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Division of Revenue Bill [B9-2003] 10 March 2003 Select Committee of Finance

Division of Revenue Bill [B9-2003] 10 March 2003 Select Committee of Finance Maria Ramos, Ismail Momoniat and Vuyo Kahla. Intergovernmental Fiscal System. Section 214 of Constitution and IGFR Act Requires an annual Division of Revenue Bill

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Division of Revenue Bill [B9-2003] 10 March 2003 Select Committee of Finance

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  1. Division of Revenue Bill [B9-2003] 10 March 2003 Select Committee of Finance Maria Ramos, Ismail Momoniat and Vuyo Kahla

  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

  3. 2003 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 on statistical data for LG equitable share

  4. DOR: Legislative Requirements • Clauses 1-35 • Schedules 1 to 7A • Equitable Share allocations (Schedules 1-3) • Schedule 1 divides eq share between 3 spheres • Schedules 2 divides provincial eq 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 and 7A) • Schedule 8 corrects one 2002 DoR allocation

  5. Budget Review: Chap 7 and Annexure E • Chapter 7 summarises fiscal framework • Provides equitable share and conditional grant allocations to provinces and local govt • Annexure E provides greater detail • Explanatory memo required by IGFR Act • Five parts to Annexure E • Part 1: Govt’s response to FFC proposals • Part 2 with how how 10 factors in s214(1) of Const taken into account • Covered in detail in Budget Review, esp in ch 6 and 7 • Part 3 deals with fiscal framework, • Part 4 and 5 provide details on prov/local allocations

  6. 2003 Budget Timeframes • Tabling of Division of Revenue Bill with National Budget (DoR) 26 Feb 2003 • Tabling of provincial budgets • 27 Feb to 12 March in terms of PFMA • Tabling of provincial department strategic plans 31 March 2003 • To precede portfolio committee hearings on departmental budget • Publication of Intergovernmental Fiscal Review first week of April (2 or 3 April)

  7. Dates of Provincial Budgets • North West and Gauteng - 4 March 2003 • Free State - 5 March 2003 • E Cape, Mpumlanga & KZN - 6 March 2003 • W Cape - 12 March 2003 • Limpopo - 13 March 2003 • Northern Cape - 17 or 18 March 2003 (granted an extension by Minister)

  8. Provincial Budget Reforms • Uniform budget and programme structures to enable comparability across provinces • Education, Health & Social Development • Uniform measurable objectives and outputs per programme or main division • To develop performance indicators for each measurable objective • Sets performance reporting for 2003/04 annual report tabled Oct 2004 • Uniform format for HoD performance contracts?

  9. 2003 IG Fiscal Review (IGFR) • Contains 2003 provincial budget info, and 2002 municipal budget info • Timing changed to coincide with budget hearings • Allows each department to benchmark itself against other provincial departments • How does share of departmental budget to total budget compare with other provinces? • How much money is dedicated for non-personnel expenditure? • Assessment of 2001/02 Provincial Annual Reports and 2003 Strategic Plans

  10. Role of legislatures • Critical that Parliament and Provincial Legislatures use non-fin & budget info • Is non-financial info linked to budget? • Are there measurable objectives and performance targets • end of year? • In-year every quarter? • Is performance contract of head of dept linked to strat plan targets • No oversight, No performance, No delivery • Budget hearings, quarterly reports, annual reports • Delay portfolio hearings after IGFR (April) • Challenge: How will national and provincial portfolio and select committees co-operate to get the full picture??????

  11. 2003 Successes and Areas of Improvement • Publication of all LG grants by formula • Review of LG Fiscal System • Areas of improvement • Current formula all based on Census 1996 • Census 2001 and review of all formula • Review of all conditional grants • Publication of all CG formulae • Better audits on conditional grants

  12. 2003 Successes and Areas of Improvement • All six of nine provinces tabling their budgets have 3 year allocations per municipality • Expect 3 remaining provinces to do the same

  13. Fiscal Framework Part 2 of Annexure E

  14. Fiscal policy • GDP growth in 2002 of 3% rising to 3,3% in 2003, and 4% by 2005 • Deficit widened to 2,4% next year • Real growth in non-interest spending of 4,5% a year over MTEF period • Debt service costs decline from 4,2% in 2002/03 to 3,8% by 2005/06 • Debt projected to drop to 36,8% by 2005/06 • Buoyant tax revenue provides for Personal Income Tax relief of R13,3 billion • Capital spending by gen govt rises strongly

