Division of Revenue Bill 2004 [B4-2004]

1
Division of Revenue Bill 2004B4-2004

• Portfolio Committee on Finance
• Ismail Momoniat

20 February 2004
2
Intergovernmental Fiscal System

• Section 214 of Constitution and IGFR Act
• Requires an annual Division of Revenue Bill
• Section 10(5) of the Intergovernmental Fiscal
  Relations Act gives effect to Constitution
• Consultation processes for all allocations
• Explanatory memorandum (Annexure E)
• Budget Council and Budget Forum
• FFC
• Extended Cabinet with provincial Premiers and
  chairperson of SALGA

3
2004 Division of Revenue Bill

• Section 76(4) Bill and has to start in NA
• Most important Budget Bill, not a s75 money bill!
• Clauses 1-35 of the Bill
• Schedules 1-7 divides revenue bet 3 spheres
• Memo on the objectives of bill
• Explanatory attachments
• Annexure E (also part of Budget Review)
• Appendix E1 E2 Frameworks on all conditional
  grants (provincial and local)
• Appendix E3 to E6 LG allocations by municipality
  for both national municipal financial year
• Appendix E7 Demographic data for Local Government
  Equitable share and Municipal Infrastructure Grant

4
DOR Schedules

• Schedules 1 to 7
• Equitable Share allocations (Schedules 1-3)
• Schedule 1 divides eq share between 3 spheres
• Schedules 2 divides provincial equitable share
  between 9 provinces
• Schedule 3 divides local equitable share between
  284 municipalities
• Conditional Grant allocations (Schedules 4-6)
• Schedules 4 and 5 on provincial grants, by
  province
• Schedules 6 on LG grants (no division by muni)
• Allocations by municipality in explanatory
  attachments
• Allocations-in-kind (Schedules 7)

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Fiscal framework
6
Division of revenue
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Response of National Govt to FFC Proposals

• Part 1 of Annexure E

8
Key Proposals on DoR

• Census 2001 results released in 2003
• Update formulae with new data for 2004
• Comprehensive review of formula for provincial
  and LG equitable share grants for 2005 MTEF
• Review of all conditional grants
• Review of LG Fiscal Framework
• Restructuring of electricity distribution
• Division of functions 3 Jan 2003
• Review of RSC and municipal service levy

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Process to consider FFC proposals

• FFC Submission DoR 2004/05
• Focus is on two main sets of issues
• First set deals with DOR issues pertaining to
  each sphere of government
• Second set focus on the intergovernmental system
• Response should be viewed against the review of
  LG and Provincial fiscal review
• Budget Council considered prov proposals
• Budget Forum considered LG proposal
• Premiers invited at Extended Cabinet
• Cabinet decides on div of revenue thereafter

10
FFC Provincial Recommendations

• HIV and Aids funding and health conditional
  grants
• Equitable share formula
• Education component
• Health component
• Welfare component
• The FFC also made overall proposals regarding the
  equitable share formula
• Framework for Comprehensive Social Security Reform

11
Response of N Govt to FFC provincial proposals

• Governments current approach to HIV and Aids
  funding is largely in line with FFC
  recommendations
• The proposal to consolidate all HIV and Aids
  grants will be explored during the review of
  provincial fiscal framework
• It is difficult to evaluate ES spending on HIV
  and Aids
• On health conditional grant proposals
• national Departments of Health and Education and
  the National Treasury review the funding of
  academic and tertiary hospitals
• PSNP to be administered by education in 2004/05

12
Response of N Govt to FFC provincial proposals

• Health component of ES formula
• Regular updates not possible due to lack of
  updated data
• Replacement of current datasets used in component
  with alternative data being explored
• Education component of ES formula
• out-of-school enrollment retained as stabiliser
• ECD phase into ES formula by adjusting the age
  co-hort to 5-17
• ABET proposal will form part of the broader
  review
• On welfare component of ES formula
• Should be viewed against current developments
  pertaining to the shifting of social security
  function
• Two Bills before parliament
• Increasing the weight of welfare component will
  not address FFC concerns as other areas of
  spending are crowded out

13
FFC proposals on LG

• Revenue capacity and the ES formula
• Municipal institutional capacity
• Financing development nodes
• Differentiated approach to municipalities

14
Response of NG to FFC on LG

• On the revenue capacity of LG and the ES formula
• Government supports the FFC proposals
• Recognise the need for a review of LG fiscal
  framework
• On I-element
• Will form part of the broader LG fiscal framework
  review
• Capacity building CG
• Will form part of LG fiscal review and steps are
  to be taken to minimise the number of CG in
  system
• Grants will be assessed in terms of outputs and
  outcomes

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Response of NG to FFC on LG

• On financing development nodes
• FFC is raising valid issues on ISRDS and URP
• The current ES transfers still fund transitional
  programmes and can only be phased out in a few
  years time
• Funding for nodes will be explored with the
  fiscal framework review
• Gov agrees that the programmes be evaluated
• On the differentiated approach to municiaplities
• Legislation provides for a differentiated
  approach
• Consideration is being given to a differentiated
  approach based on capapcity

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FFC proposals on intergov system

