1 submission on the 2003 / 04 division of revenue bill presentation to portfolio committee 3 march...

1

SUBMISSION ON THE 2003 / 04 DIVISION OF REVENUE BILL

Presentation to Portfolio Committee

3 March 2002

Presentation to Portfolio & Select Committees on Finance and the

Joint Budget Committee3 March 2003

2

FFC & the Division of Revenue process• Legal framework: Section 214 of Constitution,

Section 9 of Intergovernmental Fiscal Relations Act• Process:

– FFC annual recommendations to Parliament ten months before tabling of Division of Revenue Bill (April)

– Response from Minister of Finance in Annexure E, Budget Review (February)

– FFC submission on Division of Revenue Bill (February)

3

Contents of FFC Submission

• Section 1: Assessment of government’s response in Annexure E

• Section 2: Overview of government spending & financing trends & projections

• Section 3: Measurement of progress in delivery of Constitutionally Mandated Basic Services

4

S1 - FFC’S COMMENTS ON ANNEXURE E:

Provincial Issues • Provincial Tax Regulation Process Act: FFC

recommendations favorably received, FFC proposals on process issues to be taken into account

• Early Childhood Development: Government agrees with need to maintain conditional grant mechanism before incorporation into the Provincial Equitable Share

• HIV/AIDS: Government highlights difficulty of funding HIV/AIDs through conditional grant mechanism only

5


Local Government• Division of powers (district & local gov’t): Health &

electricity proposals implemented, asymmetrical approach to water & sanitation

• Electricity restructuring: Government supports proposal for compensation to municipalities, and for primary role of national grants for free electricity

• Municipal borrowing: Government supports FFC proposal to combine market discipline with rules-based approach; and for need for deliberate policy measures

6


Local Government cont’d• Municipal Finance Management Bill: New bill

stipulates lines of accountability between spheres

• Remuneration of councillors: Government supports proposal that remuneration be channelled through equitable share

7


Cross-cutting Issues• Comprehensive Social Security Review: Government agrees

that social security needs should be dealt with nationally

• Review of intergovernmental fiscal system: FFC principles noted, FFC to participate in review process

• Contingency reserve: Government does not see need for separate “policy” and “contingency” reserves

• Disaster management: Government agrees7 that national government assists, no final response on FFC proposal for maximum “threshold” for provinces & municipalities

8

S2 – OVERVIEW OF GOVERNMENT SPENDING & FINANCING TRENDS &

PROJECTIONS

Data and Methodology• Comparison of trends from past 5 years (1997 / 98 to 2001 /

02) with projections for this year (2002 / 03) and the 2003 MTEF.

• Indicators used include (i) real growth rate, (ii) proportion of government spending and (iii) proportion of GDP.

• Data sources – National Treasury (Budget Reviews, IFR); SARB (for past GDP & inflation data)

• Data is continuously revised, especially projections. This analysis should be updated following release of 2003 Budget Review, Provincial Budgets and IFR 2003.

9


PROJECTIONS

Analysis of the National Budget• Over the past 5 years, GDP Inflation has averaged 7% p.a. and

GDP growth 2.75% p.a.

• Inflation (and, to lesser extent GDP) projections strongly influenced by the volatile exchange rate

• Nationally budgeted expenditure grew in real terms at 1.32% p.a. (over past 5 years). Growth of nationally raised revenue exceeded that of expenditure allowing the national deficit to fall to 1.4% this year.

• The opposite trends are projected for the 2003 MTEF. Real growth of expenditure projected to be over 3.5% p.a. However, projected deficit kept below 2.5% of GDP.

10


PROJECTIONS

Analysis of the National Budget cont.

• Between 1997 / 98 and 2002 / 03, debt servicing costs have been declining in real terms (together with the deficit).

• This enabled a real increase of 2.05% p.a. in the funds available for division between the 3 spheres of government. This rate of increase is higher than the projected population growth rate of 1.96% p.a., enabling real per capita increases in spending.

11


PROJECTIONS

Analysis of the National Budget cont.

• Of the funds available for division, an average 58% was distributed to provincial governments and 3% to municipalities over the past 5 years.

• Transfers to municipalities are projected to continue rising rapidly, thereby enabling consolidation of the new local government system.

• The provincial share is projected to increase relative to the national sphere, enabling real increases in spending on welfare and health.