  15. Summary of tax proposals • Personal income tax relief of R13,3 billion • Threshold rises to R30 000 • Interest exemption raised to R10 000 • Retirement Fund Tax reduced from 25% to 18% • Tax allowances for investment in inner city areas • Several business stimulus measures • Transfer duties reduced further • Excise duties on vehicles reduced and eliminated on computers • Inflation-related adjustment to excises on alcohol and tobacco products

  16. Division of Revenue • Macroeconomic objectives • Tax-to-GDP, deficit etc • First responsibilities • Debt servicing • Contingency reserve • Total allocations • Divide between the 3 spheres of govt (national, provincial and local) • Take into account 10 criteria in section 214 of Constitution • Fiscal capacity and functions of each sphere

  17. National budget framework

  18. Fiscal capacity and functions • Provinces • Raise 3.5% of own revenue • Social services (85%) and roads are public goods • Local Government • Raise over 90% of own revenue • Only one third of functions are public goods • Two thirds of functions are user charge services • National Government • Over half departmental spending on protection services • Other national functions: higher education, admin, policy or regulatory

  19. Div of Rev (Table E3 Annex E) • Revenue to be shared: • Revenue plus borrowing, exc RDP & social security funds • National share • Declines, from 40,4% in 2002/03 to 38,9% in 2003/04 and 38,0% at end of MTEF • Provincial share • Increases from 56,0% in 2003/04 to 56,8% in 2003/04 • Increases to 57,6% at end of MTEF • Increasing share driven by CSG extension • Local share • Increases from 3,6% in 2002/03 to 4,3% in 2003/04 • Static over MTEF

  20. 2003 Division of Revenue • Starting point is 2002 Division of Revenue • Additions to year 2 (2003/04), year 3 (2004/05) • Total additions to 2002 baseline of R105,4 bn • 2003 Budget shifts resources towards provinces and local governments • Adjustments provide for higher inflation • Provinces get R69,3 billion more over MTEF • 6,1% annual average real growth in transfers • Policy adjustment of R50,3 billion • LG gets R7,3 billion more over MTEF • 12,2% growth in local government transfers • Policy adjustment of R6,7 billion

  21. Division of additional amounts

  22. Main policy additions

  23. Policy priorities for 2003 MTEF • Reducing poverty and vulnerability • Extending the social security net • Reinforcing the fight against HIV/Aids • Providing free basic services • Increasing infrastructure spending • Accelerating land restitution • Higher education and skills development • Strengthening the fight against crime • NEPAD and peace support operations

  24. Provincialpriorities for 2003 • Social Development • Further expansion of the social security net (CSG) • Real increases in values of social security grants • Education • Increasing spending on non-personnel non-capital, especially LSM, ECD, classroom backlogs • Health • Attracting personnel with scarce skills • Further bolstering HIV/Aids programmes • Refurbishing health infrastructure • Increasing spending on INP • Stepping up spending on medicines and other critical supplies taking • Step-up support for other functions, esp.roads

  25. Transfers to provinces • National transfer to provinces: • Equitable share rises from R123 bn in 2002/03, to R142 bn in 2003/04 and to R168 bn in 2005/06 • Conditional grants which are R13 bn in 2002/03, R16,6 bn in 2003/04 and R24 bn in 2005/06 • Increase in conditional grants largely due to introduction of child support extension grant which rises from R1,1bn in 2003/04 to R6,4bn in 2005/06 • Transfers to provinces grow by 6,1% a year in real terms

  26. Local government priorities • Extending provision of free basic services • R4,1bn extra over the MTEF (incl. R1,4bn for electricity) • Investing in municipal infrastructure • R1,8 billion more, including R1bn for labour-based programmes • infrastructure grants to be consolidated in future • Reinforcing financial management reforms • R300m set aside for this purpose

  27. Transfers to local government

  28. Reconciliation with DoR Bill • Schedule 1: legal vs economic/functional • National share- • National allocation (appropriated and some direct charges) • Debt servicing and contingency reserve • Conditional grants (provincial and local) • Provincial share • Equitable share only, excludes cond grants • Local share • Equitable share only, excludes cond grants

  29. Questions on Conditional Grants • What does 2001/02 audit say about grant? • What does national dept do on reporting and monitoring? • Are monthly reports received on time? • Were grants transferred on time? • Was NT informed on any delays? • Were reasons anticipated at time of Budget? • Municipalities do not have capacity etc • Are all allocations per province and municipality in terms of DoR in 2001/02 and current year? • Do allocations appear on budget of municipality?

