Financial and Fiscal Commission Recommendations on Division of Revenue 2010/11


27 May 2009
Presenters: Dr Bethuel Setai, Mr Bongani Khumalo and Ms Tania Ajam

Dr Bethuel Setai, Chairperson: Financial and Fiscal Commission (FFC) briefed the media on the FFC recommendations for the 2010/11 Division of Revenue, background of the FFC mandate and the eight sections of recommendations (see document).



Q: A journalist queried the likely impact if all the FFC recommendations were implemented and how that would change the relationship between national and provincial government.

A: Dr Setai responded that this was a constitutional matter and the FFC tried to adhere to what the Constitution mandated them to do. There was no opposition to this mandate.

Q: How closely had the National Treasury followed the recommendations to date and to what the degree were the recommendations actually reflected in the budget.

A: Ms Tania Ajam, Commissioner: FFC, responded that the FFC made its recommendations and National Treasury then commented on whether they would implement those recommendations. They found that most of the recommendations were agreed to by National Treasury. The FFC needed to follow up on whether that agreement actually translated into implementation on the ground. Their research strategy had moved from focusing solely on the allocations, to what the impact on service delivery was and the improved outcomes to the community.

Dr Setai added that they had a new Budget Analysis research function and this would look at what happens to the resources National Treasury provides and what happens to these funds at the later stages of the budget process. There was room for this analysis as a response to the requests of stakeholders, especially the provincial legislatures.

Q: What was the FFC's views on the Constitutional 17th Amendment Draft Bill, which would provide for national government to tell other spheres of government to adhere to national policy priorities and whether that would impact on their recommendations.

A: Mr Bongani Khumalo, Deputy Chairperson: FFC, responded that the FFC could not take an official view on the matter as they had not yet been formally provided with the Draft Bill.
His personal view was that there is inherent tension between national and sub-national priorities. Not unduly encroaching on the discretion of sub-national government was an important aspect of that problem. There was a degree of resonance in the Bill with the FFC recommendation that they needed to find a way to balance those priorities. The design of the inter-governmental fiscal system must respond to the balance between national and sub-national priorities. Sub-national government had its own distinct rights, regarding those types of decisions.

Q: A Northern Cape provincial delegate stated that the Northern Cape is historically disadvantaged. He felt that the recommendations the FFC made on provincial allocations should be coupled with substantive evidence, regarding each province. The Northern Cape had never received proper attention and as the province that constituted 1/3 of the country, it deserved special attention. He referred to the problems posed by transportation over the vast distances in the province and the developmental potential in mining and agriculture. He felt that these factors should be taken into account when the FFC made its recommendations.

A: Mr Khumalo responded that from when the Provincial Equitable Share (PES) formula was first proposed, the Northern Cape was recognised as a big problem. It was the province with the largest geographical area and the smallest population. The PES formula was designed to target people. The allocation was related to the number of people residing in the province. Based on this, the Northern Cape lost significantly. The institutional component of the formula compensated the Northern Cape, as it allocated equal amounts to all provinces. This meant that the Northern Cape received more in per capita terms. The question now was whether the institutional component of the formula addressed the problem fully. He assured the Northern Cape delegate that they would deal with this issue in more detail in future and would provide the data.

Q: What was the FFC's view on the government's ability to expand social spending and undertake the planned infrastructure spending in the face of falling revenue over the Medium Term Expenditure Framework (MTEF) period, due to the global economic meltdown.

