ATC231207: Report of the Select Committee on Appropriations on the Proposed Division of Revenue and Conditional Grant Allocations to Provinces and Municipalities as Contained in the 2023 Medium Term Budget Policy Statement, Dated 07 December 2023

NCOP Appropriations

Report of the Select Committee on Appropriations on the Proposed Division of Revenue and Conditional Grant Allocations to Provinces and Municipalities as Contained in the 2023 Medium Term Budget Policy Statement, Dated 07 December 2023 

 

Having considered the 2023 Medium Term Budget Policy Statement, and in compliance with section 6(10) of the Money Bills and Related Matters Act, No.  9 of 2009 (as amended), the Select Committee on Appropriations reports as follows:

1. Introduction

The Minister of Finance (the Minister) tabled the Medium Term Budget Policy Statement (MTBPS) on 01 November 2023, outlining the budget priorities of government for the medium term estimates. According to section 6(10) of the Money Bills and Related Matters Act No 9 of 2009 (as amended), committees on appropriations must, within 30 days after the tabling of the MTBPS or as soon as reasonably possible thereafter, report on the proposed division of revenue and conditional grant allocations to provincial and local government as contained in the MTBPS. This report must contain -

• The spending priorities of national government for the next three years;
• The proposed division of revenue between the different spheres of government and between arms of government within a sphere for the next three years; and
• The proposed substantial adjustments to conditional grants to provinces and local government, if any.

 

Upon tabling of the 2023 MTBPS, the Committee considered the proposed division of revenue and conditional grant allocations to provinces and municipalities contained therein; and will conduct further consultations after the tabling of the 2024 Division of Revenue Bill by the Minister of Finance.

2. Revised medium term expenditure priorities

The proposed division of revenue shows that over the next three years, government is projected to spend R7.41 trillion. Although expenditure growth has slowed in recent years, the bulk of spending remains focused on the social wage, primarily for healthcare, education, and social protection. Government submitted that the value received for each Rand spent varied across programmes and there was wide scope for improved efficiency. In addition, government acknowledged that debt-service costs, estimated at R1.3 trillion, exceeded all individual consolidated spending sectors by function, reflecting the increasing extent to which these payments crowded out spending on basic services and other policy priorities. To maximise the value of spending, government said there was a need to contain costs, exercise prudent financial management and eliminate wasteful treatment of public funds and resources.

Government further reported that the Department of Public Service and Administration, the National Treasury, the Department of Planning, Monitoring and Evaluation and the Presidency would, over the medium term, review and reconfigure executive functions to address duplication of functions, close ineffective programmes and consolidate departments and institutions. These measures would be proposed based on spending reviews conducted in the 2020/21 and 2021/22 financial years, which suggested a general need to ensure that programmes were designed to be affordable and avoid overlapping policy mandates. Overall, the changes were expected to lead to reduced executive responsibilities, higher fiscal credibility and savings in non-interest expenditure.

The consolidated government spending priorities by function group is projected to increase from R2.3 trillion in the 2023/24 to R2.6 trillion in the 2026/27 financial years, growing at an annual average rate of 4.6 percent. The economic development function accounts for the largest share of this growth. Debt-service costs grow at the fastest rate, averaging 8.7 percent per year. Spending on payments for capital assets is the fastest-growing item by economic classification, mainly due to buildings and other capital assets, which grow by an average of 13.9 percent over the three-year period.

3. The proposed division of revenue

The proposed division of revenue demonstrates that provinces are responsible for basic education and health services, roads, housing, social development, and agriculture. On the other hand, municipalities provide basic services such as water, sanitation, electricity reticulation, roads, and community services. Provinces and municipalities face both spending pressures from rising costs of basic and social services and revenue pressures from lower economic growth and high borrowing costs. These pressures imply the need for greater spending efficiency and strong financial management. 

Table 1 below shows that, over the next three years, government proposes to allocate on average 48 percent of available non-interest expenditure to national departments, 42.1 percent to provinces and 9.9 percent to local government.

