgets was recorded for KZN, GP and MP FFC Submission on the 2011 MTBPS 14

P ROVINCIAL H EALTH F ISCAL M ANAGEMENT P ERFORMANCE The evidence of provincial government fiscal consolidation is noted against health departments budgets – Halfway through , a potential under-spent of -2.5% is projected, continuing the trends from last year when an under- spend against budget of -2.57% was recorded – nevertheless the sector increased its spending by a rate of 9.3% p.a. MP, WC, FS and NW are projected to under spend by more than 5% this year Current spending rates in EC and LIM health departments will lead to over-spend if not curbed KZN, EC, LIM and GP record higher than average annual growth rates in excess of 10% – Real declines were experienced in EC and MP FFC Submission on the 2011 MTBPS 15

IV. P ROPOSED A DJUSTMENTS TO C ONDITIONAL G RANTS

C ONDITIONAL G RANTS : H EALTH Comprehensive HIV and Aids Grant: Improving provincial targeting and increasing the quantum of funds to cater for an expanded programme on the Prevention of Mother to Child Transmission and voluntary HIV Counselling and Testing (VCT) Health Infrastructure: Health infrastructure grants must be reformed, not only the funding formulae but the delivery mechanism through alternative delivery mechanisms 17 FFC Submission on the 2011 MTBPS

C ONDITIONAL G RANTS : U RBAN AND B UILT E NVIRONMENT (1 OF 3) W.r.t. human settlements, FFC notes following positive developments: – Merging of Integrated Housing and Human Settlements conditional grants with part of the infrastructure grant for metros to form USD grant – Upgrading of Informal Settlements programme However, a number of issues have to be addressed including: – Reviewing of human settlements grants to create incentives for efficient land use in line with the Commission’s recommendations for 2012 DoR, leverage grants as co-funding and attract private sector investment – Rationalisation and integration of built environment related conditional grants (housing, transport, energy) – Address the slow pace of municipal accreditation 18 FFC Submission on the 2011 MTBPS

C ONDITIONAL G RANTS : U RBAN AND B UILT E NVIRONMENT (2 OF 3) On transport, the FFC supports a requirement that provinces need to adopt road asset management system for the roads maintenance – NDoT should enforce this and use it as part of the checklist to release the road maintenance conditional grant The FFC also supports devolution of the public transport function to cities – NDoT should ensure that cities have fiscal capacity to fully undertake this function and provide such capacity where necessary – NDOT together with NT should finalise Municipal Land Transport Fund as part of devolution 19 FFC Submission on the 2011 MTBPS

C ONDITIONAL G RANTS : U RBAN AND B UILT E NVIRONMENT (3 OF 3) FFC welcomes S9 of DoRB which facilitates the faster release of disasters conditional grant to affected areas – The Commission is currently working on a disaster funding project to be tabled with the next set of recommendations for 2013/2014 FFC welcomes additional funding provided for waste management through the solid waste management grant – The Commission is currently working on a Solid Waste Management project to be tabled with the next set of recommendations for 2013/ FFC Submission on the 2011 MTBPS

E XTENDED P UBLIC W ORKS C ONDITIONAL G RANT The grant should be streamlined to the Division of Revenue Act (DORA) requirements in terms of allocation and disbursements of funds Punitive and incentive elements of the grant should be made transparent to all the stakeholders 21 FFC Submission on the 2011 MTBPS

IV. L OCAL G OVERNMENT F ISCAL F RAMEWORK

B ACKGROUND Baseline allocation to local government set to increase by R5 billion over MTEF – R2.2 billion in respect of LES – R2.8 billion for increases to local government conditional grants – Increases phased in as of 2013/14 financial year Commission strongly supports emphasis on efficient expenditure in improving service delivery to communities FFC Submission on the 2011 MTBPS 23

LES I SSUES Underlying concerns regarding LES, consistently raised by the Commission – Commission held public hearings on the broader LGFF and will be tabling a preliminary report shortly – LES and Census 2014 – Increases to Institutional Component supported and in line with Commission recommendations – Continued use of RRC component Commission will be making recommendations on the measurement of fiscal capacity in its 2013 submission for the division of revenue FFC Submission on the 2011 MTBPS 24

