2001 MTBPS2001 MTBPSDivision of RevenueDivision of Revenue

6 November 2001Presentation to Budget Committee

MTBPS covers...• Budget reform agenda• Macroeconomic developments• Fiscal framework• Tax policy• Medium term expenditure framework• Intergovernmental finances

2002 Budget theme

Reducing poverty, inequality and vulnerability

Fiscal framework• Fiscal policy shift in 2001 will continue

– Real growth in spending of 3,7% a year– Strong growth in spending on local government

services, social services, criminal justice and infrastructure

– Continuing reduction in tax rates for low and middle-income groups

– Declining debt and debt service costs as a percentage of GDP

– Increase in deficit to 2,6% next year from 2,3% this year

Fiscal framework 2001/02 2002/03 2003/04 2004/05

R billion 2001

Budget 2001

Mtbps 2001

Budget 2001

Mtbps 2001

Budget 2001

Mtbps 2001

Mtbps

Budget revenue 233,4 238,2 252,9 254,7 279,1 276,8 299,3

% of GDP 23,6% 24,5% 23,6% 24,1% 23,6% 24,1% 24,1%

Expenditure 258,3 261,0 277,3 282,6 297,5 304,8 327,3

% of GDP 26,2% 26,8% 25,9% 26,7% 25,8% 26,5% 26,3%

Deficit 24,9 22,9 24,5 27,9 24,4 28,0 28,0

% of GDP 2,5% 2,3% 2,3% 2,6% 2,1% 2,4% 2,2%

Non-interest spending 210,2 213,0 227,7 234,6 246,5 254,3 274,2

% real growth 5,7% 7,1% 3,5% 4.6% 3,5% 3,4% 3,2%

Fiscal framework• Total expenditure of R282.6 bn, R304.8 bn

and R327.3 bn

• Top-slice first deductions– Debt servicing of R48 bn, R50.6 bn and R53.1

bn– Contingency reserve of R2bn, R4bn and R8bn

• Total available R234.6 bn, R254.3 bn and R274.2 bn compared to R213 bn in 2000/01

• 10.2% increase in 2000/02 over 2001/02

Vertical Division• Division between the three spheres

• Recommendations of FFC

• Process of consultation with provinces and organised local government

• Section 214(2) (a) to (j) of Constitution– 10 criteria to be taken into account– fiscal capacity and expenditure efficiency– development needs and economic disparities

Powers, Functions and Expenditure Needs

• Provinces raise 4% of budget • Provide tax-funded services (education, health, welfare)

that do not raise significant revenue

• Local govt raises over 90% of revenue • Two third of budget: user-fee services (elec, water)• One third of budget: public goods streets, street lights,

refuse removal, emergency services

• National govt• Over half its budget is for protection sector• Economic (Roads, rail), Administrative (SARS)• Small budgets for social services, Higher education

• Different spheres, diff expenditure needs

Principles of Intergovt Fiscal Relations

• Accountability and autonomy

• Good governance– Division of responsibilities between political and

administrative office-bearers

• Redistribution

• Broadened access to services

• Revenue-sharing

• Vertical division

• Each govt responsible over own budget– No bail-out to reduce moral hazard

New allocations • Three year baseline allocations• Additional allocations in revised framework

– 2002/03 R8,9 billion

– 2003/04 R11,8 billion

– 2004/05 R13,3 billion

• In line with priorities, strong growth for:– Municipal services and infrastructure– Social security, HIV/Aids action plan and early childhood

education– Capacity in criminal justice sector– Administrative departments that play a role in delivering social

services– Step up in infrastructure projects

Changes from 2001 Budget

R billion 2001/02 2002/03 2003/04

National 2,9 3,9 4,5

Provincial 1,5 4,0 5,4

Local 0,3 1,0 1,8

Total 4,8 8,9 11,8

Total allocationsR billion 2001/02 2002/03 2003/04 2004/05

National 87,1 93,4 99,3 105,5

Provincial 118,9 130,8 140,9 150,1

Local 7,0 8,4 10,0 10,6

Total 213,0 232,6 250,3 266,2

Share of spending

(excl. contingency reserve)