Table: 1: Proposed division of revenue framework

Proposed Division of Revenue	2024 Medium Term Estimates
	2024/25	2025/26	2026/27
	R billion	R billion	R billion
National allocations	840.9	846.4	884.2
Provinces	720.5	752.4	784.6
Equitable share	589.5	616.4	644.3
Conditional grants	131.0	136.1	140.3
Local governments	169.2	177.3	182.9
Equitable share	101.2	106.1	110.7
General fuel levy sharing with metropolitan municipalities	14.5	15.2	15.9
Conditional grants	53.5	56.0	56.4
Provisional allocations not assigned to votes	2.3	38.0	47.1
Non-interest allocations	1 732.8	1 814.1	1 898.8
Debt-service costs	385.9	425.5	455.9
Contingency reserve	5.0	7.6	14.5
Main budget expenditure	2 123.7	2 247.2	2 369.2
Percentage shares
National departments	48.6%	47.7%	47.8%
Provinces	41.6%	42.4%	42.4%
Local government	9.8%	10.0%	9.9%

 

 

4. The provincial equitable share

The Provincial Equitable Share (PES), the main revenue source for provinces, is made up of six components, namely education, health, basic, institutional, poverty and economic activity. To ensure fair funding allocations to each province, the PES formula is updated annually to reflect demographic changes and the demand for services based on need.

The National Treasury indicated that the changes introduced in 2022/23, because of the review of the health component, would be fully phased in at the end of the 2024/25 financial year. The PES task team, made up of representatives from the National Treasury and provincial treasuries, is reviewing the education component in partnership with relevant departments and agencies.

To cover implementation costs associated with the 2023 public service wage agreement, the education and health sectors will receive additional allocations amounting to R68.2 billion during the 2024 MTEF period. These allocations will be disbursed to provinces using the PES formula and conditional grants.

Table 2: Proposed provincial equitable share allocations

Province	2024/25 R million	2025/26 R million	2026/27 R million
Eastern Cape	76 680	80 125	82 768
Free State	32 487	33 972	35 578
Gauteng	125 652	131 405	137 629
KwaZulu-Natal	118 932	124 127	129 745
Limpopo	68 354	71 637	75 192
Mpumalanga	48 596	50 825	53 237
Northern cape	15 849	16 608	17 429
North West	42 034	44 089	46 314
Western Cape	60 937	63 584	66 447
Total	589 520	616 371	644 338

 

5. Major in-year adjustments

In 2023/24, direct conditional grants to municipalities are reduced by R3.4 billion and provincial direct conditional grants by R6.2 billion. To create a resource pool to respond to future disasters, R372 million has been added to the Municipal Disaster Response Grant, while R1.2 billion has been added to the Municipal Disaster Recovery Grant for the repair and rehabilitation of infrastructure damaged by flooding in February and March 2023. An amount of R1.4 billion had been included in the Local Government Equitable Share (LGES) to fund electricity-related pressures that have not materialised, and these funds revert back to the National Revenue Fund (NRF). The National Treasury is reviewing the conditional grant system, so no major changes are proposed to conditional grants for the 2024 MTEF period. To improve water management and wastewater systems, changes will be made to the Urban Settlements Development Grant for metropolitan municipalities, the Integrated Urban Development Grant for intermediate cities and the Municipal Infrastructure Grant (MIG) for other local and district municipalities. The conditions attached to conditional grants will change to require alignment with the Green Drop, Blue Drop and No Drop assessment.   

6. Progress with review of local government fiscal framework

The 2023 Budget noted that the National Treasury was developing compulsory national norms and standards to regulate municipal surcharges on electricity and identify alternative sources of revenue to replace these surcharges and a draft report was under review. The next step will be to consult with stakeholders on the recommendations.

Government indicated that, over the medium term, the focus would be on improving the efficiency of spending and targeted revisions to departmental baselines’ direct resources to key functions. Lastly, work continues on a range of initiatives aimed at improving the management of municipalities.   

