Minister of Finance on Budget 2009/10 & Tax Proposals; Division of Revenue Bill: FFC submission & adoption; Western Cape Inherited Debt Relief Bill

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Finance Standing Committee

11 February 2009
Chairperson: Mr K Moloto, Mr T Ralane, Ms L Mabe
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Meeting Summary

The briefing on Budget 2009/10 covered the developments in the macroeconomic environment. Emphasising the unprecedented global economic crisis, its impact on South Africa was examined. There had been a sharp decline in commodity prices and in manufacturing production. In South Africa’s macroeconomic forecast 2009 – 2011, public finance would be under pressure as revenue under-collection of R14 billion was expected this year.

The forecast drivers were explained as were the five principles used in crafting South Africa’s response to the crisis. The budget framework was outlined according to the estimates for real growth and the budget deficit over the Medium Term Expenditure Framework (MTEF). There was a brief introduction of the main tax proposals for 2009/10, the Western Cape Inherited Debt Relief Bill, key spending proposals and the Division of Revenue Bill.

Members welcomed the increased emphasis in the budget on value for money. The grant to South African Airways was sharply highlighted, specifically pertaining to the conditionality attached. The R6,4 billion additional spending on the transport infrastructure was queried due to the recent non-payment of bus operators’ subsidies. The deferred mining royalties regime was raised by several members. The possible reasons that South Africa’s growth was substantially lower than other emerging markets was queried. A discrepancy in the budget deficit estimate was noted and the sustainability of this figure was questioned. Members asked how the Industrial Policy could be rectified to deliver increased exports. Other matters raised were the new fuel levy, the level of co-ordination and information sharing, related to the potential for systemic crisis. The consequences of weaker exports for the Southern African Customs Union were queried in the context of the global economic crisis. Members asked what was being done, other than the Extended Public Works Programme in order to sustain jobs and asked for clarity on the role of Development Finance institutions as well as the loan amount of € 1 billion for financing eight Airbuses for the Department of Defence. The issue of infrastructure development through the use of Public Private Partnerships and the possibility of a wage subsidy as an aggressive way of stimulating employment were raised.

The tax proposals for the Budget 2009/10 were reported as quite "green" with a view toward changing behaviour towards the environment, rather than raising revenue. The tax policy objectives for 2009/10 were expanded upon and the main tax proposals were discussed under the headings of environmental fiscal reform, individuals, business and other indirect taxes. The emission charges and taxes would take forward the 2008 announcements.
The Personal Income Tax table was explained according to the taxable income, tax rates, rebates and tax threshold changes. The changes to provisional tax for taxpayers 65 years and older were presented as were the increases in tax-free interest-income ceilings. Also discussed were ad valorem "luxury" excise duty rates on motor vehicles, ad valorem emissions tax rate on motor vehicles, fuel taxes and taxes on alcoholic beverages and tobacco products. Members queried the plastic bag levy and asked what assurance there was that the money would be properly used.

The background, current status and purpose of the 2009 Western Cape Inherited Debt Relief Bill was presented along with the accounting process for debt relief. The aim of the Bill was to authorise the over-expenditure of the former Cape Province regional structures in line with similar arrangements in the 1998 Inherited Debt Relief Act and the 2000 Finance Act and to facilitate the accounting process necessary to clear the overdrawn accounts. Members queried Schedule 1 of the Bill and the amount of R912 million. Thereafter, the Bill was adopted without amendments.

The Division of Revenue Bill 2009 briefing noted the most important changes, specifically the Municipal Infrastructure Grants. The appendices were explained as was the location of the fiscal framework in the Bill. The response of national government to the Financial and Fiscal Commission (FFC) proposals was reported. The five new conditional grants were explained as being mostly once-off assistance grants. The local government equitable share (LGES) formula had been reviewed to improve funding of poorly resourced municipalities. Future work on redirecting funds to the municipalities would continue, as this was where the real constraints to development were. Further improvement to the formula was in progress, as was updating the formula using the 2007 Community Survey results.

