The Budget Committee was briefed by National Treasury on the Division of Revenue Bill [B3-2021]. The meeting took place on a virtual platform. It was highlighted that the tax base was concentrated in urban areas, however rural areas received more per capita/per household through the division of revenue. Rural municipalities were allocated almost three times more per household with an allocation of R11 700 per H/H for rural municipalities and R4 900 per H/H for metros. The allocations and these funds were guided by the clauses of the Division of Revenue Bill as well as the reporting requirements, setting of conditions, enforcement mechanisms and in-year changes, amongst others. Most of the clauses remained the same annually.
Conditional grants grew at an average annual rate of 4.6%, whilst the equitable share grew at an average annual rate of 0.8%. Approximately 82% of transfers to provinces were through equitable shares. The PES accounted for 81.9% of transfers to provinces and was allocated through a formula based primarily on demand for public services in each province.
It was indicated that there was a drastic difference between the funds allocated to the Western Cape, Gauteng and KwaZulu-Natal and the same scenario applied to the equitable share amounts. Members inquired on how National Treasury determined the respective amounts allocated to the different provinces, and the factors considered when calculation took place. It was highlighted, by the Members, that the allocations did not make sense the Western Cape performed financially better than the mentioned provinces.
2021 Division of Revenue Bill Presentation
Mr Marumo Maake, Director: Intergovernmental Relations, National Treasury stated that the tax base was concentrated in urban areas, with rural areas receiving more per capita/per household through the division of revenue.
- Rural municipalities are allocated almost three times more per household
- Total allocation of R11 700 per H/H for rural municipalities and R4 900 per H/H for metros
- More rural provinces receive higher allocation per capita than urban province
Emerging Trends in Salaries across the Three Spheres
- Until the mid-2000s, public-service compensation spending grew more slowly than nominal GDP. Since 2004, however, this relationship has reversed, and the ratio of compensation spending to GDP has increased to about 11%.
- Since 2006/07 the average public-service remuneration has increased at a faster pace than per capita GDP and is now 4.7 times larger partly the result of slow economic growth and high levels of unemployment.
- Remuneration for employees of national and provincial governments tends to be higher than that of private-sector workers. More than 95 per cent of public servants earn more than the bottom 50 per cent of registered taxpayers.
Division of Revenue Bill Clauses
- The clauses of the Division of Revenue Bill govern the allocation and transfer of funds, reporting requirements, setting of conditions, enforcement mechanisms and in-year changes (among others)
- Most of the clauses remain the same annually
- Technical refinements to the Bill clauses are summarised in the annexure
- Conditional grants are growing faster than equitable share
- Conditional grants grow at average annual rate of 4.6%
- Equitable share grow at average annual rate of 0.8%
- About 82% of transfers to provinces are through equitable share
- Details of the allocations are in the annexures
Provincial Equitable Share (PES) Formula
- The PES accounts for 81,9% of transfers to provinces and is allocated through a formula based primarily on demand for public services in each province
- The data used is updated annually to reflect changes in relative demand across provinces
Changes since the 2020 MTBPS
Responding to COVID-19
- R8 billion has been added in 2021/22 to Provincial Equitable Share
- R2.4 billion has been added in 2021/22 and 2022/23 to HIV, TB, Malaria and Community Outreach Grant
- R140 million has been shifted to Human Resources and Training Grant for the hiring of medical interns
- R1.7 billion in 2021/22 and R2.1 billion in 2022/23 reductions in Compensation of Employees (CoE) have been shifted to conditional grants from PES
Changes to Conditional Grants
- From 2021/22 a new standalone ISUPG: province is established for the upgrading of informal settlements
- This grant will focus purely on the upgrading of informal settlements
- Informal settlements were not done to scale required within HSDG hence the need for dedicated funding
- HSDG will focus mainly on non-informal settlement areas but can be used for informal settlements upgrading
- The Title Deed Restoration Grant has been incorporated back into Human Settlements Development Grant to continue with eradication of title deed registration backlogs
Ms N Nkondlo (ANC) wanted to know whether the Permanent Delegate from the National Council of Provinces (NCOP) was present in the meeting. She asked if it was a prescribed requirement for the delegate to be attending the current engagements and what that meant for the NCOP consultation process.
She asked for an explanation of the phrase “areas of perpetual underspending”, as was mentioned by the first presenter.
She inquired on how migration from rural to urban areas offsets the budget composition for allocations to health and education and how the labour market pressures were made up, including whether studies had been done on urban migration. She wanted to hear how these matters were reviewed and considered.