• Bulk of proposals are work-in-progress
• Proposals related to CBS, expenditure assignment,
  costed-norms,performance management,building
  institutional capacity, funding instruments for
  poverty-alleviation
• Gov response just an initial response
• Gov welcomes the emphasis on the need for
  certainty in functions
• Expenditure assignment is complex and calls for
  greater cooperation
• Re-assignment of social grants underway
• CBS taken account of in vertical and horizontal
  DOR

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Provincial Allocations

• Part 4 of Annexure E

18
Provincial Allocations

• Total provincial share allocation increases from
  R161,5 bn in 2003/04 to R181,1 bn 2004/05 and to
  R216 bn at end of MTEF
• Biggest allocation to KZN at R36,9 bn in 2004/05
  (compared to R32,2 bn 2003/04)
• Next highest EC (R30 bn), Gtg (R29 bn)
• Lowest to NC (R4,4 bn)
• Equitable share R159,9 bn, or 88,3
• Conditional grant R21,2 bn

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Total transfers to provinces 2002/03 to 2006/07
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National transfers to provinces(1)

• National transfers make up 97 of total
  provincial revenue in 2004/05
• Equitable share makes up 88,3 of national
  transfers to provinces
• Rises from R144,7bn in 2003/04 to R159,9bn in
  2004/05 and will peak at R186,4 bn by 2005/06
• R19,7 bn added to ES over the next three years, a
  growth rate of 8,8

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National transfers to provinces(2)

• Conditonal grants grow from R16,7 bn in 2003/04
  to R21,2bn in 2004/05, and will rise to R30bn by
  2006/07
• Growth in CGs largely linked to
• Child support extension grant
• R3,7bn, R6,9bn and R9,3bn
• Food relief of R388m each MTEF year
• HIV and Aids in health
• R782 million, R1,1bn and R1,7bn
• R750 million for CASP
• Growing infrastructure grants
• 19 Conditional grants
• 2002/03 Audit concerns

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Local Government Allocations

• Part 5 of Annexure E

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Local Government priorities

• Bulk of pro-poor spending is in provinces and
  local government
• Accelerate the rollout of free basic services
• Electricity, water and sanitation, refuse removal
  
• Municipal infrastructure development
• MIG to provide the infrastructure to rollout free
  basic services
• Contributing to job creation
• Capacity building grants to support MIG
  implementation
• MFMA implementation
• Building in-house capacity in planning, budgeting
  and financial management

24
Local Government Allocations

• National allocations an important and growing
  source of revenue for municipalities
• Comprise about 14,4 per cent of total LG
  budgets, but can be as high as 90 per cent in
  some municipalities
• Increases by R3,9 bn over the next 3 years
• Total allocations grows to R17,1 billion in
  2006/07 from R12,4 billion in 2003/04
• Equitable share is most significant comprising 55
  per cent of allocations
• allowing greater discretion at local level
• Equitable share increase to R9,4 billion in
  2006/07 from R6,4 billion in 2003/04

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LG Allocations (continued)

• R21,6 billion earmarked transfers made to LG over
  the MTEF
• Infrastructure grants also receive a major boost
  to address backlogs
• Grow to R6,0 bn in 2006/07 from R4,1 bn in
  2003/04 R1,7 bn increase over baseline
• Capacity building and restructuring grants are
  allocated R2,2 bn over the three years
• Mainly to support the implementation of MIG and
  the MFMA
• Support municipal restructuring

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Clauses in the Bill
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Division of Revenue Bill 2004

• Bill largely same as 2003 DOR Act
• Substantive changes
• New clauses to align the Bill with MFMA
  (additional definitions, 1(2 and 3), 14(3),
  16(3), 18(3))
• 3 additional clauses in section 8 to strengthen
  the regulation of provision of municipal services
  through public entities
• 4 new sub-clauses in section 11 to facilitate the
  phasing in of infrastructure grants to MIG,
  facilitate better planning and reporting on
  performance

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Division of Revenue Bill, 2004

• Substantive changes
• additional clause in sections 23 and 26 to
  restrict reallocation of grants between
  municipalities
• additional clause in section 23 as interim
  measure to deal with uncertainties regarding
  possible take up of additional funds to HIV/Aids
  for roll out of ARV treatment plan
• New section 35 to deal with underspending of
  capital grants

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Analysis of transfers
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Analysis of Provincial Formula

• Formula updated education, population and
  economic data (2001 Census)
• Weighting for social grants is 18, but provinces
  will spend29,3 of eq share I 2003/04, and rising
• Allocations are redistributive, as can be seen in
  Table E21 in Annexure E
• Gauteng, W Cape and to a lesser extent KZN get
  less than per capital average

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Local Government Transfers

• As reflected in tables E17, E22 and E23 in
  annexure E
• Total transfers as percentage of municipal
  budgets average 13,7 country wide
• as high as 55,2 in Limpopo municipalities,
• as low as 4,0 in Gauteng municipalities
• Total transfers as percentage of budgets for
  sample municipalities
• only 3,0 in Cape Town
• only 3,2 in Johannesburg
• as high as 92,1 in Bohlabela (Bushbuckridge)