The Financial and Fiscal Commission agreed that the National Treasury had covered many of the issues raised in their submission. The issues that remained were the complexity of the Division of Revenue Bill. The key strategic issues here related to the broadness and the size of document. The FFC called for a comprehensive review of the Division of Revenue Act (DORA). Conditional Grant proliferation was a matter of concern. The FFC was of the opinion that National Treasury needed to think of innovative ways of funding disaster mitigation and that all new grants should be subjected to rigorous analysis before introduction. One area that government needed to clarify was learner transport as this issue had still not been resolved.

The Members queried the reasons for the Minister of Transport not following the right procedure for the Gautrain loan application. Due to time constraints, it was recommended that the new Committee of the Fourth Parliament have a workshop with National Treasury and FFC on the mechanisms of DORA. Opposing opinions on the sustainability of conditional grants versus allocations via the equitable share were raised. Concern was expressed about the delay in finalising grants due to the planned restructuring of the Department of Provincial and Local Government. The timeframe attached to the re-demarcation of Merafong was questioned. The replacement of
Regional Services Council (RSC) levies with the new fuel levy was queried for its possible regional discrimination as was the disproportionate equitable share weighting of Kwazulu-Natal. In response to various constituency specific queries, Members were asked to submit such questions in writing and the National Treasury would assist Members on a case by case basis. It was noted that the National Schools Nutrition Programme (NSNP) would be progressively extended to secondary schools. The meeting ended with the adoption of the Division of Revenue Bill without amendments.

Meeting report

Mr Kuben Naidoo, Deputy Director-General: Budget Office, National Treasury, briefed the committee on the Budget 2009 titled: “A Time of Crisis, a Window of Opportunity”. In the macroeconomic environment, there had been a sharp deterioration in the global economic outlook, with quite a significant difference since the beginning of February. The areas of most notable concern were: export volumes, a fall in manufacturing and slowing private investment. 
The global economic crisis was unprecedented and global growth forecasts in all regions had recorded consistent downgrades to Gross Domestic Product (GDP). The impact on South Africa was shown by the fact that forecast growth in South Africa’s GDP was closely correlated with world GDP growth trends. There had been a sharp decline in commodity prices and in manufacturing production.

Macroeconomic forecasts for 2009 – 2011, showed that the South African economy was likely to slowdown as in other emerging markets, but also likely to remain in positive growth territory. Headline Consumer Price Index (CPI) was set to be in to be in target range by mid 2009. Modest recovery in GDP growth was forecast from 2010. Public finance would be under pressure as revenue under-collection of R14 billion was expected this year. The revenue risks were that company taxes might fall further coupled with declining Value-Added Tax (VAT) collection due to lower consumer spending. The forecast drivers covered the factors affecting the lower GDP forecast, overall growth and the risks to GDP growth.

The 5 principles used in crafting South Africa’s response to the crisis were:
▪ protect the poor,
sustain employment and expand training opportunities,
▪ accelerate public sector infrastructure spending to enhance our future capacity,
▪ take the required steps to enhance competitiveness and to broaden opportunities,
▪ maintain sustainable public finances.

Real growth (excluding the transfer to ESKOM) would average 5,1% over the Medium Term Expenditure Framework (MTEF) and the Budget deficit rises to 3,8% next year before falling to 1,9% of GDP as revenue recovers; made up the outline of the budget framework.

For the public sector borrowing requirement, the worsening budget balance was the result of the downward revision of revenue estimates, the upward revision of debt service costs, the R4,2 billion Gautrain loan and the R60 billion ESKOM loan. Government debt was set to rise over the MTEF to maintain government infrastructure spending.

The 2009/10 main tax proposals covering individuals, businesses, environmental fiscal reforms and indirect taxes were reviewed along with the key spending proposals. The Division of Revenue Bill and the Western Cape Inherited Debt Relief Bill were introduced (see relevant documents).

Discussion
Mr N Singh (IFP) congratulated the National Treasury for their emphasis on value for money. He thought this had been lacking for some time. Referring to the grant to South African Airways (SAA), he asked if there was any conditionality attached to it. He also requested background to the deal, similar to that provided for the loan to ESKOM.

Mr Moloto referred to the grant to SAA and commented on the problem of the amount of information given to lawmakers. He asked if they could establish a link between the causes of their financial difficulties and the current global situation. This information should be communicated more clearly.