She asked if National Treasury had considered informal settlements within the Western Cape when allocations were made. She requested information on municipalities, within the province, that were flagged for their apparent underspending and asked on what was being done to try and curb this issue.
Mr G Brinkhuis (Al Jama-ah) wanted to know what was meant in page 8 where it stated: “trigger for release of funds is proof that a province/municipality is overwhelmed.” He asked Treasury to explain the criteria that determined a province/municipality being overwhelmed.
The Chairperson said the presentation indicated that the Western Cape received R13 million in conditional grants, Gauteng received R24 million, and KwaZulu-Natal received R22 million both of which were almost double that of the Western Cape and the same scenario applied to the equitable share amounts. She asked how National Treasury determined the amounts and which factors had been considered when calculations took place. She highlighted that the other provinces were essentially getting double, which made no sense as most of the clean audits came from the Western Cape. She added that the Western Cape was also doing better economically, at the moment, than the other provinces.
She asked for an estimation for when the formula review would be completed, as it had already been a year and a half since the review had been requested.
She inquired about the extra funding for infrastructure needed for students with special needs and highlighted these students could not receive the same allocation as fully abled students.
She asked for clarity on whether the R140 million which had been allocated to deal with the medical interns was reserved only for Cuban interns or it also included South African medical interns.
She added that all future presentations should not only include the current years MTEFs estimations, but also that of previous years in order to give a more holistic and comparative view.
The Chairperson pointed out that it felt as if national government wanted provincial government to be grateful for the money which had been allocated to the various provinces. She said; “this is not national governments money, it is not national treasury’s money, it is not Minister Tito Mboweni’s money – it is the people’s money because the people pay taxes and as such it belongs to the people! That is why provincial government should not be grateful for money being allocated but should instead be asking where is the extra money that we supposed to get!”
Mr Kolisang Molukanele, Senior Economist, National Treasury, responded on the statement “perpetual understanding” and said it meant that National treasury looked at the historical trend of grant spending from provinces and municipalities and how money had been spent. If a municipality had been underspending their grant for a long period of time, then that grant became a target for possible reduction. He said he could not supply the aggregate numbers; however, it would be included in the information which would be passed on to Members at a later stage and a breakdown of the grants would also be forwarded to Members. He added that grants in agriculture, sports and human settlements have all been historically underspent.
He mentioned that municipalities can be overwhelmed in two ways, either through the severity of a disaster or the reprioritisation of their budget and spending.
He stated that the Department of Basic Education (DBE) had embarked on a new system of collecting data from schools which would be reviewed for its validity. The inclusion of the data in the system depended on the maturity of the system and validity of the data. DBE also had to do a lot of validation when it came to special needs students as they were funded from different places and different sectors.
Mr Maake responded that another session would need to be held just to deal with the structure of the equitable share, including how the presented numbers were reached. He mentioned that there were a lot of factors, indicators and inputs which were used in the equitable share and these weighted differently to help reach output values. He added that there has been a move away from census to StatsSA mid-year population estimates and a technical adjustment was made to deal with the migrations. He emphasised that the allocations had nothing to do with clean audits and a risk adjusted index had been used which was based on the age and sex cohorts across different kinds of populations.
He said that the review remained ongoing as some of the imaging trends from different sectors which informed the components, were to be considered. The risk adjusted index was still to be reviewed while taking into account other matters such as depreciation.
Ms Pretty Mavhungu, Intergovernmental Relations, National Treasury, responded that the new Informal Settlement Upgrading Partnership Grant would be introduced as a schedule 5 grant from 2021/22. The Western Cape City Grant would be allocated as R518 million, and these funds would be determined through the Urban Settlement Development Grant.
She mentioned that every year at the end of the second quarter, National Treasury initiated a process of ‘stopping and reallocating’ to address underspending of municipalities. National Treasury looked at municipalities which were not underspending in comparison to their performances. They also looked at municipalities which were underperforming, the benchmark being 40%, and would then allocate them a period of time in which to motivate as to why their funds should not be stopped as per the Municipal Finance Management Act (MFMA). Some municipalities declared that funds should be stopped due to them not having spending capacity, while others would contrast in their responses due to fund commitments and hampering of service delivery. She emphasised that National treasury would never just stop the funding, if a municipality had still underspent at the end of the financial year, it could apply for the rollover of funds. If approved, the funds would not be returned to the National Revenue Fund. She said that the ‘stopping and reallocating’ process was done as a method to prevent the funds being returned to the National Revenue Fund.
