Division%20of%20Revenue%20Bill%202004%20[B4-2004]

1
Division of Revenue Bill 2004B4-2004

• Select Committee on Finance
• NCOP
• Ismail Momoniat, Nompilo Sidondi, Sandra Sooklal,
  Musa Ndimande

25 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
• Consultations with Budget Council and Budget
  Forum
• Extended Cabinet with provincial Premiers and
  chairperson of SALGA

3
2004 Budget Timeframes

• Tabling of Division of Revenue Bill with National
  Budget (DoR) 18 Feb 2004
• Tabling of provincial budgets
• 24 Feb to 2 March in terms of PFMA
• Consolidated spending function figures only in
  Budget Review Table 7.6, and this is an initial
  projection
• Final consolidated and provincial figures in
  IGFR, to be published in May
• Provincial departments also strategic plans
• To precede portfolio committee hearings on
  departmental budget

4
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

5
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)

6
Budget Review Chap 7 Annex E

• Chapter 7 summarise fiscal framework
• Provides equitable share and conditional grant
  allocations to provinces and local government
• Annexure E provides greater detail .
• Six parts to Annexure E
• Part 1 deals with how 10 factors in s214(1) of
  Constitution were taken into account
• Part 2 Govts response to FFC proposals
• Part 3 deals with fiscal framework,
• Part 4 and 5 provide details on prov/local
  allocations
• Part 6 concludes with brief analysis of IG grants

7
Appendices E1 and E2

• Grant frameworks in Appendix E1 E2
• Gazette by 1 April makes it legally binding
• Measurable outputs conditions
• Allocation criteria
• many use sector data, not nec certified by Stats
  SA (eg enrolment)
• Past performance
• 2002/03 audit outcomes
• many with material non-compliance with DOR
• 2003/04 three quarter projections
• Transferring dept quarterly reports?

8
Appendices E3 to E7

• Local govt allocations per municipality in
  Appendices E3 to E5
• Total allocation per municipality in E6
• National AND municipal financial year
• Good summary of table E6 in Table E22 or E17 in
  Annexure E
• Appendix E7 provides demographic data for LG
  equitable share and MIG formulae

9
Review of Provincial and LG Fiscal Framework

• 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

10
Corrections to DoR in NA

• Schedule 1 -minor rounding errors
• Schedule 3, p22 - division btw district and
  local munis uMgundgundlovu
• Schedule 3 - page 29, figures for NW and NC
  swopped, for National Tertiary Services Grant
• Changes in total per province allocations
• Corrections to clauses

11
Response of National Government to FFC Proposals

• Part 2 of Annexure E

12
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

13
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

14
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

15
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

16
FFC proposals on LG

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

17
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

18
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 municipalities
• Legislation provides for a differentiated
  approach
• Consideration is being given to a differentiated
  approach based on capapcity

19
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

20
Fiscal Framework

• Part 3 of Annexure E

21
2004 Budget priorities
Increasing investment in infrastructure,
industrial capital (16 to 25 of GDP)
Improving education, training and skills
development to raise productivity
Fighting poverty and inequality through work
opportunities, income support and empowerment
Improved regulation of markets public entities,
and efficient public service delivery
22
Fiscal policy

• 2003/04 deficit estimate of 2,6
• Expansionary stance from in 2001 continues
• Strong real growth in non-interest spending,
  averaging 4,8 a year
• Stable tax burden at 24,7
• Debt service costs decline from 3,9 of GDP in
  2003/04 to 3,6 in 2006/07
• Deficit of 3,1 in 2004/05 declining to 2,8 by
  2006/07
• Significant surpluses in social security funds

23
Summary of tax proposals

• Income tax on individuals reduced by R4 billion
• Provision made for share transfers
• Interest exemption raised to R11 000 for
  taxpayers under age 65 and to R16 000 for
  taxpayers age 65 and over
• Transfer duty threshold on property transactions
  increased to R150 000
• Duties on some products abolished
• Increase in fuel levy (15c/l) and RAF (5c/l)
• Increase in exercise tax (tobacco, and alcohol)