Mr L Kganyago, Director-General: National Treasury, responded that the allocation to SAA was meant to support their turnaround strategy. He recalled the special adjustment made for SAA in 2007. At that time they had to deal with the grounding of aircraft and other once-off other issues. The condition was that SAA was to implement the turnaround strategy vigorously. The possibility of another request for funds from SAA was a question the National Treasury had asked and his opinion was that this was unlikely. He noted that the environment for airlines was not very attractive at present as airlines globally were recording big losses. The lack of information issue was an interesting one. The Committee had called ESKOM to account for their special adjustment and perhaps it was time that SAA was called to answer for their sins.

Mr Singh referred to the R6,4 billion additional spending on the transport infrastructure, roads, rail and bus systems. He pointed out that the Department of Transport (DoT) had been taken to court for the non-payment of bus operators subsidies. He asked for an update on what had happened.

Mr Andrew Donaldson, Deputy Director General: Public Finance, National Treasury, responded that consolidated spending on transport amounted to R50 billion last year which would rise to R70 billion by next year. It rose by 33% per year for the last 3 years, making it one of the fastest growing areas of spending. There were 5 components of public transport spending on the national budget: support for the South African Rail Commuters’ Corporation (SARCC), taxi recapitalisation, the Gautrain project, the Public Transport Infrastructure Systems Grant and the subsidisation of the bus commuter services. The subsidisation of the bus commuter services would become a conditional grant in the following year. This would be the first step in bringing the subsidisation for contract bus services into financing in an integrated way for commuter rail and passenger road services in cities and provinces. The current figure of R3 billion, in the context of the R50 billion overall spending plan, should grow to R3,5 billion next year bearing in mind the effects of rationalisation and changes in bus transport as the contracts were renegotiated.

Mr Singh asked if the deferment of the mining royalties regime would amount to a big saving. He asked if there was any quid pro quo involved to reduce retrenchments and general job losses in the mining sector.

Mr N Nene, Deputy Minister of Finance, responded that the spirit behind the postponement was based on creating an environment conducive to dialogue in order to mitigate job losses.

Mr K Marais (DA) thanked the National Treasury for the presentation but noted that he did not necessarily agree on all points. He noticed that there was a comparison of South Africa with the other emerging markets. On the graph depicting GDP growth, he noted that South Africa’s growth was substantially lower than other emerging markets. He queried the possible reasons for this and the extent to which the Treasury foresaw an improvement in GDP growth.

Mr Naidoo responded that the two largest emerging markets in the world were India and China and the latter had been growing at approximately 8% annually. In general South Africa was far wealthier than these two countries to begin with and had a much higher Purchasing Power Parity (PPP). China and India therefore grew out of a much lower base and it was these countries that peg the overall growth of emerging markets at such a high level. South Africa was much more developed and it was the trend that more developed countries record lower growth rates. That was not to say that South Africa should not aspire to higher levels of growth.

Mr Marais queried a discrepancy in the budget deficit estimate. According to his own calculation, it came in at 3, 862 – closer to 3, 9 % of GDP rather than the presented figure of 3, 8 % of GDP. He asked if this figure was sustainable, in terms of financing the deficit, if the world went into a depression. He further asked how long the deficit could be sustained at its current level.

Mr Naidoo responded that the estimate published in Chapter 3 of the Budget Review depicted a consolidated budget balance and was the broadest possible perspective which excluded local government. At the consolidated level the budget deficit was projected at 3,8 % of GDP. Viewed from the main budget level, including local government, it was projected at 3,9 %. From a fiscal policy perspective, it was their view that the consolidated measure (referring to the larger government) was a more appropriate measure, referring largely to national government and the associated agencies.

Mr Marais remarked that imports had been higher than exports by far too much in the past. The Industrial Policy (IP) was meant to deliver increased exports but had not done so. He asked how this could be rectified.

Mr Naidoo responded that the assumption was that the global growth would stay low for 2 to 3 years and that SA growth would stay low as well. South Africa had a very low debt to GDP ratio (22% - 23%). This meant there was space to cushion the economy in downturns. However, if the debt to GDP ratio rose too rapidly, it would have long term implications. There needed to be a balance between how much SA borrowed during the slowdown and as the economy recovered, it would have to reduce that debt. A protracted slowdown had been contemplated but the National Treasury would continue with the counter-cyclical fiscal policy if that scenario arose. They felt it would be imprudent to raise taxes or cut spending in that situation. However long it took the economy to recover, they would then reduce the debt to GDP ratio.

