Division of Revenue Bill B4-2017: National Treasury & Financial and Fiscal briefing

Standing Committee on Appropriations

10 March 2017
Chairperson: Ms Y Phosa (ANC) and Co-Chairperson: Mr S Mohai (ANC)
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Meeting Summary

National Treasury briefed the Joint Committee on the Division of Revenue Bill, 2017. The brief focused on the background to the Bill, overview of the division of revenue for the 2017 Medium Term Expenditure Framework, responses to recommendations on the Bill, changes to clauses of the Bill, provincial allocations and local government allocations. It was noted that the Bill had 39 sections and seven schedules which would form part of the Bill if and when it was enacted. Explanatory memorandum fell away although it remained on the National Treasury website, whereas conditional grant frameworks, annexures with allocations per municipalities and appendixes were given legal force through the Government Gazette.

National Treasury noted how the Division of Revenue Bill was pulled together. The starting point was that proposal for changes to clauses of the Bill was invited from all national departments, provinces, South African Local Government Association, and the Finance and Fiscal Commission. Allocations baseline was based on the indicative of Medium Term Expenditure Framework allocations in the previous Division of Revenue Act and new outer year allocation. The Bill went through consultation processes. As a result, equitable share allocations were determined through formula described in Annexure W1 to the Bill. Conditional grant allocations to each province or municipality and their frameworks were traditionally determined and signed off by Transfer Officers and the process of transfer was set out under section 27(2) of the Division of Revenue Act.

Changes to the Division of Revenue Act resulted in the reduction for fiscal consolidation and reprioritisations for other priorities; additions to ensure provinces and municipalities could serve growing populations, 2017. Medium Term Expenditure Framework allocations for provinces grow at an average annual rate of 7.5% and allocations to local government grow at 8.6%. There were many changes to the structure of allocations to provinces and municipalities. Both provincial and municipal Equitable Shares were reviewed. The Bill was a powerful tool for redistribution. It achieved a substantial redistribution of revenue raised through taxes in relatively wealthy (mainly urban) areas to areas where demand for subsidised public service was highest. As a result, the most rural municipalities receive twice the allocation per household that was transferred to metros (although 70% of tax revenue was raised in metros).

National Treasury responded to recommendations on the Bill. These included responses to the Standard Chart of Accounts, Select Committee on Appropriations, and Financial and Fiscal Commission recommendations on the Bill.

National Treasury took the Joint Committee through clauses 1 to 2 of the Bill. These clauses set out the rules for transfers to provinces and municipalities. National Treasury noted total transfer to provinces for 2017/18, new grants to the Provincial Fiscal Framework starting 2017/18, changes to the implementation and allocation method of grants, provincial equitable share, and local government allocations.

National Treasury apologised for technical errors in the Bill and thus requested the Committee to recommend that they be corrected in the Bill and the Government Gazette.

Members sought clarity on the progress of increasing infrastructural conditions of Early Child Development, on the bucket eradication programme to be funded through bulk and reticulation grants in the Department of Water and Sanitation, on the review of the local government equitable share formula, on whether foreign learners might indirectly be discriminated against, on whether the changes made would speak to creation of more jobs as well as timely payment of teachers and nurses, on changes in the allocations of grants/funds to provincial governments, and on whether the National Treasury believed that a greater responsibility was given to municipalities.

The Financial and Fiscal Commission briefed the Joint Committee on the Division of Revenue Bill. It focused on economic outlook and the Bill, changes and additions to the fiscal framework and government responses to the Commission and Select Committee on Appropriations recommendations. The Bill was crafted in an environment of exceptionally difficult domestic and global conditions. Fiscal measures were therefore not enough. Expansion of the social wage in sustainable manner, creation of jobs and reduction of poverty needed much faster rates of inclusive economic growth. Low fragile growth below National Development Plan targets substantially constrained government’s ability to address triple challenges of unemployment, inequality and poverty. Social and fiscal risks remained high and this required prudent fiscal management and allocative efficiency.

