FINANCIAL AND FISCAL COMMISSION

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• FINANCIAL AND FISCAL COMMISSION
• COMMENTARY
• on the
• 2002 Medium Term Budget Policy Statement
• --------------------------------------------------
  --------------
• (for)
• JOINT BUDGET COMMITTEE
• Hearings on the MTBPS 2002
• 07 November 2002

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1INTRODUCTIONConstitutional and Legislative
Mandate

• Section 214 of the Constitution requires
  consultation with the FFC before the annual
  Division of Revenue Act is passed.
• This commentary is supplementary to the FFCs
  analysis of the Division of Revenue Bill
  presented to Parliament after the Budget Speech.
  The analysis is therefore preliminary.
• Data used in this preliminary analysis will be
  updated and supplemented as new data is released
  during the annual division of revenue process.
  Any results indicated are therefore tentative.

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2INTRODUCTIONConstitutional and Legislative
Mandate Cont.

• Section 214 of the Constitution and Section 9 of
  the IGFR Act provide for the FFC to recommend on
  the forthcoming financial years division of
  revenue in April.
• The FFC provides an overview of its proposals for
  the 2003 MTEF for Governments consideration in
  the annual Division of Revenue process.
• Governments response is to be contained in Annex
  E of the Budget Review.
• The FFC is also mandated to comment on all money
  bills especially as they relate to tax and
  borrowing by sub-national governments.

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3INTRODUCTIONConstitutional and Legislative
Mandate Cont.

• Section 214 (2) of the Constitution provides
  factors (a) (j) as a basis on which to
  determine, analyze and evaluate the Division of
  Revenue.
• In this preliminary comment, particular
  consideration is given to
• Provisions for national debt and obligations
• National governments needs and interests
• The ability of provinces and municipalities to
  provide basic services
• Fiscal capacity of provinces and municipalities
• The developmental needs of provinces and
  municipalities
• Stability and predictability of revenue shares

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4INTRODUCTION cont.Structure of Submission

• This preliminary comment is the first draft of 2
  component parts of the FFCs analysis of the
  Division of Revenue Bill for 2003 / 04 and
  consists of
• Part I Overview of the FFCs proposals for the
  2003 MTEF (presented to Parliament in May 2002).
  The extent to which Government has taken account
  of these proposals is considered where
  applicable.
• Part II A tentative analysis of recent past and
  projected trends in national, provincial and,
  where data is available, municipal revenue
  sourcing and spending patterns.

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6INTRODUCTION cont.Data References
Methodology

• Projected budget data is derived from the MTBPS
  2002. Recent past data (from 1997 / 98) is
  referenced to the IGFR 2001.
• Methodology involves comparison of recent past
  (98/99 to 01/02) with the current year (2002 /
  03) and the 2003 M.T.E.F. period.
• Indicators used include
• Nominal and real growth rates
• Proportions of GDP and Government Spending

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7PART I OVERVIEW OF FFC PROPOSALS for the 2003
MTEFLocal Government

• The FFC proposed widely on municipal finance.
  Particular note is taken here of proposals to
• build creditworthiness in municipalities with
  little capacity to access debt through
  infrastructure capital grants, institutional
  capacity building programs and clarified
  accountability between the 3 spheres of
  government
• further consider the division of functions
  between local and district municipalities noting
  existing local government policy and the primary
  role of national government in redistributing
  resources
• incorporate considerations of councilor
  remuneration in the I-element of the LES
• consider the relationship between regional and
  municipal electricity distributors noting the
  option of a levy to compensate distributing
  municipalities for asset transfer losses and to
  enable inter-municipal revenue sharing. National
  grants could be used to provide free basic
  electricity and overcome capital backlogs for the
  poor.

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8PART I OVERVIEW OF FFC PROPOSALS for the 2003
MTEFProvincial Government

• With respect to provincial taxing powers, the FFC
  proposed that provinces be granted maximum
  flexibility in setting tax rates whilst enabling
  compensatory measures in equitable revenue
  sharing and further considering the capacity of
  the tax authority.
• Conditional grant funding mechanisms for Early
  Childhood Development should continue until they
  can be incorporated into the PES mechanism.
• A conditional grant was considered the most
  appropriate mechanism for targeting the impact of
  HIV-AIDS whilst a suitable information base is
  established.