7. Observations and Findings

While considering and deliberating on the proposed division of revenue and conditional grant allocations to provinces and municipalities as contained in the 2023 MTBPS, the Select Committee on Appropriations observed the following:

1. The Committee noted that government proposes to allocate 48 percent to national departments, 42.1 percent to provinces and 9.9 percent to local government for the 2024/25 MTEF. Of note is that a total amount of R7.41 trillion is proposed for the division of revenue, with most of the spending earmarked for the social wage for healthcare, education, and social protection.
2. The Committee welcomed the fact that government was planning to review and reconfigure executive functions to address duplications and inefficiencies, through the Department of Public Service and Administration, the National Treasury, the Department of Planning, Monitoring and Evaluation and the Presidency.
3. The Committee noted that the Provincial Equitable Share (PES) task team, which is made up of relevant representatives from the National Treasury and provincial treasuries, is reviewing the education component in partnership with relevant departments and agencies.
4. The Committee noted that, to cover the implementation costs associated with the 2023/24 public service wage agreement, the Education and Health sectors will receive an additional R68.2 billion for the 2024/25 MTEF period.
5. The Committee noted the proposed changes, which will require alignment with the Green Drop, Blue Drop and No Drop assessment, to the Urban Settlements Development Grant for metropolitan municipalities, the Integrated Urban Development Grant, and the Municipal Infrastructure Grant (MIG) to improve water management and wastewater systems.
6. The Committee noted that the National Treasury is developing compulsory national norms and standards to regulate municipal surcharges on electricity and to identify alternative sources of revenue to replace these surcharges.
7. The Committee noted the disproportionately high reductions in allocations to local government, despite this Committee’s previous demands for the ratio of allocation to local government to be increased, and National Treasury’s undertakings in this regard. The Committee also noted the many inputs from local government, the FFC, the PBO and other stakeholders calling for such increase.  

 

8. Recommendations

After considering and deliberating on the proposed division of revenue and conditional grant allocations to provinces and municipalities as contained in the 2023 MTBPS and submissions by stakeholders, the Select Committee on Appropriations recommends as follows:

1. The National Treasury, together with the Department of Public Service and Administration, the Department of Planning, Monitoring and Evaluation and the Presidency should, within 60 days of the adoption of this Report by the House, ensure that clear plans are developed to expedite the review and reconfiguration of the executive functions to address duplications and inefficiencies.
2. The National Treasury and provincial treasuries should, within 90 days of the adoption of this Report by the Housed, take steps to ensure that the Provincial Equitable Share (PES) task team expedite the review of the education component, ensuring that proper consultation with relevant stakeholders is conducted.
3. The National Treasury, together with provincial treasuries and provincial departments should, within 60 days of the adoption of this Report by the House, take steps to ensure that the wage agreement is effectively implemented by provincial departments of education and health, and funds are utilised for their intended purpose.
4. The National Treasury should, within 60 days of the adoption of this Report by the House, take steps to fast-track the process of developing compulsory national norms and standards to regulate municipal surcharges on electricity and to identify alternative sources of revenue.   
5. The National Treasury, together with the Department of Water and Sanitation should, within 60 days of the adoption of this Report by the House, take steps to finalise the proposed conditions to ensure that the Urban Settlements Development Grant, the Integrated Urban Development Grant, and the Municipal Infrastructure Grant (MIG) are aligned with the Green Drop, Blue Drop and No Drop assessment to improve water management and wastewater systems.
6. The Committee once again recommends that National Treasury review the funding model of local government and calls for more meaningful commitments to increase the proportion of the nationally raised revenue allocated to local government. The Committee further calls upon all municipalities to use their funds more effectively and productively to ensure value for money.

 

The Democratic Alliance (DA), the Economic Freedom Fighters (EFF) and the Freedom Front Plus (FF+) reserved their positions on the Report.

 

 Report to be considered.