A National Treasury official responded that exports performance was a function of the cost of production. As more investment was made in infrastructure (telecommunications, rail and road transport), cost competitiveness would improve. There were issues of trade reform in terms of bringing down costs. Those were the two factors which led to the cost structure of the domestic economy as the most direct reason for poor exports performance.

Mr Marais stated there was a perception that the fuel levy would be a reserve fund for the maintenance of roads. He asked if this perception was correct or if the fuel levy would be ordinary revenue.

Mr Kenneth Brown, Acting Deputy Director: Inter-Governmental Relations, National Treasury, responded that this was the formalisation of an existing arrangement to abolish the Regional Services Council (RSC) levies. Part of the arrangement of RSC levies was that municipalities needed to spend that money on maintenance. The change was meant to emphasise that point. The additional R6,4 billion got split between the provinces and municipalities, particularly the Public Transport Infrastructure Grant (PTIG). This was specifically meant to benefit the municipalities who would not benefit from the levies as levies only accrued to the metros.

Mr K Moloto (ANC), referred to the multiple regulatory regimes in the United States of America (USA) and the more unified system of the UK. He pointed to the greater issue of institutional structure co-ordination. He asked if the Minister of Finance was satisfied with the level of co-ordination and level of information sharing in South Africa’s financial industry and the potential for a systemic crisis.

Mr Trevor Manuel, Minister of Finance, responded that the idea of the single regulator was premised on the collaboration of the financial industry and the South African Reserve Bank (SARB). Legally, there was only one position in South Africa’s financial regulation that was constructed on the basis of joint accountability – the position of the Registrar of Banks. He recalled the situation in the UK, back to the Northern Rock collapse. It appeared that the city grew so large with so many banks to supervise that it became difficult for regulators to penetrate the complex banking system.

He said that when South Africa had its own banking crisis, we emerged with a much stronger understanding of these issues. He did not think there was a single regulatory regime model as the issues were so complex. In the European Union, this was addressed by the European Central Bank (ECB) managing monetary policy. However they had very little power of enforcement and supervision because that remained the national responsibility of the member states. In South Africa it was achieved in part due to the co-ordination between the Financial Services Board (FSB) and the Registrar of Banks. The National Credit Regulator (NCR) also came into play as well as the Independent Regulatory Board of Auditors (IRBA). There was a myriad of similar bodies. The National Treasury had intervened and promoted dialogue to create an environment of mutual accountability where information was shared as needed, allowing for the model of engagement between regulators to mature.

Mr Moloto referred to the consequences of weaker exports for the Southern African Customs Union (SACU). He expressed concern about the sustainability if the global economic crisis deteriorated further. He asked if they were sure that the programmes in place to boost exports, could deliver results in the long term.

The Minister responded that the countries that were more dependent on trading with the other SACU members would tend to have a greater level of benefit. Another concern was how to separate the issues of the member countries from those pertinent to SACU as a whole.
South Africa ran certain automobile programmes with SACU, which tended to be quite cyclical and generally, the cyclical nature of revenues had been discussed. Now that the imports of automobiles had come off and as the 2010 World Cup approached, our import bill had dropped and our customs intake had declined. This drop in revenue had an impact that would be felt by the more dependent SACU members and was a situation they would have to work through.

Mr Moloto pointed out the assumption of a global recovery in the Budget Review and asked on what this confidence was based.

A National Treasury official responded that it was fair to say the world was in a bad state. This was illustrated in the International Monetary Fund’s (IMF) consistently poor forecasts. The most important signals to keep up to date on currently were the fluctuations in housing stock in the USA and the changing levels in manufacturing inventories world-wide. There had, however, been stabilising figures in the recent months. This supported a domestic forecast with consumption remaining strong due to falling interest rates and the rationing down of domestic debt levels.  The debt servicing costs should fall which would underpin increased consumer confidence and higher spending. The environment outlined should also make it easier for Small, Micro and Medium Enterprises (SMMEs) to function and create employment.