24
Fiscal framework
25
Key MTEF priorities

• Renewed focus on employment creation
• Deepening the skills base
• Stepping up investment, esp. in infrastructure
• Strengthening the social security
• Reinforcing security and crime prevention
• Improving core admin services to citizens
• Land reform and post settlement support to
  farmers
• Promoting multilateral cooperation, incl. AU and
  NEPAD

26
Division of revenue
27
Provincial Allocations

• Part 4 of Annexure E

28
Provincial priorities

• Comprehensive HIV and Aids prevention and
  treatment plans
• Providing for social security expansion
• Non-personnel inputs into education
• Post-settlement support for farmers
• Infrastructure investment
• Special focus on labour-intensive projects
• Hospital revitalisation programme
• Provinces receive R19,7 billion extra over MTEF

29
Provincial Budget Reforms

• Uniform budget and programme structures extended
  to more depts
• Education, Health,Social Development, PW,
  Transport and Roads, Housing, Agriculture, Local
  Government, and Sports
• Uniform measurable objectives and outputs per
  programme or main division developed
• To develop performance indicators for each
  measurable objective

30
Provincial Budget Reforms

• Introduction of sectoral Quarterly performance
  reports piloted in 2004/05 and mandatory in
  2005/06
• New economic reporting format
• New standard chart of accounts
• Migration to BAS to be completed
• Supply chain framework finalised

31
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

32
Total transfers to provinces 2002/03 to 2006/07
33
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

34
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

35
Provincial revenue2004 MTEF
36
Equitable share allocation formula

• Jointly recommended by FFC and govt
• Adopted in 1998, full phase-in 2003/04
• System takes into account fiscal imbalances
• Seven factors taken into account
• Dual approach to review of formula
• For 2004 Budget structure retained and
  education,basic and economic activity components
  updated for data
• Comprehensive review for 2005 MTEF

37
Components of the formula

• Education share - 41
• Health share - 19
• Social security share - 18
• Basic share - 7
• Backlog component - 3
• Economic component - 7
• Institutional component - 5

38
Summary of provincial ES formula
39
Actual allocations vs formula

• Social security share -
• 26,5 total budget (exc CSG) in 2003/04
• 29,3 total eq share (inc CSG) in 2003/04
• Substantially more than original formula, will be
  even higher at end of MTEF
• Started at 17 three years ago
• Education share 38,7 per cent
• Almost 2,3 less than formula
• Health share 19,9 per cent
• Excludes all conditional grants worth R7,6 bn.
  Total health share is 22,3
• Health CGs is 0,9 higher than formula

40
ES transfers to provinces 2002/03 to 2006/07
41
Conditional grants

• Legally from the national equitable share
• National priority programmes
• Compliance with national norms and standards
• Cross-border spill-overs
• Two types
• General or Assigned function
• Provincial infrastructure, health tertiary
  training
• Specific purpose conditional grants
• Housing subsidy, Other health
• Total R21,2 bn in 2004/05
• Total Health R7,7 bn, Housing R4,6 bn, infras
  R3,3 bn
• Child Support Extension R3,7bn
• HIV/Aids in health R782 million
• Formula differ for each grant (see App E1 E2)

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44
Local Government Allocations

• Part 5 of Annexure E

45
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

46
Local government priorities

• Increasing basic service provision
• Step up in infrastructure spending
• Complements EPWP
• Rolling out free basic services
• Municipal financial management reforms
• Implementation of Municipal Finance Management
  Act
• Local government receives R3,9 billion extra
• R2,2 billion for equitable share
• R1,7 billion for infrastructure

47
Local Government Reforms

• LG grant system is being rationalised
• to ensure simplicity, flexibility and certainty
• Three-year allocations for all grants are
  published per municipality
• to facilitate proper budget planning
• The next phase focus mainly on financial
  management reforms (MFMA)
• Modernisation of budgeting and reporting
• Accountability and good governance
• Consolidation of LG infrastructure spending (MIG)
• To improve coordination and integration at a
  local level in line with IDPs
• Restructuring of the electricity industry