The Commission commented on clauses 21(2), 21(2), 21(4), 27(2)(d), and 23(2)(b) of the Bill, and took the Joint Committee through major changes and additions to the Bill with reference to the views of the Commission on those changes and additions. The FFC tabled its submission for the Bill in May 2016. The submission comprised 11 chapters and 37 recommendations. Government responded to recommendations in 9 of the 11 chapters and indicated processes underway to implement the recommendations. Government agreed with most of the recommendations.

The Commission was in agreement with the general thrust of the Bill; hence improvement in economic growth prospects as a means of generating additional tax revenue to bring the budget deficits and public debts were a pre-requisite.

Members welcomed the presentation as constructive. A study conducted by the University of Free State on equitable shares was requested. Members were of the view that allocation of funds should be directed to creation of jobs rather than social security.

Meeting report

Briefing by National Treasury on Division of Revenue (DR) Bill

Ms Malijeng Ngqaleni, Intergovernmental Relations Branch, National Treasury (NT or Treasury), took members through the presentation. The presentation would talk about background to the Bill, overview of the division of revenue for the 2017 Medium Term Expenditure Framework (MTEF), responses to recommendations on the division of revenue, changes to clauses of the Bill, provincial allocations and local government allocations. The DR Bill had 39 sections and 7 schedules which would form part of the Division of Revenue Bill if when the Bill was enacted. Explanatory memorandum fell away although it remained on the National Treasury website, whereas conditional grant frameworks, annexures with allocations per municipalities and appendixes were given legal force through the Government Gazette.

Ms Ngqaleni noted how the RD Bill was pulled together. The starting point was proposal for changes to clauses of the Bill that was invited from all national departments, provinces, South African Local Government Association (SALGA) and the Financial and Fiscal Commission (FFC). Allocations baseline was based on the indicative of MTEF allocations in the previous Division of Revenue Act and new outer year allocation. The Bill went through consultation processes. As a result, equitable share allocations were determined through formula described in Annexure W1 to the DR Bill. Conditional grant allocations to each province or municipality and their frameworks were determined and signed off by Transfer Officers and the process of transfer was set out under section 27(2) of the DR Act.

Changes to the DR Act resulted in the reduction for fiscal consolidation and reprioritisations for other priorities; additions to ensure provinces and municipalities could serve growing populations, 2017 MTEF allocations for provinces grow at an average annual rate of 7.5% and allocations to local government grow at 8.6%. There were many changes to the structure of allocations to provinces and municipalities. Both provincial and municipal Equitable Shares were reviewed. The DR Bill was a powerful tool for redistribution. It achieved a substantial redistribution of revenue raised through taxes in relatively wealthy (mainly urban) areas to areas where demand for subsidised public service was highest. As a result, the most rural municipalities receive twice the allocation per household that was transferred to metros (although 70% of tax revenue was raised in metros).

Ms Ngqaleni noted that National Treasury responded to recommendations on the DR Bill. These included responses to the Standard Chart of Accounts (SCOA), Select Committee on appropriations (SeCOA), and FFC recommendations on the DR Bill (see attachment).

Ms Ngqaleni took the Joint Committee through clauses 1 to 2 of the RD Bill, which set out the rules for transfers to provinces and municipalities.

Total transfer to provinces for 2017/18, new grants to the Provincial Fiscal Framework starting 2017/18, changes to the implementation and allocation method of grants, provincial equitable share, and local government allocations (see attachment).

In the conclusion, Ms Ngqaleni, on behalf of the National Treasury, apologised for technical errors in the DR Bill and thus requested the Committee to recommend that they be corrected in the Bill and the Government Gazette.

Discussion

Mr C de Beer (ANC) welcomed the presentation and sought clarity on the progress of increasing infrastructural conditions of Early Child Development (ECD), on the bucket eradication programme to be funded through bulk and reticulation grants in the Department of Water and Sanitation, on the review of the local government equitable share formula.

