1. Considering the 2017 Division of Revenue Bill
Presentation to the Select Committee on Appropriations
By Hassan Essop
Economics Departement, Stellenbosch University
National Parliament, Cape Town, 2 May 2017

2. Brief Asked to consider the 2017 Division of Revenue Bill
Specifically:
“Whether the 2017 Division of Revenue allocations to the various spheres of government are justifiable taking into consideration the constitutional mandate of the various spheres of government and capacity to spend the allocated funds by each sphere of government?”
“Whether the current Division of Revenue allocations address the government's needs and interest, developmental needs of the country as well as economic and social disparities within the country?”
“Whether the 2017 Division of Revenue allocations to the various spheres of government are in line with the current government spending priorities as stipulated in the National Development Plan and also reiterated by President Jacob Zuma during the 2017 State of the Nation Address?”

3. Brief reduced to the following questions
Are allocations in line with constitutional mandate given macroeconomic environment and fiscal limitations?
Are allocations focussed on government priorities?
Given NDP, SONA
Given recent proclamations regarding “radical economic transformation”
Not a legal perspective

4. Outline General macroeconomic environment and fiscal limitations
Justifiability of allocations given constitutional mandate and economic realities
Ability to generate own revenue
Increased expenditure liability
SNG’s implementation capacity
Framework of NDP, SONA 2017 and recent statements

5. General macroeconomic environment
Stagnant to low growth prediction
Regardless of source, NT at 1.3% GDP growth
Estimates for 2018 at 2%, 2019 at 2.2%.
Probably overoptimistic in the absence of strong world growth and other factors (such as hard Brexit)
High unemployment remains, 24.5% on average for 2 decades
Net increase of in total unemployment in 2016
Inequality remains high (Gini 0.77), with millions dependent on grants (Gini 0.59)
Inflation outlook stable but sensitive to political and external risks
Limits spending ability: R163 billion on interest repayments in current budget. Education spend is less than 20% of total budget, some Votes have been cut in real terms.
Inequality stat: 95% of wealth owned by 10% of the population.

6. Declining incomes per person
Start of Zuma era
Mandela era
Mandela 1994 – 1999
Mbeki 1999 – 2008
Motlanthe 2008 – 2009
Zuma current
Start of Mbeki era

7. General macroeconomic environment
High total public debt levels (±50% of GDP)
Ratings downgrades
Limits spending ability
Impacts well discussed, not focussed on here
Coupled with the decreasing levels of investment, high total debt, increased interest repayments means less funds to spend
Lower growth means tax revenue will be under pressure
Low employment growth and lack of income growth amplifies pressure on tax revenue generation
Highly likely to miss tax target by tens of billions
Limits spending ability: R163 billion on interest repayments in current budget. Education spend is less than 20% of total budget, some Votes have been cut in real terms.
Other matters: Drought, water management, electricity generation and nuclear; real exchange rate depreciation,

8. Are allocations in-line with constitutional mandate?
Yes.
However, allocations do not imply that resources are used to achieve desired outcomes
Even if allocations are spent on desired outcomes it does not imply that such spending is efficient and achieves the best possible outcome
This is applicable to all spheres of government
Also note that constitutional mandate requires allocation to be within fiscal limits
Fiscal limits are narrowing

9. Are allocations in-line with constitutional mandate?
Not commenting on technical changes to 2017 DoR Bill
Changes are “tweaks” to improve efficiency in allocation and improve SNG spending
FFC’s concerns are minor; mainly related to definitions and limits, accountability and
Recommended that these concerns are addressed with haste
Clarity is key for rapid implementation of policy
Sector specific allocations focus on sectors highlighted in the NDP
Additional spend on Higher Education and Training
Infrastructure and economic development
Limited focus on innovation
Technical changes mainly to grants - direct to indirect

10. Some comments on Provincial Allocation
Provincial framework saw wages as % of total budget decline marginally from 60.4% to 59.8% from 2015 to 2016.
Also note that the FFC recommendation on measurement of public sector productivity has not been finalized
Given declining incomes wage demands within the public sector will increase post the 3 year settlement period
Conditional grant allocations focus on appropriate areas, but:
Decline in human settlements development grant disconcerting given latest views on land reclamation
Note high level of average expenditure (96%) does not equate to money well-spent
Technical changes mainly to grants - direct to indirect

11. Some comments on Provincial Allocation
Health Facility Revitalisation Grants has been cut; reduction by itself not necessarily a bad step
In this instance the lack of clarity on many aspects of the NHI, accountability within the public health care system, management deficits, productivity measures and increased demand for services such as ARVs may compound reductions in the grant
A general comment would be to clarify ambiguities with all changes
Regular review of Provincial Equitable Share formula is appropriate
Should reward SNG that complies with Auditor General recommendations
Technical changes mainly to grants - direct to indirect

12. Some comments on Local Government allocations
Several grants will face cuts over the 2017 MTEF
FFC has noted concerns that these cuts affect grants that “perform well”
Whilst average spend of these grants (MIG, WSIG, URDG, PTOG) might be high, efficiency of actual spend is a more accurate measure of performance
Several studies (see Mohabir 2014) find actual spending to be inefficient in large numbers of municipalities across the country
No clear action being taken to address inefficient spend, which is different from inappropriate spending, and lack of spending
(Municipal Infrastructure, Water Services Infrastructure, Urban Settlement Development, Public Transport Network Operations Grant, )

13. Are allocations focussed on government priorities?
Yes.
Large transfer to rural muni’s
61 rural munis receive 31% of transfers, only generate 5% of PIT
Speaks to own revenue generation capacity
However, cuts are required
Fiscal space
Public sector innovation lacking
Allocations not the main concern; spending and efficacy of spending should be

14. Ability to generate own revenue
Important as it improves accountability (not shifting responsibility to national), public sector innovation, improved efficiency and planning
Provinces generate ±3% of own revenue
De facto national administrative offices?
Grant to total revenue ratio 96% for provincial government, over 30% for local government
Coupled with increased expenditure pressures over the past decade

15. SNG tax coverage ratio: Reflects diminishing ability to cover increasing own expenditures (Calitz & Essop, 2013)

16. DoRB, SONA and current claims of RET
Little doubt that DoRB is in line with current mandate and policy
Long term policy has consistently emphasised market based plans, with focus on good policy to drive long run growth
Radical Economic Transformation creates confusion
No clear, consistent definition
No implementation plan
No additional safety net plan due to increased costs
Many other questions; as such cannot answer whether current allocations are in line with RET as policy
Even RET must be in line with fiscal limits

17. Conclusion Unfavourable macro and fiscal environment
Lack of clarity on “radical economic transformation” not useful to implementation/adjudication of current policy
Not clear that “radical” changes will achieve “a better life for all” in the short and medium run
Current allocations entirely justifiable within current fiscal limits
Several areas of concern but focus has not waivered from national policy

18. Conclusion
Implementation of policy and linked capacity constraints remains problematic
Role of provincial government as national gov agent vs sphere of government in own right
Reduced ability to generate own revenue by SNG will place increased pressure on DoR Bill in future
Reduced revenue generation capacity also reduces ability to issue debt, accountability and public sector innovation
Constitutional question about the role of SNG should be revisited; de facto situation may differ from de jure position