48
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 92 per cent in
  some municipalities
• Increases by R2,9 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 54
  per cent of allocations in 2004/05
• allowing greater discretion at local level
• Equitable share increase to R9,4 billion in
  2006/07 from R6,4 billion in 2003/04

49
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

50
Analysis of Grants
51
Analysis of Grants

• Table E21 provides provincial analysis
• ES is redistributive from Gauteng, W Cape and KZN
  to other provinces
• ES plus CG still redistributive, but less so
• Table E22 and E23 show LG grants redisrib
• Different budget per head, over R3000 in metros
• National allocations 13,7 of LG budgets
• 3 to 7 for metros and munis in Gauteng, WC
• Up to 92 in one rural municipality, but by
  province highest in Limpopo at 55, btw 20-31 in
  most prov
• Note population nos include Cross-Boundary munis
• Highest allocations to OR Tambo and Amatole

52
Clauses in the Division of Revenue Bill
53
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 ) (3), 14(3),
  16(3), 18(3)
• Revisions of clause 5 to enforce transparency in
  municipal budgets and expenditure monitoring
• 2 additional sub-clauses in section 8 to
  strengthen the regulation of provision of
  municipal services through public entities

54
Division of Revenue Bill, 2004

• Substantive changes
• 4 new sub-clauses in section 11 to facilitate the
  phasing in on infrastructure grants to MIG and
  facilitate better planning and reporting on
  performance
• revisions in sections 23 and 26 to restrict
  reallocation of grants between municipalities
• additional sub-section in clause 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 clause 35 to deal with under-spending of
  capital grants

55
DOR Bill Chapter 1 and 2

• Section 1 new defns to align the Bill with the
  MFMA
• (I), (iii), (vi), (vii), (xiv) and (xvi)
• S1(2) and S1(3) to deal with inconsistency bet
  the Bill other related legislations ie MFM, FFC
  Municipal Systems Acts
• New subsections 5(7f), 5(8) and 5(9) to
  require municipality to settle statutory payments
  and enforce transparency in their budgets and
  expenditure monitoring

56
DOR Bill Chapter 3

• Additional clauses and amendments
• ammended s8(2) and added s8(3) to force
  conclusion of agreement btn munis and entities on
  provision of municipal services
• added s8(4) to ensure entities are paid for
  providing municipal service per agreeement
• s11(3, 4) added to require municipality to
  prepare capital plans for the MTEF, and state
  contents of the plans
• s11(5) added to ensure that district munis are
  transparent in allocations for capital grants
  they make to municipalities

57
DOR Bill Chapter 3 Cont

• s11(6 7) added to enforce submission of capital
  plans, and MIG phasing in agreements with depts
• DOR Bill Chapter 4
• s14(3) and s16(3) added to enforce transfers of
  funds into primary bank accounts, and require
  munis to indicate primary bank A/C
• s18(3) aligns with MFMA for annual report
• s18(4) provides for determination of quarterly
  repts to facilitate auditing of munis

58
DOR Bill Chapter 5

• Revisions of s19
• Added s19(2) to ensure that NT informs depts on
  primary banks details
• Added s19(3 4) provide for delegation fo
  functions entrusted to the Minister in line with
  PFMA
• DOR Bill Chapter 6
• Revisions of section 23
• s23(1) to restrict reallocation of municipal
  grants can only be within the district
• Added S23(2) make provision for the HIV and Aids
  grant for this budget

59
DOR Bill Chapter 6 cont.

• Revised s26(1) to restrict reallocation of local
  govt grants to deal with weak capacity only
  within destrict
• s28(2) ammended to restrict NT revisions of
  payment schedule deal with cashflow management
  fin mismanagment
• s28 (4) added to provide for payment schedules
  revised by NT take precendence over the revisions
  by national depts
• New clause 35 to deal with past roll overs of
  conditional grants, and to allow provinces to
  redirect funds to other capital programmes where
  underspending is projected