Mr B Johnson (ANC) stated that budgets were about planning and allocations to government spheres. Departments should also be encouraged to save. He asked if the Treasury had monitored the trends, watching for major areas concern, similar to the specifics provided in the reports by the Office of the Auditor-General.

Mr Johnson said that the mining royalties suggested two dividends: one for industry and one for government. In view of the fact that retrenchments would have to be minimized, he asked if workers would gain in any form – apart from the retention of jobs.

The Minister responded that there was an ongoing discussion between the National Union of Mineworkers (NUM), the Chamber of Mines and the individual employers. They could not ask employers to retain certain jobs, having agreed that certain jobs were not sustainable. However, the workers still need livelihoods and they needed to deal with those issues as they proceeded. The reality was that part of the mining sector was bleeding and there were risks they had to take.

Mr Johnson referred to the goal of creating jobs and the allocation to the Expanded Public Works Programme (EPWP). What was being done, other than the EPWP, to sustain jobs?

The Minister responded that in many instances, the focus was on people and retaining jobs. The finding by the International Growth Advisory Panel (IGAP) was that South Africa was at only 2/3 of optimal employment when one looked at the numbers of comparable countries. There was the issue of the skills of school leavers and the skills of other workers. There were by far too many people who had never had the opportunity to be in regular employment. The EPWP would deal with some of that skilling. The money had been released to start Phase 2 of the EPWP where the approach was to begin with provinces and municipalities. There was an agreement that the projects of provinces and municipalities would be demonstrably more labour intensive.

Mr Johnson referred to the nearly R1 billion allocation to the Unsobomvu Youth Fund (UYF) and what issues did this address in view of the consolidation of the UYF with the new National Youth Commission.

Ms Julia de Bruin, Chief Director: Social Services, Public Finance, National Treasury, responded that the R996 million would be used to recapitalise the UYF as the merger progressed with the National Youth Commission - for the UYF to continue to undertake operational activities.

Mr Mnguni asked if miners would benefit from the Mineral and Petroleum Royalties Bill. There were communities who depended on these mines. He asked if this affected them as well.

The Minister responded that R1, 8 billion was a bird in the hand. The fact was that the deductions for royalties were incurred before tax.

Mr Mnguni referred to the Industrial Policy, the role of development finance institutions (DFIs) and the prospect of having future generations inheriting the debt incurred. Foreign and domestic debt had increased in real terms. He asked if they had taken that into account in the counter-cyclical and what was the certainty of continued performance of economy. 

The Minister spoke about the role of the development finance institutions – the Development Bank of South Africa, the Land Bank and the Industrial Development Corporation. The big challenge for the DFIs would be what happened to the money released through land restitution, specifically how to use the funds to make the land productive before it depreciated in value. They could not look at the Land Bank to solve that. There were other issues to correct first.

Ms L Mabe (ANC) stated that she had looked at the Estimated National Expenditure (ENE) and the Budget Vote of Public Enterprises. She recalled SAA’s appearance before the committee in 2007 and the assurances made. They had not indicated the coming retrenchments at that meeting. In the years that followed people had to endure delayed flights, procurement problems and the general inefficiency of SAA.  Was there a conditionality attached to the current deal that Parliament could check on in its oversight.

The Minister responded that one must not act in anger where SAA was concerned but rather attempt to take the correct decisions in view of the Comprehensive Expenditure Review, Public Service Act and the Public Finance Management Act. They took the view that managers should manage and that centralised control should be reduced. Before 1994, the Public Service Commission was all powerful and determined the most minute details of the public service. The same applied to the State Tender Board and the Department of State Expenditure. Part of the reform had been to allow managers freedom of resources to manage better.

Ms Mabe noted foreign loans on page 80 of the Budget Review, specifically a loan amount of € 1 billion for financing eight airbuses for the Department of Defence. She asked for clarity on this.

Mr Lungisa Fuzile, Acting Deputy Director-General: Assets and Liabilities Unit, National Treasury, responded that the deal referenced the most sensible mechanism to finance the purchase agreement ahead of the delivery of the aircraft.

Ms Mabe queried the length of time before the payment of the loan was completed.

Mr Fuzile responded that this was only the beginning of the payment - the first installment. The full payment would take place only long after the aircraft were delivered

Dr D George (DA) agreed with the proposition that SAA should appear before them. The low cost Mango Airline seemed to be heavily subsidised by SAA and asked for an explanation of this.

