Division of Revenue Bill: hearings

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Finance Standing Committee

09 March 2000
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Meeting report

FINANCE SELECT COMMITTEE
10 March 2000
DIVISION OF REVENUE BILL: PUBLIC HEARINGS

Documents handed out
Presentation by the Department of Finance
Presentation by the Financial & Fiscal Commission
Presentation by Idasa
Presentation by Afrec
Division of Revenue Bill (B8B - 2000)

SUMMARY
Department of Finance explained the division of national revenue amongst national provincial and local government the vertical split amongst provinces and the operation of conditional grants and agency payments.

In the discussion it was emphasised that if a local authority wanted to receive a conditional grant they would have to put their case to Cabinet in a proper way explaining exactly why they wanted the funds and how they intended to spend it. He also noted that Cabinet would be less likely to help a local government which did not make an effort to collect the revenue which was due to it.

The Financial & Fiscal Commission felt that the management of the budget process had improved. The general increase of funds for education was commended and in the category of health, the AIDS grant was applauded as well. However the unequal access to social security grants in the category of welfare still presented a problem. Mr Morobe said that fostering Public - Private sector partnerships in the development of infrastucture was necessary to stimulate growth and development.

Idasa said that government's spending showed a shift from the provincial to the national sphere (as government made a choice to spend certain funds on Defence rather than on social services). This choice seemed to indicate a belief that social services were sufficiently funded to the point where funds could be moved elsewhere. This view is also based on the fact that government said that there would not be additional funding for social services but rather that the money allocated toward social services should be spent more efficiently. While Idasa agrees that there should be more efficient spending on social services, there is still a need for additional funding.

Afrec noted that the fact that the Division of Revenue Bill had to be tabled together with the National Budget undermined Parliament's power to amend the Division of Revenue Bill. If Parliament were to amend the Division of Revenue Bill at such a late stage, the result could be disastrous for the integrity and coherence of government budgeting. A three-stage process for passing the budget was proposed by Afrec. It also suggested that certain additional information be included in the Explanatory Memorandum.

MINUTES
Department of Finance
Mr Ishmail Momoniat, Chief Director of Intergovernmental Fiscal Relations in the Department of Finance, made the presentation (
Presentation by the Department of Finance)

Discussion
A committee member commented that for the year 2000 - 2001 local government seemed to be receiving very little money.

Mr Momoniat replied that the amount that local government would receive was about 6.7 billion rand. He said that there could be no dispute as to this figure. He then added the following comments:
Local governments have own sources of revenue and the effort to collect them seems to be declining. The result of this decline in collecting revenue will be that local government would not get more grants. In order to be effective in the process of getting funds they must build up a case as to why they want more funds. Local government must persuade government that they need more and that what they have they are spending effectively. It is also imperative that they ''must collect revenue''.

In response to questions by the members the following emerged:
- Mr Momoniat said that everyone would like to get more money but that the money had to get divided. He emphasised that the funds could not simply be demanded. The requestor had to make it clear how they would spend the money.
He said that national government would be less likely to help local government if they were not collecting the funds which were due to them.

- In response to a question about section 154 of the Constitution, Mr Momoniat said that this section does not necessarily refer to a money allocation. He noted that they can only ''help those who help themselves''. Also local government must know what they need the money for. Poor administration and poor capacity must be dealt with. He said that they do not tell local government how to budget and that national government makes significant resources available. Nothing in the Constitution obligates government to give local government more funds. The primary point that the Department was making was if more funds were asked for local government would have to ''persuade government''.

- Government has made R204 million rand available for the local government elections.

- It is not essential for provinces to have a contingency reserve. These reserves are there to generate a surplus (it is only a ''technical surplus'': Mr Momoniat referred to it in this way because the only purpose it serves is to pay off their debts, it is not used for services). For example, if a flood took place and there was major damage, then national government would assist the province. They would not simply be expected to make do with their allocation.

- Responding to a question on the formula for budget allocation to provinces (specifically the use of census data and the location of the area), Mr Momoniat said that the formula takes into account some component of where people stay. The Department is aware that census data are not always accurate but that is what they must rely on to determine population numbers. Delivery to rural areas is important. He said that if one compares the grants given to rural areas before and after apartheid, then it is clear that there has been a bigger shift toward more spending on rural areas. Still the spending on these areas is not sufficient, there has to be more. However if more funding is required then the local government must convince Cabinet of this. If people do not produce audited statements then the conclusion is that they are not spending the funds correctly and it is not a good idea to give them more funds. They need good administration so that the funds are spent properly and if more funds are needed then there has to be a proper submission to Cabinet. Most importantly effective delivery must take place from local authority.

Financial and Fiscal Commission
Mr Murphy Morobe, Chairperson of the FFC, gave the presentation (
Presentation by the Financial & Fiscal Commission).

Discussion
A member commented that the Free State province invoked section100 of the Constitution (getting the intervention of the national executive) and therefore the money borrowed has to be automatically repaid. He asked what central government could do in this regard and whether the FFC had considered devolving Capital Gains Tax (CGT) to the provinces.

Mr Momoniat said that Section 100 allocations were not loans but grants which were made to the various provinces. There are conditions which the provinces receiving these grants must comply with or national government can ask for repayment. The Finance Department is only responsible for allocations but at the end of the day the oversight function is with the provinces.