Mr B Gaehler (UDM) sought clarity on new ECD grants designed to expand access and improve facilities for young learners and how the ECD grant could fit in basic education on the interface between the Departments of Basic Education and of Health, and on how these two departments could be integrated to achieve a common goal. Referring to education grants to fund learners with intellectual disabilities, he sought clarity on whether foreign learners might indirectly be discriminated against. He appreciated that the new grant was established.

Mr A McLoughlin (DA) sought clarity on the ECD in terms of increasing infrastructural conditions, and on whether the changes made would speak to creation of more jobs as well as timely payment of teachers and nurses.

Mr A Shaik Emam (NFP) sought clarity on local government procurement and how their expenditure could be controlled, on whether issue of transport fell under the Department of Basic Education, on the position of National Treasury with regard to the Bucket Eradication Programme, on changes in the allocations of grants/funds to provincial governments, and on whether National Treasury believed that a greater responsibility was given to municipalities. He remarked that problems that the DR Bill sought to address rested on employees who were not performing their tasks and not on the lack of funds.

Ms E Louw (EFF) remarked that certain funds that were placed under the Department of Social Development should be managed and controlled by the Department of Basic Education. She supported new grants to support leaners with intellectual disability and felt that workers/employees should be more accountable for a policy to realise its objectives.

Dr C Madlopha (ANC) welcomed the presentation and sought clarity on regulation of in-year conversions between direct and indirect allocations. There had been a negative financial record with national and provincial insofar as spending indirect grant was concerned. These two spheres of government were always faced by the question of under spending. Referring to allocation methods of transport grants, she sought clarity on what could be the allocation criteria, from 2018/19 onwards. She remarked that the term “rural development” was used often but without a clear and precise meaning. Was rural development about opening shopping malls in rural areas which poor people could not have access to in addition to the absence of a sense of ownership? The term should be defined for clarification purpose.

The Chairperson agreed. The Committee had submitted to the Department to a request to define the term rural development. It seemed that it was difficult to define the term.

Mr M Figg (DA) sought clarity on ECD and remarked that the Equitable Share was needed to be reviewed because local governments were not receiving enough money to run municipal projects. He remarked that the Chief Procurement Officer, when he came to brief the Committee, made a good presentation. The major problem was that he was corrupt. He expressed concern that perhaps the person who would take over from him was or would be corrupt too.

The Chairperson remarked that Mr Figg should trust the system and refrain from making baseless allegations.

Ms D Senokoanyane (ANC) said rural development was key in economic development and thus the term “rural development” should be defined so as to be specific in designing how services would be delivered for the purpose of improving the quality of life of rural residents.

The Chairperson sought clarity on what National Treasury was doing to capacitate municipalities to collect revenues. National Treasury should be sensitive to social issues affecting the poor and thus work to ensure, for example, the bucket system was eradicated. National Treasury should, in responding, be short and straight to the point given that the Committee was running out of time.

In her response, Ms Ngqaleni noted that increasing of infrastructure of the ECD was an issue that National Treasury was seeking to respond to. The functions of the Department of Social Development and of the Department of Basic Education were clarified. The former was entrusted with the tasks of overseeing the services offered children between zero to four years and the latter assumed responsibilities of five to six years. The department ought to show the baseline of funding ECD. The DR Bill sought to make sure that the ECD grants were available. Grants would be available to pre-schools that were run by communities. This included upgrading of infrastructures to ensure that a pre-school was complying with the ECD requirements.

On the bucket system, the problem started four years ago. It was highly expected to be resolved swiftly, National Treasury was not expecting that the system would still be persisting. Problems started when the eradication of the bucket system was under the Department of Human Settlements. The major problem was embedded in the absence of prior planning how the system would be eradicated so that the costs of implementation could be defined. There were no definite details on what was required to eradicate it. There were also other programmes run by other departments that focused on eradication of the bucket system. There was a need to reconcile these programmes.

