Question NW266 to the Minister of Finance
22 March 2024 - NW266
Singh, Mr N to ask the Minister of Finance
(1)Whether, considering that during his reply to the debate on the State of the Nation Address, the President of the Republic, Mr M C Ramaphosa, indicated that unspent funds by municipalities is something that should not be tolerated, and noting that the financial year-end of departments and municipalities do not coincide, he has found that there is a level of fiscal dumping by national departments onto local governments which gives them only three months to spend their money; if not, what is the position in this regard; if so, (2) whether he will consider motivating the financial year-end of all spheres of government to be the same; if not, what is the position in this regard; if so, what are the relevant details?
Reply:
1. National Treasury (NT) during the many forums, intergovernmental forums and consultation processes always caution organs of state against fiscal dumping. Fiscal dumping is perceived when sector departments (transferring officers), that administrate and monitor municipal performance, transfer huge amounts of money during the last month of the national financial year (March). However, it should be noted that in terms of the division of nationally raised revenue that appropriates money through the Division of Revenue Act (DoRA), NT is of the view that the national departments are unable to ‘dump’ funding to municipalities because all transfers to municipalities are made in terms of the approved payment schedule and follow a project plan.
Municipalities also implement in-year budget adjustments changes in the last month of the national financial year, between January and March annually which is another process that may also appear to imply fiscal dumping of the funds to the local government sphere.
Additionally, NT conducts another process in terms of section 18 of the DoRA which is a mid-year process of assessing progress of municipalities in terms of their DoRA allocated funds. This process is undertaken during the middle of the municipal financial year, 31 December annually. The implication of this process is that should funds against slow moving municipalities be stopped in terms of section 18 of DoRA and be reallocated to fast moving municipalities in terms of section 19 of DoRA, the recipient municipalities would receive additional funding during the last month (March) of the national financial year, allowing a municipality three months to spend the additional amounts.
2. NT is not considering motivating the financial year-end of all spheres of government to be at the same time.
The national / provincial budget process involves managing the following simultaneously: the Medium-Term Strategic Framework (MTSF), the medium-term fiscal framework, the division of revenue process, and the budget processes of national government and the nine provincial governments.
The separation of national / provincial financial years from the local government financial years allows for a proper sequencing of the national / provincial and the local government processes. The MTSF, the fiscal framework, the division of revenue and the national and provincial conditional transfers to local government are all in place and certain by mid-February which is when municipalities begin compiling their budgets. This means that municipalities can compile their budgets with accurate awareness of what resources they will be receiving from the equitable share and in the form of national and provincial conditional transfers.
From the municipal perspective, the alignment of the municipal financial year with the national and provincial financial year will:
a) place enormous pressure on municipalities already strained financial management capacity.
b) impact negatively on the quality of municipal budgets, as they will not have access to the final equitable share and conditional transfer numbers until right at the end of the process.
c) undermine the community consultation and participation processes around municipal budgets, as they would have to happen during the same period while the national and provincial budgets are being compiled and changed; and
d) undermine the scope for effective coordination of national, provincial and local government planning, as the municipalities would be required to develop and revise their integrated development plans, at the same time the national and provincial departments are still doing their own planning.
The net result would be to condense coordination of national, provincial and local government planning which would inevitably result in gaps and weaker spending outcomes, particularly in relation to conditional grants and will generally impact negatively on the move towards improved planning and execution.
A further key factor to consider is the ability of the Office of the Auditor-General to audit all national departments and their entities, all provincial departments and their entities, municipalities and their entities, within two months after the end of the financial year. The current staggering of financial years means the work is spread over a four-month period and there are sufficient auditors to meet the requirements.