Mr Fuzile responded that Mango was a separate entity and that SAA's financing challenges did not seem to be linked to Mango.

Dr George queried infrastructure development and the use of Public Private Partnerships (PPPs)

Mr Naidoo responded that PPPs were in use and they would continue to use them in delivery. Notable use of PPPs had been seen in the construction of 5 new prisons and the bus rapid transport system. There were a range of PPP options on the table.

Mr Singh asked if National Treasury was satisfied with the way the Department of Transport managed the subsidies to bus service operators.

Mr Donaldson responded that when a department ended up in court that was certainly a problem. It was clear that their contractual obligations were greater than their monetary appropriation and the National Treasury would deal with that. The history of contract bus operators was certainly a long one going back to the pre 1994 inherited contracts. National Treasury had expressed concerns about renegotiation of contracts in the interim. They had agreed that the DoT would change the flow of funds so that the management of the contracts would be reflected in their budget. Generally National Treasury and Parliament had a role to play and it would take a while to get the balance between the buses, taxis and rail services right.

Mr Marais stated that the answer on exports did not shed any light on the issues for him. As was pointed out, the cost of production was the most important factor in boosting exports and why did the IP not address this.

The Minister responded that this was a very complex question as there were many job losses in many sectors. He noted the decline in Chinese economic activity. There were other factors such as the skills of workers, cost of capital, labour legislation, property rights, the cost of transport and input costs. Taking all this into account, one still had to be fully compliant with the World Trade Organisation (WTO) which forbade the subsidisation of exports.

Mr Marais remarked on the possibility of a wage subsidy (a recommendation of the International Growth Advisory Panel) as an aggressive way of stimulating employment, especially for first-time job seekers.

The Minister responded that the proposals were received shortly before the global economic crisis emerged and they had perhaps been taken over by events as there were no immediate plans for instituting a wage subsidy or a similar employer incentive to assist first-time job seekers.

Budget 2009 – Tax Proposals: Presentation
Mr Ismail Momoniat, Deputy Director General (Intergovernmental Relations): National Treasury, commented on the fact that this was quite a “green” budget. The larger aim was to change behaviour, rather than raise revenue. The tax policy objectives for 2009/10 were protecting the environment for future generations, boosting household confidence (via personal income tax relief), supporting mining and private sector investment and raising sufficient revenue as the economy slowed down. The summary of the main tax proposals fell under the headings of environmental fiscal reform, individuals, business, other indirect taxes. Most notable on the tax revenue trends was the decrease in company tax due to the shrinking profits in the period of economic slowdown.

Mr Cecil Morden: Chief Director (Economic Tax Analysis): National Treasury, presented the emission charges and taxes which would take forward their 2008 announcements.
South Africa was a significant Green House Gas (GHG) emitter with coal combustions accounting for 40 per cent of carbon emissions. Recent reports on the Economics of Climate Change emphasised the use of appropriate market-based instruments such as charges, taxes, tradable permits and incentives.  In consultation with the Department of Environmental Affairs and Tourism, National Treasury would address concerns about both climate change and local air pollution. The electricity levy should be viewed as a first step in this direction. Other reforms include an ad valorem excise duty on motor vehicles - to include consideration of environmental criteria such as engine capacity, fuel efficiency and level of emissions. A draft policy paper on Environmental Fiscal Reform had been released for public comment in April 2006.

The Personal Income Tax Tables covered the taxable income, tax rates rebates and tax threshold and the changes from the 2008/9 financial year to 2009/10. Travel (motor vehicle) allowances, medical scheme contributions, medical expense and tax deductibility of post-retirement medical contributions were briefly reviewed.

Mr Franz Tomasek, General Manager (Legislative Policy): South African Revenue Services, presented the changes to provisional tax for taxpayers 65 years and older. It was proposed that the threshold exemption from provisional tax, be increased to R120 000.  To continue to encourage, it was proposed to increase the tax-free interest-income ceiling. This extended to foreign dividends and the annual exclusion ceiling for capital gains. Also discussed were ad valorem "luxury" excise duty rates on motor vehicles, ad valorem emissions tax rates on motor vehicles, fuel taxes and taxes on alcoholic beverages and tobacco products. Certain parts of Annexure C of the Budget were highlighted according to changes in individual and employee taxation, business taxation and tax administration.
Mr Singh referred to the plastic bag levy. He commented that R 15 million was not much and asked what assurance there was that the money would be properly used.