12


PROJECTIONS

Analysis of Provincial Budgets• Over 85% of provincial government spending has been funded

through the unconditional Equitable Share. This preference over conditional grant funding is projected to continue over the 2002 MTEF cycle.

• Whilst there is declining reliance on conditional grants as a funding mechanism, significant growth is projected for infrastructure, child nutrition and the HIV-AIDS grants.

• Provincially collected revenue is projected to continue declining as a share of provincial budgets (from 3.9% over the past 5 years to 2.6% over the 2002 MTEF cycle.) Provinces appear to be disinclined to take up the opportunities presented by the Provincial Tax Regulation Process Bill.

13


PROJECTIONS

Analysis of Provincial Budgets cont.• Provincial spending has been declining in real terms over

the past 5 years. Budget deficits have switched into surpluses over the past 5 years.

• Real increases of less than 1% p.a. have been recorded for the welfare and health functions though. This reflects increased take-up of the child support grant and the impact of the HIV-AIDS epidemic on health services.

• Real increases in provincial spending on all basic services (including education and housing) are projected for the 2002 MTEF.

• Accumulated budget surpluses are to expected to be used to deficit finance these real increases in provincial spending.

14


PROJECTIONS

Analysis of Municipal Budgets• Municipal budgets are difficult to analyze in the absence of

financial data presented in standardized reporting formats.• Available data suggests that Metropolitan authorities raise

most of their own revenue whilst many rural municipalities are heavily reliant on inter-governmental transfers.

• Over the past 3 years, municipal deficits have been rising and are projected to rise sharply over the next 2 years.

• Significant real increases in both unconditional Equitable Share and conditional grant allocations are anticipated this year and over the 2003 MTEF.

• This will accommodate spending pressures in infrastructure, free basic water and electricity and institutional restructuring.

15

S3 – PROGRESSIVE REALIZATION OF CONSTITUTIONALLY MANDATED BASIC SERVICES

ASSIGNED TO PROVINCES

Data and Methodology

• In accordance with the Bill of Rights, the FFC defines Constitutionally Mandated Basic Services (CMBS) assigned to provinces as (a) school education, ABET, FET; (b) primary & secondary health care; © social security and (d) housing.

• Progressive realization can be measured in terms of financial inputs and, given available data, service delivery outputs. Ultimately, it should be measured in terms of policy outcomes (e.g. numeracy, infant mortality rates etc.)

• Average real growth rates (per beneficiary or per capita) over the past 5 years (1997 / 98 to 2001 / 02) have been calculated to enable this analysis.

16



All C.M.B.S.

• Progressive realization occurs within a context of resource availability.

• Compared to a real decline of 1.19% in provincial government spending, provincial governments have nevertheless enabled a spending to increase slightly by 0.15% p.a. on all assigned CMBS.

• However, given a projected 1.96% increase in population over the same period, this translates into a real decline of 1.35% p.a. in per-capita spending.

17



All C.M.B.S. cont.

• Education: a combination of resource shifts towards basic education (within the education function) and declining learner enrolment translates into a real increase of 1.94% p.a. in spending per learner. These trends are particularly apparent in the Eastern Cape.

• Health: Whilst there have been significant resource shifts within Health departments towards primary and secondary health care (clinics and hospitals), real increases have not been sufficient to enable real per capita growth (except KZN)

18



All C.M.B.S. cont.

• Welfare: Average annual take-up rates of social security grants (9.85% p.a.) have exceeded the real rate of growth of social security spending (-0.34%). This translates into a decline in real spending per beneficiary of 9.28% p.a.)

• However, this simply indicates that proportionately more social security recipients are taking up the Child Support Grant, which is less than a third of the value of other grants such as old age and disability pensions.

• Housing: Expenditure on housing has declined by an average 7.32% p.a. over the past 5 years. On average, 202 508 houses were delivered annually with 3% of provincial spending.

19



All C.M.B.S. cont.• Compared to a real decline of 1.19% p.a. in provincial

government spending:

Component of CMBS

Real Annual Growth Rate of

Spending1997-2001

Real Annual Growth Rate of Spending per Beneficiary1997-2001

Basic Education 0.87% 1.94% Primary & Secondary Health Care

0.61% -1.33% (per capita)

Social Security -0.34% -9.28% p.a.Housing -7.32% 3.33% p.a.

1 submission on the 2003 / 04 division of revenue bill presentation to portfolio committee 3 march...

Documents