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9PART I OVERVIEW OF FFC PROPOSALS for the 2003
MTEFCross Cutting Equitable Share Issues

• The FFC offered guidelines for reviewing the
  Comprehensive Social Security Review and proposed
  the establishment of a national social security
  agency to administer the payment of pension and
  child support grants over the medium- to
  long-term.
• The FFC proposes that it, with Parliament and
  Government, review the inter-governmental fiscal
  system in the light of the Bill of Rights and
  Section 214 (2) a-j. Particular note is to be
  taken of data collection and inter-governmental
  fiscal capacity building requirements.
• A tiered system of municipal, provincial and
  national funding thresholds was proposed for
  various aspects of disaster management.
• Finally, the FFC proposed that a legal basis be
  established to enable contingency reserves to
  accommodate disaster management, macro-economic
  shocks and new policy priorities.

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10PART II COMPARATIVE ANALYSIS OF 2002 / 03
BUDGET 2003 M.T.E.F.Analysis of the National
Budget

• This years adjusted macro-economic projections
  reflect the impact of the nearly 40 depreciation
  of the ZAR last year.
• These include expectations of higher export-led
  economic growth and
• a nearly 3 increase in expected inflation for
  2003/04, which falls towards target over the
  medium-term.
• Both impacts may be countered during 2003/04 to
  2004/05 with the ZAR recovering almost half last
  years loss.
• As a proportion of GDP, government spending is
  projected to rise faster than revenue. This may
  reflect additional spending pressures and/or the
  approach of capacity limitations in revenue
  collection.
• Tax room of approximately 2.5 of GDP is targeted
  for other general government bodies including
  provincial and municipal governments.
• The national deficit is projected to rise sharply
  next year.

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11PART II COMPARATIVE ANALYSIS OF 2002 / 03
BUDGET 2003 M.T.E.F.Analysis of the National
Budget cont.

• Over the medium- to long-term, a higher national
  deficit impacts on debt-servicing costs.
• Relative debt servicing costs are expected to
  decline slightly over the medium-term between 16
  and 15 of National Budget Expenditure.
• Debt servicing costs displace funds otherwise
  available for division between the 3 spheres to
  deliver services.
• Real growth of funds available for division is
  projected to be nearly 6 next year and 4 over
  the medium-term. This enables growth in
  per-capita spending on Constitutionally mandated
  basic services.
• The projected vertical division of revenue
  reflects a counter-shift from the national to the
  provincial sphere and a continued shift to the
  local sphere. This may reflect the demands on the
  social security and health systems and the
  consolidation of the new local government system.

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12PART II COMPARATIVE ANALYSIS OF 2002 / 03
BUDGET 2003 M.T.E.F. cont.Analysis of
Provincial Budgets

• The 2002 Budget Review anticipated a reversal
  into provincial government deficit over the
  medium-term. This may reflect the demands on the
  social security and health systems and declining
  attention to provincially collected revenue.
• Unconditional Equitable Share funding continues
  to be preferred over conditional grants as a
  mechanism for funding provincial governments.
• Significant differences in the recent past and
  projected real growth of social security, health
  and education spending for the 2002 MTEF have
  been narrowed.

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13PART II COMPARATIVE ANALYSIS OF 2002 / 03
BUDGET 2003 M.T.E.F. cont.Analysis of
Provincial Budgets Cont.

• Healthy real growth of 8.3 p.a. is projected for
  infrastructure capital grants over the
  medium-term. There may be a real decline in
  conditional grant allocations for institutional
  capacity building as national-provincial sphere
  relations stabilize.
• Both the nutrition and HIV-AIDS conditional
  grants have been substantially consolidated. Real
  growth of 10 and 62 p.a. respectively over the
  medium-term is indicated. This is off a low base.

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14PART II COMPARATIVE ANALYSIS OF 2002 / 03
BUDGET 2003 M.T.E.F. cont.Analysis of
Municipal Budgets

• Budget projections are not yet available for
  municipally collected revenue or deficits. Data
  on local government finances is difficult to
  collate without standardized reporting formats.
• Evidence from the recent past reflects that 89
  of municipal revenue is collected from own
  sources. Most of this is collected by
  Metropolitan authorities. Many rural local and
  district councils are heavily reliant on
  inter-governmental transfers.
• Further, municipal deficits have been rising in
  the recent past to an average 2.5 of municipal
  budgets in 2000 / 01.
• Real annual growth of 15 for LES allocations,
  13 for infrastructure capital grants and 7 for
  institutional capacity building grants is
  projected for the short- and medium-term. This
  enables growth in per capita spending on basic
  municipal services.
• Consolidated data on spending trends on basic
  municipal services such as water, sanitation,
  waste disposal, electricity and transport
  services is difficult to compile.