Mr Momoniat responded that they envisioned the purpose of taxes as discouraging bad behaviour and would not want to earmark such tax revenue for specific purposes.

Mr Morden responded that they had quite a long debate with the Department of Environmental Affairs and Tourism on how to structure and one of the arrangements was for retailers to charge the tax. That had an impact on their ability to play with the amounts. The tax is then relatively low.
The principle was that if retailer reneged, on that responsibility, they could raise the tax significantly. On the expenditure side, an amount had been set aside for recycling and that was now up and running.
 
2009 Western Cape Inherited Debt Relief Bill

Mr Kenneth Brown explained the background to the Bill and the current status of affairs. The purpose of the Bill was to authorise the over-expenditure of the former Cape Province regional structures in line with similar arrangements in the 1998 Inherited Debt Relief Act and the 2000 Finance Act and to facilitate the accounting process necessary to clear the overdrawn accounts. The clearing of accounts was necessary as they currently reflect unauthorised expenditure against the Province, even though it was not incurred by the Province. Finally the accounting process for debt relief was outlined.

Mr Singh referred to Schedule 1 of the Bill and queried the amount of R912 million.

Mr Brown responded that the amount was supposed to deal with the outstanding amounts. Schedule 3 of the Bill pointed to that.

After consideration of the Bill, the Committee adopted the Bill without amendments.

Division of Revenue Bill 2009
Mr Kenneth Brown discussed this according to the changes to the 2008 Division of Revenue Act. The layout of the Bill was outlined. As to its contents, the most important change made was to the Municipal Infrastructure Grants. The current structure inhibited long term planning for cities. The content also dealt with the Expanded Public Works Programme incentive, the Gautrain Loan, easier conversion of Schedule 7 to 6 grants during the course of the financial year in order to prevent under-spending on the allocation. The duties relating to Category C Municipal Budgets were aimed at ensuring proper flow of funds between Category C and B municipalities for providing basic services and infrastructure. In cross border matters, the re-demarcation of Merafong occurred late in the budget process, therefore Merafong was still part of the North West at the implementation of the Budget. The various appendices were explained. The Fiscal Framework was contained in Part 1 of Annexure W1.

On the Division of Revenue, Mr Brown noted the changes to the amounts over the baselines for the period 2009/10 to 2011/12. It also contained the division of revenue between the spheres of government and Schedule 1 of the Division of Revenue Bill.

The response of national government to the Financial and Fiscal Commission (FFC) proposals was contained in Part 2 of Annexure W1. The response should be viewed against the review of local government and provincial fiscal frameworks. The National Treasury Budget Council had considered the FFC’s provincial proposals and the Budget Forum had considered its local government proposals. All spheres deliberated on the proposals and responded at an Extended Cabinet. The FFC recommendations consisted of 3 parts: provincial, local government and cross-cutting.

Five new conditional grants have been introduced: the Expanded Public Works Programme Incentive grant for provinces, the Public Transport Operations grant, the Technical Secondary Schools Recapitilisation grant (2010/11). There were two disaster related grants for only 2009/10: the Health Disaster Response (Cholera) grant and Housing Disaster Relief grant. As can be seen, these were mostly once-off assistance grants.

Ms Wendy Fanoe, Director: Local Government and Finance Policy, National Treasury, reported that the local government equitable share (LGES) formula was reviewed to improve funding of poorly resourced municipalities. There were a number of anomalies in the revenue raising formula. Further possible reforms (for 2010 Budget) include further improvements to the formulae and updating the formulae with 2007 Community Survey results as the somewhat outdated 2001 Census results were currently used. All municipalities were to receive a minimum location.They had made provision for three new metros after the elections and future work would be on redirecting funds to the municipalities as this was where the real constraints to development were.

