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ANNUAL SUBMISSION:

DIVISION OF REVENUE 2003/04________________________

SELECT COMMITTEE ON FINANCE

NATIONAL COUNCIL OF PROVINCES

20 May 2002

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Background:Financial & Fiscal Commission• Legislative Mandate

– Advise Government on the division of revenue among national, provincial, and local spheres

– Make recommendations on provincial and municipal fiscal matters

• Nature of proposals– Next financial year– MTEF Cycle

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Framework for FFC Proposals

• FFC guided by criteria in Section 214(2)(a-j) of Constitution:– National debt & other obligations– Needs and interests of national government– Provinces & municipalities:

• Provision of basic services and other functions • Fiscal capacity & efficiency• Developmental and other needs

– Economic disparities among provinces– Need for stable and predictable allocations– Need for flexibility in responding to emergencies

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Government response:Proposals for 2002/03• Over-arching proposal: equitable

shares should take account of CMBS– Government: agrees more precise

information on CMBS needed, but cannot be implemented owing to data constraints

• Provincial tax proposals– Government: agrees with Commission’s

overall approach, except PIT surcharge

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Government response:Proposals for 2002/03 Cont’d• Provincial capital grants

– Government: agrees on need for infrastructure conditional grant

• FFC model requires extension; should be part of a review of the provincial equitable share formula

• Local government– Government: recommendations timely &

substantive• Agreement in some cases, further study on other

proposals

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Local government proposals 1

• Municipal borrowing & finance markets– Combination of market discipline &

rules-based approach– Differentiated approach to

municipalities– Policy measures to assist

municipalities to build credit-worthiness

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Local government proposals 2• Division of powers & functions of district and

local municipalities– General principle: Local municipalities

responsible for service delivery, unless no capacity

– Health services: district municipalities – Water & sanitation services: local municipalities

• Remuneration of councillors– From local government revenue (own revenue &

equitable share)– Link legislative requirements to Institutional

Grant of equitable share formula

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Local government proposals 3• Restructuring of electricity distribution

– Compensation to municipalities for losses related to transfer

– Municipal levy on electricity available to all municipalities

– National tariff support for low-income consumers

– RED boundaries co-terminus with municipal boundaries

– Retain advantages of consolidated billing systems of municipalities

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Provincial proposals 1

• Early Childhood Development– Conditional grant funding should

continue until incorporated into equitable share

– Formula for ECD funding:• Should not discriminate between public,

community-based, and independent schools• Poverty-weighted• Phase-in parameter until programme fully

implemented

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Provincial proposals 2• HIV/AIDS

– 2002/03 Budget: R400m through provincial equitable share to address HIV/AIDS

– FFC position: Conditional grants most appropriate mechanism for targeting spending on HIV/AIDS

• Should not be included in equitable share formula if inadequate data

• Equitable share is unconditional – cannot track funding

• National priorities best dealt with through conditional grants

• Public health needs and priorities change continuously

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Cross-cutting Equitable Share Proposals 1

• Disaster management funding– Further development of central

funding mechanisms– Programme for nationally identified

prevention / mitigation projects– Funding of emergency response

activities from contingency reserve once municipal and provincial thresholds exceeded

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Cross-cutting Equitable Share Proposals 2

• Contingency reserve– Reserve for emergency purposes

(macroeconomic stability & disasters)– “New spending priorities” categorised

as policy reserve– Provinces & contingency reserves

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Cross-cutting Equitable Share Proposals 3

• Social security– FFC guidelines to assist stakeholders

in reviewing Comprehensive Social Security Report• Range of services• Financial & administrative factors

– Location of old age pensions: national– Establishment of national social

security agency

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Cross-cutting Equitable Share Proposals 4

• Review of current equitable share formulae, which includes:– Provincial capital grants scheme– Audit of intergovernmental fiscal

relations– Restructuring of formulae to achieve

balance between CMBS and Section 214(2)(a-j)