  30. Response of National Govt to FFC Proposals Part One of Annexure E

  31. Key Proposals on DoR • Census 2001 results out this year • Review of formula for provincial and LG equitable share grants • 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

  32. Process to consider FFC proposals • FFC Submission: DoR 2003/04 • 6 provincial, 6 LG and 3 cross-cutting proposals • 3 proposals are old (2001), and many others do not really deal with Division of Revenue • National government responds to all proposals • NT suggests FFC separate DoR from non-DoR proposals • Budget Council considered prov proposals • Budget Forum considered LG proposal • Premiers invited at Extended Cabinet • Cabinet decides on div of revenue thereafter

  33. FFC Provincial Recommendations • Provincial Own Revenue Sources • Provincial Tax Regulation Process Bill (2001) • Early Childhood Development funding • Implications of HIV/Aids for Health, Welfare and Education Sectors • Primary Health Care • Framework for Comprehensive Social Security Reform

  34. Response of N Govt to FFC provincial proposals • NG agrees on first two proposals generally • note Prov Tax Reg Act is now enacted • Further consideration for specific tax proposals • Agree on ECD funding thru equitable share • Agree generally on cond grant of HIV/Aids, but difficult for total separation from dept budget • Primary health proposals on further research • Govt exploring sep agency for social grants • Establish cond grant CSG extension in interim

  35. FFC proposals on LG • Division of powers between category B and C municipalities (2001 proposal, no NG response) • Restructuring of electricity distribution industry • Municipal Borrowing and financial markets • Municipal Finance Management Bill • Remuneration of municipal councillors (2001) • Measurement of Revenue-Raising Capacity

  36. Response of NG to FFC on LG • Two proposals of FFC are on restructuring • Comprehensive review of LG fiscal system • Div of 4 fncs (water, sanitation, elec, health) • 3 Jan 2003 Gazette by Min of PLG • Govt agrees with FFC, but local views taken into account, so functions (esp for water & sanitation) differ by region • Further work on electricity restructuring • Interim approach for 2003 MTEF • further division of allocations between category B and C munis depending on function (DPLG) • FBS window for electricity and water services • Other proposals are old, research or dealt with in MFM Bill

  37. FFC cross-cutting proposals • Review of Intergovernmental System • Centralised Contingency Reserve • Assessment of Disaster Management Funding • Response of NG • Agree on comprehensive review of grants and LG fiscal system, better data collection • Not clear what FFC means wrt its proposals on contingency reserve, as grants divided ito legal process, and see no need to divide into two pots. Agree to allow for emergency and adjustment provisions in MFM Bill • Similarly not clear to NG why it should change its approach on funding disasters

  38. Provincial Allocations Part 4 of Annexure E

  39. Provincial revenue:2003 MTEF

  40. Provincial Allocations • Total provincial share allocation increases from R136,9 bn in 2002/03 to R159,0 bn 2003/04 and to R191,6 bn at end of MTEF • Biggest allocation to KZN at R32,2 bn in 2002/03 (compared to R27,5 bn 2002/03) • Next highest EC (R26,4 bn), Gtg (R25,8 bn) • Lowest to NC (R3,8 bn) • Equitable share R142,4 bn, or 89,5% • Conditional grant R16,6 bn

  41. Total transfers to provinces 2001/02 to 2005/06

  42. National transfers to provinces(1) • National transfers make up 96,5% of total provincial revenue in 2003/04 • Equitable share makes up 89,5% of national transfers to provinces • Rises from R123bn in 2002/03 to R142bn in 2003/04 and will peak at R167bn by 2005/06 • ES grows an average annual rate of 10,7% over MTEF or 5% in real terms

  43. National transfers to provinces(2) • Conditonal grants grow from R13,5bn in 2002/03 to R16,6bn in 2003/04, and will rise to R24bn by 2005/06 • Growth in CGs largely linked to • Child support extension grant • R1,1bn, 3,4bn and R6,4bn • Food relief of R388m each MTEF year

  44. Transfers to provinces: 2003/04

  45. Equitable share 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 • No change to formula this year • No update of data • Comprehensive review this year for 2004 MTEF, using Census 2001

  46. Components of the formula • Education share - 41 per cent • Health share - 19 per cent • Social security share - 18 per cent • Basic share - 7 per cent • Backlog component - 3 per cent • Economic component - 7per cent • Institutional component - 5 per cent

  47. Summary of provincial ES formula

  48. Equitable shares2001/02 to 2005/06

  49. Actual allocations and formula • Shares and formula beginning to diverge, compared to 2002/03 adjusted budget shares • Social security share - 20,7per cent • Excludes R2 billion arrear allocation • Three per cent more than original formula, and expected to RISE to 23% at end of MTEF • Started at 17% two years ago • Education share - 36,2 per cent • Almost 4 per cent less than formula • Health share - 15,4 per cent • Excludes tertiary and training conditional grants worth R10,5 bn. Total health share is 22,8% • Health exc tertiary/training 3,6% less than formula

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