C ONDITIONAL G RANTS Increases in conditional grant funding driven by increases in the USD Grant and INEP Grant Tightening systems and processes around unspent conditional grant funding supported Existing approach to establishing and terminating conditional grants should be tightened to strengthen stability and predictability FFC Submission on the 2011 MTBPS 25

C APITAL S PENDING Spending on capital and repairs and maintenance – Reliance on intergovernmental transfers to fund capital spending – Credibility of budgeted versus actual spending – Unless poor planning and spending on capital is improved, plans to invest in economic and social infrastructure as a means of promoting economic growth, will be unattainable – Enforcing legislative requirements around the need to factor in maintenance in tariff-setting process FFC Submission on the 2011 MTBPS 26

C LIMATE C HANGE AND I NFRASTRUCTURE Government commitment to dealing with climate change is in line with Commission recommendations for 2012 DoR and is thus welcome – taking advantage of opportunities that emerging vis a vis climate change Climate change induces increases in infrastructure expenditures Municipalities forgo provision of essential services as they stretch budgets to cater for climate change consequences Concrete support to municipalities is needed. – FFC has recommended a climate change conditional grant to support adaptation and mitigation in municipalities 27 FFC Submission on the 2011 MTBPS

C ONCLUDING R EMARKS

C ONCLUSION A main theme running through the 2011 MTBPS: economic growth slower than expected → revenue growth lower, budget deficits slightly higher Emphasis: need to shift priorities in government spending away from consumption towards infrastructural investment → job creation FFC’s submission on the MTBPS details and highlights key issues emerging from the 2010 MTBPS and tries to link the issues with the FFC’s recommendations that were tabled in May 2011 – Resonance with government? – Parliament: process MTBPS and take on board FFC’s recommendations 29 FFC Submission on the 2011 MTBPS

C ONCLUSION ( CONT.) Goal of achieving the 5 million job creation goal by 2020 seems unlikely – Global economy SA should not rely on its global counterparts but should be doing more domestically to find solutions to employment problems – FFC welcomes shifts in the composition of public expenditure towards investment and economic development – Government should weigh up carefully the impact of increasing spending against the risk associated with increasing taxation rates, spending levels and re-allocating expenditure from capital expenditure 30 FFC Submission on the 2011 MTBPS

C ONCLUSION ( CONT.) Capacity-building initiatives should be assessed with a view at ascertaining whether they are sufficient to improve delivery given the increases in funding of infrastructure over the medium term – Problems with norms and standards, linking budgets and infrastructure plans as well as with unclear priorities when it comes to infrastructure investment and maintenance FFC calls for a greater focus on institutionalisation of project management, external auditing of budget expenditure, greater involvement of the private sector through PPPs, establishment of budgeting norms and standards as well as institutionalising life- cycle project management as interventions towards dealing with capacity issues 31 FFC Submission on the 2011 MTBPS

C ONCLUSION ( CONT.) Reaching all the health MDGs (child and mother- related health goals) within four years seems unlikely, even impossible – National, provincial and local government should further reprioritise expenditures in respect of Equitable Share and Conditional Grants for 2012/13 to move towards attaining MDGs In this respect, Government should continue prioritising MDG 6 (HIV indicators) in the interim as its attainment will have positive impacts on other MDGs (positive spillovers) Time-frame for attaining all outstanding MDGs simultaneously should be extended beyond 2015 to make the task feasible 32 FFC Submission on the 2011 MTBPS

C ONCLUSION ( CONT.) National government and municipalities should put systems in place that allow poorer performing municipalities to learn from their better performing counterparts – More efficient municipalities may already have solutions to the problems faced by less efficient municipalities Government should encourage cities to become more compact and dense both for fiscal and environmental considerations – Policy options: transport and housing subsidies and infrastructure grants can promote densification; local taxes and charges can discourage underutilisation of land 33 FFC Submission on the 2011 MTBPS

T HANK Y OU. Financial and Fiscal Commission Montrose Place (2 nd Floor), Bekker Street, Waterfall Park, Vorna Valley, Midrand, Private Bag X69, Halfway House Tel: Fax: