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. 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 - 19 per 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

51. Consolidated Mun Revenue

52. Division of Revenue Bill

53. Division of Revenue Bill, 2000 Required by Constitution (section 214) IGFR Act (no 97of 1997) - section 10 –Bill –Annexure E in Budget Review Section 76(1) process in terms of s 76(4) –not a money bill –introduced in National Assembly –introduced in NCOP after NA passes bill –back to NA if any NCOP amendments

54. Changes to the Bill Few changes to 2001 Act To remove the implied exclusion of category C municipalities from receiving equitable share allocations Excludes clauses that clearly no longer apply –Old section 8 on detailed info on all grants, as appendix is now published with the Bill –Phasing out of supplementary grant –Delaying and with-holding

55. Budgeting principles Comprehensive budgeting process Three year budgets in all spheres Transparency of criteria for division Use of generally accredited data Timeous preparation of grants All grants on budget of beneficiary govt Clear accountability arrangements Monitoring to focus on performance

56. Types of Grants in Bill Schedule 1 - equitable share (vert division) Schedule 2 - division between provinces Schedule 3 - general and allocated-functions Schedule 4 - grants to provinces Schedule 5- grants to local government Schedule 6 - indirect grants

57. Clause-by-clause Section 1 - minor changes in definitions Part II - only change is in clause 5(2) to ensure category C munis not excluded from equitable share Part III - essentially the same, but remove old section 8 because of improvements, and on reference to supplementary grant Part IV - essentially the same

58. Clause-by-clause Part V - same as before Part VI - small change to withholding of equitable share, to take account of new constitutional amendments. Clauses 21 and 22 on delays and withdrawals apply to cond grants only Clause 6 a transitional issue to allow reallocations between municipalities Small technical changes effected in the bill