Division of Revenue Bill: Briefing; Input from financial & fiscal commission

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Finance Standing Committee

24 February 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE
25 February 2002
DIVISION OF REVENUE BILL: BRIEFING; INPUT FROM FINANCIAL & FISCAL COMMISSION

Chairperson: Ms Hogan (ANC)

Relevant Documents
Division of Revenue Bill [B5 - 2002]
FFC PowerPoint Presentation
FFC Submission to Parliament
National Treasury PowerPoint Presentation

SUMMARY
The Financial and Fiscal Commission made a presentation to the Committee on the Division of Revenue Bill for 2002 / 03. Two issues that arose from the presentation is that the FFC is engaged in a review of the equitable share formula and secondly that the Constitutionally Mandated Basic Services should be defined.

National Treasury briefed the Committee on the Bill. There are no major changes from last year's Bill. A few technical amendments were made. The Bill was adopted by the Committee. The Bill will be more thoroughly scrutinised in the NCOP.

MINUTES
Financial and Fiscal Commission (FFC)
The FFC was represented by its Chairperson, Mr Morobe, the Vice Chair, Mr Josie, Mr Van As and Mr Makinta.

The presentation was in three parts. The first dealt with the government's response to the FFC's 2002 proposals and recommendations. The FFC submitted that government supports and concurs with most of its proposals and recommendations.

The second part is a comparative analysis of the 2002 / 03 Budget and the 2002 MTEF. This includes an analysis of the National, Provincial and the Municipal Budgets.

The third part looks at the trends in the realisation of the Constitutionally Mandated Basic Services (CMBS). The FFC focused on Education, Social Security and Primary Health Care.

The FFC Chair in his introduction noted that government supports and concurs with most of FFC's proposals and recommendations for 2002. He said that not all the proposals are for immediate implementation but form part of the review of the equitable share formula. Everyone concurs that the formula must be reviewed from time to time but at the same time a review of the formula must be approached cautiously because consistency needed to be maintained. Therefore there cannot be an immediate major overall of the formula. The FFC is engaged in a review of the formula.

The Chair handed over to his colleagues to do the presentation (see document).

Discussion
Prof. Turok (ANC) commented that there was a difficulty with the Constitutionally Mandated Basic Services (CMBS) in courts and for government. He wanted the FFC to elaborate on these issues and the government's progressive realisation of the CMBS.

Secondly, the nutritional grant is declining and the professor was puzzled by this trend because it was contradicting other government policies.

Thirdly, the FFC said that because the debt servicing costs are down there is more revenue available for the CMBS. But when there is an increase in tax collection the additional revenue goes to public expenditure. He asked the FFC to explain this.

Mr Josie said that the FFC is aware of the fact that government should set policy objectives but that the court has a role in looking at the constitutionality of implementing the policies. He said that it is not only an FFC / Government debate on how to progressively realise the CMBS. Broader society must also get involved.

Mr Van Gas responding to the question on the nutritional grant said that the Select Committee had asked the FFC to look into conditional grants more closely but at the moment he could not give the committee a reason for the decline.

To the final question Mr Van Gas said when there is a higher tax revenue, then the deficit decreases and as a result the debt service cost decreases and more money is available for spending on basic services.

Mr Andrew (DP) asked if the FFC has done work whereby not only the budget is looked at but rather at what actually gets spent.

Secondly, he said that the FFC must make recommendations and at the same time accept that the determination of the equitable share is a policy decision that is part of the political process. But when the policy decision is made and the priorities are clear then objective criteria exist to say whether the share is equitable. He would like the FFC to state, after looking at the Budget and the Division of Revenue Bill, whether the division conforms with section 214(2) of the Constitution. He said that the FFC is a watchdog that must advise parliament if government is adhering to the constitutional requirements.

Mr Josie replied that monitoring actual expenditure is crucial. The FFC proposed the development of a model on the equitable grant schemes for capital expenditure that has a component to assess the spending on infrastructure.

Mr Morobe added that the key was to develop a tracking mechanism for expenditure and the FFC was not yet at that level.

Mr Josie said that monitoring whether the share was equitable was an important issue. The formula being used is based on demographic data with various weightings. This formula is not adequate to measure if the division is equitable or not. He submitted that a set of standards must be developed so that the equitable share can be monitored.

Mr Louw (DP) referred to a grant such as the Child Support Grant and asked if it made provision for anomalies. Using an example he said that in Kwazulu - Natal there are an increasing number of refugees from Mozambique. Also many people migrate to Gauteng. He wanted to know if anomalies such as these are taken into account when determining the grant.

Mr Van As replied that the FFC is working with the Department of Social Development (DSD) to come up with new figures in relation to the grants. The DSD is also meeting with provinces to discuss the grants.

Dr Koornhof (UDM) commented that the FFC analysis of the provincial and municipal budgets indicates a shift back to deficits. He wanted to know how big the deficits were and whether these related to all provinces and municipalities.

Secondly, he referred to the figures that show the collection of own revenue in provinces has declined from 4.8% to 3% and wanted to know why.

Mr Josie noted that the main source of revenue for a province is the transfers and that they have no significant source of revenue.

To the first question he replied that the size of provincial deficits is not a worry but what is a worry is the magnitude of municipal deficits. But even at local level the deficits are a result of structural changes and the reorganization of the municipal own revenue structure.

Mr Khumalo added that currently the own revenue source of provinces is inefficient and what must be looked at is if the revenue sources are efficient.