Ms Nkondlo asked for an explanation on what it meant now that there was a new classification under the disaster declarations. She wanted to know how the new classification helped with the issue of who got to declare a disaster and asked how National Treasury helped expedite implications for service delivery during disaster situations.
Mr Brinkhuis stated that National Treasury and national government played an oversight role over the country, which included all provinces and over 200 municipalities. He wanted to know the measures National Treasury took to ensure that when money was allocated to municipalities, it was allocated and spent accordingly.
He added that the gap between the privileged and less fortunate continued to increase at an alarming rate. People had opportunities in some areas and did not in others. He said that national government was and is meant to play an oversight role to see that such challenges and problems are addressed. He asked whether national government played its oversight role and took note of the problems in municipalities which needed to be addressed.
The Chairperson responded that the Permanent Delegate from the NCOP was meant to brief the Committee however, information had been given that the Delegate had to attend a finance workshop. She said that, according to her knowledge, the Member was meant to prioritize the briefing over the workshop, however, that would be taken up with the NCOP.
She wanted to know whether National Treasury took into account that when a learner migrated to the Western Cape, all other factors such as health, transport, sewerage, electricity, etc had to be considered when they made their adjustments. The formula seemed to require a more holistic approach with consideration to the various requirements that a person migrating may need or make use of.
She said that National Treasury was requested to come and do a presentation to show the Committee how exactly calculations and breakdowns worked. The presentation would help the Committee as they were currently in the process of doing research on a money bill and were looking at dates on which to hold their first workshop.
As it had almost been two years, the Chairperson wanted to know how much longer the review on the Provincial Equitable Share Formula would take. She requested that the question regarding the R140 million for the medical interns be dealt with on whether that money had been made specifically available only for the Cuban interns or for South African interns as well.
Mr Maake responded that the R140 million was not only for the Cuban medical interns but included the South African medical interns as well and whether interns had been trained in Cuba or South Africa. He mentioned that allocations were late in the previous year and apologised for such, however, it had been due to the extraordinary circumstances the country found itself in. He stated that three budgets had been tabled in one financial year which had never happened before during his time at National Treasury. There were a lot of decisions which needed to be taken, both at a technical and political level which disrupted the process and led to some of the delays.
The Medium Term Budget Policy Statement (MTBPS) was supposed to give an indication in terms of what National Treasury’s plans were. However, economic conditions were also not stagnant and disrupted their physical framework at a national level.
The issue of special needs student, he mentioned, needed to be looked into and would be forwarded to the Committee at a later stage.
Regarding the equitable shares, he clarified that they needed more sectors to come up with credible data which was auditable before National Treasury could even consider putting it into the equitable share formula.
Referring to the presentation to the Committee, he stated that the Committee Secretary could forward all the relevant information to him and he would relay the message to the necessary stakeholders who could come and present to the Committee. This, he mentioned, would be able to assist the Committee in understanding the equation of migration process as a whole. It could also then deal with the equitable share formula components.
He emphasised that the equitable share formula was not just one component which was affected but rather a variety of components which were affected by the migration of people.
He said that whilst there were mechanisms that National Treasury used to play their oversight role over provinces where challenges were identified, it required an integrated effort from various stakeholders in order to deal with those challenges.
Mr Molukanele responded that the PES had been essentially structured according to the functions which they delivered, with education and health being the biggest functions and therefore received the biggest percentage and the basic component dealt largely with infrastructure. He said that when the PES was reviewed years back, it was restructured due to the social services which were largely taken by national government. The PES review was at the stage of dealing with data and had taken far longer when compared to other reviews. However, the systems and status of the Department had changed robustly and as such had to be taken into consideration. Understanding the implications of those changes and the validity of the data which was coming through was done very carefully. The rationale of the economic component was to incentivize provinces, because provinces had very limited taxing abilities.
He clarified that the provisions from the Disaster Management Act remained intact and the premiers of the respective provinces remained responsible for declaring a disaster. A national disaster led to the National Minister in consultation with various other Ministers and Cabinet being the individuals responsible for declaring a disaster. The classification essentially expedited the process of releasing funds from the national level to the provincial or local levels.
Ms Mavhungu requested that all questions be forwarded to her in writing. Members would receive the requested feedback in a timeous manner.
The Chairperson wanted to know whether there was any gender-based violence data which got factored into the equitable share formula system which helped decide what percentage went to provinces.
Mr Maake responded that there was no such data factored into the equitable share formula.
The Chairperson stated that there were no members of the public online and as such the public hearing section would be concluded. She mentioned that discussions needed to occur on how to increase public participation on matters such as money bills.
The Committee business was concluded.
The meeting was adjourned.
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