Division of Revenue Bill

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 Govts 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
Division of Revenue

• 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

33
(No Transcript)
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

35
(No Transcript)
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