Division of Revenue Bill 2004[B4-2004]

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

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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

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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 frameworkMain budget framework

2003/04 2004/05 2005/06 2006/07

Revised Medium-term estimates

R billion estimate

Revenue 300,3 327,0 360,3 394,0

Percentage of GDP 24,6% 24,6% 24,7% 24,7%

Expenditure 331,7 368,9 404,7 439,1

Percentage of GDP 27,1% 27,7% 27,8% 27,6%

State debt cost 47,3 50,4 54,0 57,9

Percentage of GDP 3,9% 3,8% 3,7% 3,6%

Deficit -31,4 -41,9 -44,4 -45,1

Percentage of GDP -2,6% -3,1% -3,0% -2,8%

Gross domestic product 1 223,2 1 331,8 1 455,6 1 592,6

R billion 2003/04 2004/05 2005/06 2006/07

Total expenditure 331.7 368.9 404.7 439.1

Less:

Debt service costs 47.3 50.4 54.0 57.9

Contingency reserve – 2.5 4.0 8.0

Total allocations 284.4 316.0 346.7 373.1

Percentage increase 16.2% 11.1% 9.7% 7.6%

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Division of revenue2003/04 2004/05 2005/06 2006/07

R million Revised Medium-term estimates

National departments 110,494 120,597 131,047 139,677

Provinces 161,476 181,130 199,704 216,344

Equitable share 144,743 159,971 173,852 186,392

Conditional grants 16,733 21,158 25,853 29,953

Local government 12,390 14,245 15,916 17,091

Equitable share 6,350 7,678 8,643 9,365

Conditional grants 6,039 6,568 7,272 7,726

Total allocations 284,359 315,972 346,667 373,112

Percentage increase 16.2% 11.1% 9.7% 7.6%

Contingency reserve – 2,500 4,000 8,000

Non-interest expenditure 284,359 318,472 350,668 381,113

State debt cost 47,326 50,432 53,986 57,945

Main budget expenditure 331,685 368,904 404,654 439,058

Percentage increase 13.8% 11.2% 9.7% 8.5%

Percentage shares

National departments 38.9% 38.2% 37.8% 37.4%

Provinces 56.8% 57.3% 57.6% 58.0%

Local government 4.4% 4.5% 4.6% 4.6%

Response of National Govt to FFC Proposals

Part 1 of Annexure E

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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

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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

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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

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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

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FFC proposals on LG

• Revenue capacity and the ES formula

• Municipal institutional capacity

• Financing development nodes

• Differentiated approach to municipalities

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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

Provincial Allocations

Part 4 of Annexure E

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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

2002/03 2003/04 2004/05 2005/06 2006/07

Outcome Budget Revised Medium-term estimates

R million estimate

Eastern Cape 22,714 26,447 26,826 30,129 33,248 35,911

Free State 9,270 10,709 10,873 12,164 13,294 14,321

Gauteng 22,413 25,794 26,188 29,008 31,697 34,005

Kw aZulu-Natal 27,516 32,196 32,681 36,906 40,921 44,555

Limpopo 17,981 21,043 21,403 23,953 26,580 28,926

Mpumalanga 9,414 11,131 11,311 12,814 14,273 15,623

Northern Cape 3,270 3,841 3,899 4,412 4,784 5,150

North West 11,032 12,869 13,077 14,862 16,493 17,927

Western Cape 13,314 14,964 15,218 16,884 18,415 19,927

Total 136,925 158,995 161,476 181,130 199,704 216,344

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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

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

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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

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

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)