A: Ms Ajam responded that the Commission had quite a sophisticated set of macroeconomic and Computable General Equilibrium (CGE) models where they could evaluate different scenarios to have an understanding of the likely impact of different economic conditions.
Based on this, they felt that the current deficit level was sustainable. This was mainly as a result of the past fiscal prudence. In light of the recession, it was appropriate for South Africa to stimulate the economy. Rigorous planning has already been done for economic slowdown and it was now a matter of implementing those plans. There was some concern about the social grant system and finding a way to balance the need to cushion the poor and the vulnerable against the need of preventing dependency. As the roll-out expanded, there was a trade-off between expanding coverage (getting more people into the system) and increasing the entitlements (giving more to the people already in the system). They also needed to locate social security payments within the broader context of a safety net. The question also included issues of how to use non-cash transfers and developing skills to draw people into the economy. Some of those options were fruitful avenues for further research and policy development. The FFC recommendation did pick up on that.

Q: A journalist referred to the tension between national and sub-national priorities and asked what the trend had been between 1994 and now. Was the tendency a more centralised approach or more delegation-focused, and what was driving this?

A: Mr Khumalo responded that within the Commission, there was a tendency toward more centralisation based on the need on the ground. If one looked at how the transfer system had evolved, there was a tendency to depend on conditional grants as a corrective tool in response to inefficiencies in the system. The FFC sometimes attended inter-governmental forums such as MinMECs and Budget Councils and had an expectation that the discussions would happen at an equal level. The reality was that there was significant dominance by national departments in the discussions. This might partly be due to the capacity constraints at sub-national level.

Dr Setai added that this was also an issue of mandates. National mandates differed from those of provinces. This was a question of negotiating those mandates. Because the provinces have independent legislatures, there were different pressures at play at provincial level that might tend to frustrate national plans. The FFC recommendation on block grants addressed this issue.

Q: A reporter queried whether the FFC was of the view that conditional grants had been effective.

A: Mr Khumalo responded that the results were mixed. There were certain instances where grants had played the role for which they were intended. The National School Nutrition Programme (NSNP) has been successful in a number of provinces. Similarly the HIV/AIDS grants had been taken up broadly and had achieved its aims. There were some conditional grants that the FFC was unsure of. He referred specifically here to decreased service delivery as a result of capacity building grants.

Dr Setai added that the grants were also very small and once-off in many cases. It was possible that there were certain policy stresses that many conditional grants were hiding. Investigating this was a challenge for the future.

Q: A journalist asked if the FFC approved of the Constitutional 17th Amendment Bill. Should power be more centralised or not?

A: Mr Khumalo again stressed that the FFC did not have an official position and spoke on the matter in his personal capacity. There were certain aspects of the legislation that would assist in the design of an effective inter-governmental transfer system.

Q: A reporter asked what the results of monitoring the implementation of the FFC recommendations were. Had they discovered areas where they were not implemented, even though they had been agreed to by National Treasury.

A: Ms Ajam responded that National Treasury provided a detailed response to the FFC recommendations in Annexure E of their annual Budget Review.  The issue was really that National Treasury allocated funds but the line departments at national and sub-national level expended them. Some of the FFC's sectoral recommendations have implications for the line departments at national, provincial and municipal levels. There may be a lag between the conceptual agreement and when the inter-governmental system responds. This meant that the lack of implementation was not necessarily due to unwillingness but a function of this lag in a complex and often fragmented system. The FFC focus in their investigation of the implementation of their recommendations would focus on how changed allocations have changed service delivery on the ground.

Q: A journalist asked if the FFC could predict some of the tensions that would arise in the intergovernmental system due to the recession in South Africa.

A: Mr Ramos Mabugu, Research and Recommendations Programme Director: FFC, responded that the impact of the global economic crisis had turned out to be much deeper than anticipated at the end of 2008. An advantage South Africa had, compared to other economies, was that the amounts locked into the MTEF were quite reasonable to accommodate the likely system shocks over the next three quarters. The FFC anticipated that there would be room to maintain the plan, provided there was an increased appetite to explore other funding sources in the form of external borrowing. Their simulations show that an increase of 10% on the infrastructure baseline allocation would not significantly harm the current account deficit. Beyond an extra R 80billion spent on infrastructure, macroeconomic effects would be felt.

The media briefing was concluded.



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