Mr Bongani Khumalo, Deputy Chairman: Financial and Fiscal Commission, agreed that the National Treasury had covered many of the issues raised by the FFC in their submission on the Division of Revenue Bill. Their key strategic issues were: the complexity of the Division of Revenue Bill and the size of document. The Division of Revenue Act (DORA) was becoming too complex, voluminous and too broad. The FFC called for a comprehensive review of the DORA
The Conditional Grant proliferation was a matter of concern. Certain transfers need not be called a conditional grant. National Treasury needed to think of new, innovative ways of funding disasters. All new grants should be subjected to rigorous analysis before introduction. One area government still needed to be quite clear on was learner transport. This issue had still not been resolved.

Discussion
Mr Mnguni pointed out that both the FFC and the National Treasury had referred to the Minister not following the right procedure in the Gautrain loan application. He queried the reasons for this and the possible risks posed.

Mr Brown responded that the National Treasury had received the documents needed to make that assessment, after which, they could then provided a further response.

Mr Khumalo responded that this issue was first raised in 2007. This related directly to the details of the loan and the general allocations to the Gautrain project. This was of concern to the FFC and it was time they had the specifics.

Mr Singh commented that due to the tight time constraints on the Committee to conclude their business ahead of elections, it was difficult to properly interrogate the content of the Division of Revenue Bill. He felt that it was important that the Committee recommend that the new Committee of the Fourth Parliament have a two-day workshop with National Treasury and the FFC on the mechanisms of DORA.

Ms Mabe added that this should include the other finance committees, as the DORA was the responsibility of both Houses.

The Deputy Minister responded that the timeframes of the Division of Revenue Bill were properly accommodated in the Money Bills Amendment Procedure and Related Matters Bill which was due to be processed, passed and implemented in the Fourth Parliament.

Mr E Sogoni (ANC) noted concern about the delay in finalising grants due to the planned restructuring in the Department of Provincial and Local Government.

Mr Sogoni referred to the re-demarcation of Merafong. He asked how long this process would take.

Mr Brown responded that the re-demarcation process would be complete by 1 April 2010.

Mr Sogoni asked if the FFC had any comments about extending the National Schools Nutrition Programme (NSNP) to high schools.

Mr Brown pointed out that the Division of Revenue Bill presentation indicated that the NSNP would be progressively extended to secondary school.

Mr Sogoni referred to slide 22 of the Division of Revenue Bill presentation and asked why the equitable share weighting of Kwazulu-Natal was comparatively higher than the other more population-dense provinces.

Mr Brown responded that the equitable share weighting formula only had a 13% population density component. It had a 51% component dependent on the number of enrolled learners. While Kwazulu-Natal might be less population dense, it did have a higher number of enrolled learners than other provinces, leading to the difference.

Ms N Mokoto (ANC) asked how long it took to process a grant.

Ms D Robinson (DA) agreed with the comments on the time constraints. She noted that the FFC had submitted that the discretion of provinces was being eroded by conditional grants. She was of the opinion that conditional grants were useful to force spending until they can get
provinces and local government to use their allocations efficiently.

The Deputy Minister noted that the question showed that there was still not agreement on whether allocations through the equitable share of through conditional grants, were best. He stated that the National Treasury and stakeholders would continue to engage on the matter until they were able to find each other.

Ms A Mchunu (IFP) asked if the comments on re-demarcation also covered ward boundaries. She asked this as the definition of these boundaries had budget allocation implications.

Ms Mchunu referred to learners who faced physical challenges in reaching schools, such as having to walk through mountainous areas to school. Noting the FFC’s comment on learner transport, she asked how this could be addressed.

Mr Johnson referred to a clinic in his constituency that had closed due to insufficient funds. This was a matter raised by his constituents and he queried the possible reasons.

The Deputy Minister responded that they did not have the information for specific constituencies at their disposal. Members were welcome to submit such questions in writing and the National Treasury would be happy to assist members on a case by case basis.

Mr Johnson referred to the replacement of RSC levies with the new fuel levy. He asked if everyone who filled up in a metro was going to be levied.

The Deputy Minister replied that the fuel levy was not levied according to a specific area, rather it was a levy on every motorist. The funds generated would be ring-fenced and then allocated to particular municipalities.

Ms Mabe determined that the National Treasury should look into the possibility of fuel levies discriminating according to areas.

Voting on Division of Revenue Bill|
The Committee resolved to adopt the Bill without amendments.

The meeting was adjourned.


 

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