Ms Hogan commented that Parliament has an important role to play but at the moment committees do not even monitor the monthly figures on spending provided by Treasury and she found this very frustrating.

Mr Mguni (ANC) asked if the money set aside for capacity building actually gets spent on that.

Mr Morobe replied that the FFC tries to avoid getting involved in micro-management issues.

Mr Mguni asked how reliable the statistics for the Child Support Grant and the disability grant are. He point out that in constituencies people who qualify for grants are not registered and yet on the other hand there are people who are fraudulently registered.

Mr Makinta replied that the FFC uses the figures from the DSD. The figures are based on people who are actually collecting the grant and therefore the figures are reliable. The number of people eligible for the grant will extracted from the 2001 census.

Mr Momoniat (Treasury) added that accurate figures are one thing but it is important that the applications get processed quickly and payments commence. Since all provinces can afford to meet these applications and given all the court rulings, there is no incentive not to process applications.

He commented that Treasury also depends on figures from municipalities and if these are not clear then nobody will know what is going on. The only way to improve the information, is if accountability is improved.

Ms Hogan referred to the budget where it states that government spending as a % of GDP rose from 26.5% to 26.6% and questioned whether the budget reflects an expansionary macro economic policy. She said that she had her doubts.

Mr Josie replied that in pure economic terms it is expansionary. If one looks at the budgetary allocations there could be debate if they are expansionary. But there are two indicators that show it is expansionary: the commitment to fixed investment and the considerable upward trend in social infrastructure spending.

There were no further questions.

National Treasury Briefing
Mr Momoniat, Deputy Director General, Ms Ngqaleni, Director: Intergovernmental Fiscal Relations, and Mr Kahla, Chief Director: Legal Services briefed the Committee on the Bill.

Mr Momoniat said that Annexure E is the heart of all the issues and he would go through this before getting into the Bill. Annexure E is the explanatory memorandum of the Budget Review and is also included in the Bill.

The outline of the presentation was the following:
- Fiscal Framework - Part 2 of Annexure E
- Response of National Government to FFC Proposals - Part one of Annexure E
- Provincial Allocations - Part 4 of Annexure E
- Local Government Allocations - Part 5 of Annexure E

Coming to the Bill Mr Momoniat said that it was required in terms of Section 214 of the Constitution. There are only a few changes to this year's Bill. The major change is to remove the implied exclusion of Category C municipalities from receiving equitable share allocations.

The budgeting principles that apply are:
- Comprehensive budgeting process
- Three-year budgets in all spheres
- Transparency of criteria for division
- Use of generally accredited data
- Timeous preparation of grants
- All grants given must appear on the budget of beneficiary government tier
- Clear accountability arrangements
- Monitoring to focus on performance

In a clause by clause analysis Mr Momoniat showed that the Bill remains the same. Part VI takes into account the new constitutional amendments therefore Clauses 21 & 22 dealing with delays and withdrawals that only apply to conditional grants.

Another change is Clause 23 - a transitional issue - to allow reallocations between municipalities.

Mr Kahla took the Committee through amendments that he classified as typographical errors:

- In clause 2(d) the word 'may' must be deleted.

- In clause 7(1) line 22, because schedule 6 refers to grants in kind, after the word except, the words 'except in respect of schedule 6' must be added.

- In clause 18(1) line 20 the reference to section 19 is wrong. The correct section is 40.

- In clause 22(1) after the word province the words 'or municipality' must be added because Treasury must be able to withhold the transfer from municipalities as well.

- In clause 23(1) the word is affected not effected. Also all the words after reallocation in the last line of the clause must be deleted and the words ' will reduce the risk of underspending' must be inserted.

- The whole of clause 24(4) must be deleted because the requirements are contained in clause 14(2).

- In clause 28(2) after the words 'inform the National Treasury' the words 'and the relevant Provincial Treasury' must be inserted.

Discussion
Prof. Turok commented that the policy of government is participatory and he said that he had expected an explanation on the role of NGOs and civil society. The only funds going to NGOs is under health and nowhere else.

Ms Ngqaleni replied that there are many projects where NGOs play a role at provincial level. Under health the funding going to that NGO is a specific program where an NGO is being used.

Mr Momoniat added that the Budget does not deal with NGOs but the Appropriation Bills at all levels of government must be looked at. How government deals with NGOs is separate issue.

Mr Ralane (ANC) asked if Treasury had considered the affordability of services.

Mr Momoniat replied that Treasury is looking into the issue of costing. Johannesburg is already well under way but is still far off.

Mr Louw commented that the bulk of the provincial budget is sourced from national transfers. He asked what pressure was put on provinces to start raising revenue such as via hospitals.

Mr Momoniat replied that provinces' own revenue is a concern. In respect of hospitals, Treasury is insisting that hospitals appoint a CEO with real powers to run hospitals and through this measure to start collecting revenue. Provincial legislation has a crucial role to play in this regard.

Mr Andrew said that the amendment to section 2(d) deleting 'may' was not sufficient and suggested that 'ensure' be replaced by 'enable'. It would read ' to enable such governments to plan.'

Treasury agreed to the amendment and the clause will be changed accordingly.

There were no further questions.

Mr Momoniat in a concluding remark said that the work of parliamentary committees is important. It would be a good idea to have workshops to teach members how to read provincial budgets.

Ms Hogan read the motion of desirability, read the committee report and the Bill was adopted with amendments.

Mr Andrew indicated that he was agreeing to the Bill subject to his being able to change his mind should anything major arise when the Select Committee looks at the Bill more closely.

The meeting was closed.

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