On the question of the cost of infrastructure being high, norms and principles laid down by the Chief Procurement Officer needed to be complied with. The average costs had been indicated.

On the question on when the review of districts would be completed, the matter could be responded to by CoGTA. It ought to make sure that the review was completed because that would help the allocation of grants mechanism. It would help the implementation of local government equitable share which the National Treasury was struggling with in the DR Bill. On collection levies, the collection could be used to fund municipalities as short-term measures. However, it could not be an efficient revenue replacement because Metro levies would not grow more than it was. The Treasury was still looking for more appropriate ways to address the problem.

Presentation by FFC on DR Bill

Prof Daniel Plaatjies, Commissioner took the Committee through presentation, focusing on economic outlook and the DR Bill, changes and additions to the fiscal framework and government responses to FFC and SeCOA recommendations.

The DR Bill was crafted in an environment of exceptionally difficult domestic and global conditions. Fiscal measures were therefore not enough. Expansion of the social wage in a sustainable manner, creation of jobs and reduction of poverty, needed much faster rates of inclusive economic growth. Low fragile growth below NDP targets substantially constrained government’s ability to address the triple challenges of unemployment, inequality and poverty. Social and fiscal risks remained high and this required prudent fiscal management and allocative efficiency.

Prof Plaatjies alluded to clauses on which the FFC made comments, including clauses 21(2), 21(2), 21(4), 27(2)(d), and 23(2)(b) of the DR Bill, and took the Committee through major changes and additions to the DR Bill with reference to the views of the FFC on those changes and additions (see attachment).

The FFC tabled its submission for the DR Bill in May 2016. The submission comprised of 11 chapters and 37 recommendations. Government responded to recommendations in 9 of the 11 chapters and indicated processes underway to implement the recommendations. Government agreed with most of the recommendations.

The FFC was in agreement with the general thrust of the DR Bill; hence improvement in economic growth prospects as a means of generating additional tax revenue to bring the budget deficits and public debts were a pre-requisite.

Discussion

The Chairperson said a study was conducted by the University of Free State on equitable shares which seemed to contradict all issues that were being raised and supported by the FFC. The study was conducted in order to determine what the impact of the DR Bill on poorest of the poor would be.

He appreciated that the FFC presentation was in line with concerns raised by Members and was really concerned about social grants which were increased, but allocations of social grants were more often underspent. Emphasis should be put on spending money on what it was requested for. The information given by the FFC would help the Committee not only to review the DR Bill but also to conduct oversight.

Dr Figg welcomed the presentation for its enlightening information. Referring to restoring growth in a shifting landscape, allocation of budget should continue to be pro-poor through increase of grants. National Treasury could not focus on increasing social grants; rather it should focus on funding programmes that would create jobs. In this regard, employment dynamics driven by sectorial dynamics could be looked at in the context of developing economy. In his understanding, the wage should be increased in the anticipation of meeting household consumption expenditure. He agreed with the FFC that sluggish growth and weak labour market might have adverse impact on the health of people; unhealthy people could not be separated from diseases that might be cause of deaths.

Ms S Shope-Sithole (ANC) welcomed the research of the Free State University. She suggested a copy be sent to the Committee and the university invited to present on that research. She sought clarity on why Prof Plaatjies was Acting FFC Commissioner.

The Chairperson responded that Prof Plaatjies had been with the FFC for so long and apologised about failing to introduce him. She then said that Members should see whether the DR Bill was in line with the Money Bill.

Mr de Beer sought clarity on the impact of fiscal consolidation on education

Prof Plaatjies was acting because the FFC was awaiting the Minister of Finance to appoint a Chair and Deputy Chair.

The Chairperson sought clarity on how long it would take to provide a definition of rural development.

Prof Plaatjies responded that the definition was under consideration progress.

Both the Chairperson and Co-Chairperson felt that many terms were used but which did not have clear meaning. The Co-Chairperson provided an example of an under-developed rural area in addition to rural development.

The meeting was adjourned.  

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