In answer to the second question, Mr Morobe said that CGT was a new thing and that they had not considered what the member proposed. It may or may not be advisable to do this. In any event he said that CGT was probably not expansive enough to give significant returns.

In response to other questions Mr Morobe made the following points:
FFC's interactions were regulated by the Constitution and the Intergovernmental Fiscal Relations Act. They were expected to make recommendations and Parliament had to consider these before the Bill was passed. Annexure E to the Budget Review indicated what came in from the FFC and what did not. Whatever suggestions they put forward had to be properly considered.

The FFC preferred not to be involved in these interventions in the provinces. The preferred way is that if the political structures cannot resolve the issue then they can come to the FFC in terms of the IGFR Act. However their door was wide open and they would be mandated with issues on a daily basis.

The FFC has been explicitly structured. The constitutional principles are broad and therefore they may require interpretation. The FFC does not want to be the managers of all these arrangements; that is not their function. All the roleplayers know their roles their capacities and their functions. They understand the various mechanisms that there are that is why directors and director-generals are employed. The politicians he said must give effect to the policies.

A member asked if government was failing their task of meeting the basic needs of the poor and whether the budget went a long way in terms of the policy objectives of the FFC.

Mr Morobe said that it was the poorest who required this kind of support and that it was essential for government to take the needs of these people seriously. In terms of welfare he said that the major issue related to numbers. On the issue of health he said that it was considered in terms of the formula.

Ms Fubbs (ANC Gauteng) referring to the FFC's 4 -1 weighting in favour of non-medical aid persons for free health care, sketched a potential problem:
Where there is a policy of free health care for certain individuals (example pregnant mums) and the 4 - 1 weighting in favour of non-medical aid persons was applied it meant that people who are on medical aid could still legally take advantage of free health care as they were not excluded - there was simply a 4 -1 weighting against them. Yet the allocation to the provinces (in accordance with the formula) does not include these people.

Mr Momoniat replied that they must not overfocus on the formula. He continued that no formula is perfect and that there is not a perfect correlation between what the province needs for health and what the province spends on health.

Presentation by Idasa
Albert van Zyl made the presentation (
Presentation by Idasa)

Discussion
From the discussion the following points emerged:
Ms Fubbs (ANC Gauteng) referred to the fact that the Finance Department had said that there would not be more funding to spend on social services because the department felt that the better approach would be to improve the spending efficiency on these services. She commented that fundamentally neglected areas such as adult education would remain neglected for some time to come (as the results of efficiency gains would only materialise in the 2002/2003 financial year).

In response to a query on the Cabinet's choice to spend on defence procurement, Mr van Zyl said that Cabinet had had a choice between spending on social services or on defence and they had decided to spend on defence. He said that while he was sure that Cabinet's decision was ''well-considered'', the document in Annexure E could not be evaluated as it did not clarify the reasons for their decision.

Mr van Zyl noted that looking at the graphs it appeared that there was an increase in equitable shares and a decrease in conditional grants. This appearance however was the result of a once-off transfer which had taken place the previous year. Therefore it looked as though there was a decline when in fact there was a stable allocation. He suggested that equitable shares to the provinces should be increased.

When asked why he thought more money should be spent on social services, Mr Van Zyl explained his point with the following example. Minister Asmal said that one billion rand was spent on classroom backlogs while what they actually needed to spend was twelve billion rand. Thus the amount spent on social services is insufficient!

The impact of the decrease in provincial allocations is well documented. Only a portion of the decrease in the allocation to provinces will be funded by efficiency gains but not all of it.

There was consensus at national and provincial level that important sources of provincial revenue have been eroded over the past few years. One example of this is the service fees at hospitals. Here there was a crisis with collections as there was a lack of motivation at institutional levels to collect. The reason for this was that the money was not kept in the institution but went to the treasury. This was one reason for the slide in provincial revenue.

Presentation by Afrec
Mr Conrad Barberton, Research Associate at AFREC, made the presentation (see
Presentation by Afrec).

Discussion
In response to a question by a member Mr Barberton said that if Parliament does not ask the FFC the right questions then they cannot advise Parliament properly. Thus the mechanisms are there but they are underdeveloped.

Mr Momoniat indicated that he would like to give a general response to Mr Barberton's presentation on behalf of the Department of Finance. He made the following comments:
- The Department of Finance agrees with Afrec regarding the updating of statistics and they have tried to get Statistics SA to update these. Mr Momoniat conceded that ''perhaps Parliament does have a role to play in updating statistics''.
- The formula for allocation to provinces is contained in Annexure E (to the Budget Review) therefore Mr Momoniat said that he did not understand the criticism which was levelled against the Department by Mr Barberton in this regard.
- Regarding the process to be followed in the adoption of the Division of Revenue Bill Mr Momoniat said that Mr Barberton had a narrow perspective of the role that parliament had in this process.
- It would be desirable to get information earlier but there is a cost associated with this.
- The equitable share allocation is not a problem because it is easy to determine.
- The problem with conditional grants is that they can only be determined after the provinces have received their allocations.
- Mr Momoniat said that it is idealistic to think that Annexure E must deal with the vertical division. He added that this much detail was not necessary.
- The baseline allocation is always important.

The meeting was adjourned.



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