National 40,9% 40,2% 39,7% 39,6%

Provincial 55,8% 56,2% 56,3% 56,4%

Local 3,3% 3,6% 4,0% 4,0%

Total 100,0% 100,0% 100,0% 100,0%

Division of revenue• Shift in resources to local and prov sphere

– Local govt. funding grows faster than other spheres– Prov share increases to 56.4%, LG to 4%

• Provincial share takes account of:– Increased social security payments (mainly CSG)– Funding of HIV/Aids action plan

• Local share takes account of:– Free municipal services– Expansion of municipal infrastructure provision– Fiscal stress due to new municipal boundaries

Which budget rises fastest?• Depends on new priorities• Is provincial transfer rising fast enough?

– Social grant pressures (take-up and size of grant)– HIV/AIDS– Health– Housing

• Is local government transfer rising fast enough?– Free Basic Services

• Is national government rising fast enough?– Operating subsidies to the Post Office and UIF– Upward adjustment to costs in foreign affairs and on strategic

defence packages due to currency depreciation

2001 FFC Recommendations • 11 provincial proposals

• 13 local govt proposals

• Broad agreement with approach

• Differ on costing of services– Difficulties in measuring, esp in LG– 2001 IGFR indicates much to be done still

• Agree on provincial own revenue, but not on surcharge on PIT

• Agree on capital grant, but not on formula

• Further work on contingency reserve

2001 FFC Recommendations • LG FFC proposals new and to be commended

• Fiscal framework– Role of Equitable Share– Role of Borrowing– Issue of division of functions

• Equitable share– Need more info and stabilisation in new munis– Premature to amend structure of formula– Agree on introducing tax capacity measure in MT

• Tariffs, RSC levy, borrowing, district health

Intergovernmental finances• Provincial equitable share changed to reflect…

– Increased importance of social security payments

– Data changes including school enrolment figures

• Provincial conditional grants– New structure for hospital grants

– Increase in HIV/Aids grant

– Housing programme increased

• Local government– Equitable share formula takes account of free basic services,

fiscal capacity and councilor salaries

– Infrastructure grants grow rapidly

– Capacity building grants being consolidated

Equitable Share and Conditional grant allocations

• Provincial equitable share increases to R116.1 bn, R124.9 bn and R133 bn

• Local govt equitable share (and operating grants) increases to R4.2 bn, R5.2 bn and R5.7 bn

• Provincial conditional grants R14.6 bn, R16 bn and R17 bn– Health grants total R6.2 bn, R6.6 bn and R7 bn

– Infrastructure, housing, supplementary, education

• LG cond. grants R4.1 bn, R4.8 bn and R4.9 bn

Horizontal Division of Eq share• Provincial equitable share

– Formula indicative– Education, health, welfare, economic, basic,

institutional and backlog components– Adjustment of formula: Increase in welfare by one,

decline in economic by one– Adjusting of education data

• Local govt equitable share– Institutional I grant and basic services S grant– Adjust institutional I grant, for fiscally-weak munis

(including category C)

Provincial equitable shares• Equitable share is 89% of transfers to provinces

• Total equitable share is R105,3 billion in 2001/02

– Rises to R116,1 billion in 2002/03 and to R133 billion in

2004/05

• Annual average growth of 8% over MTEF (average

annual real growth of 3% over MTEF)

• Strong growth to

– Address provincial priorities in education, health and social

development (CSG, ECD, HIV/Aids)

– Provide for stronger spending on infrastructure development

Provincial equitable shares formula• Formula used for horizontal division

– Based on relative needs of provinces– Based on 1996 FFC recommendations

• Changes for 2002 Budget– Weighting for welfare component increased by

1% taking into account greater spending in this sector

– Economic component decreased by 1%– Data updated for latest education data (average

enrolment for last three years)

Provincial equitable shares 2002/03 2003/04 2004/05

R million

2001/02

Budget1 Medium term estimates

Eastern Cape 18,171 19,932 21,245 22,644

Free State 7,103 7,774 8,298 8,844

Gauteng 16,028 17,720 19,183 20,446

KwaZulu-Natal 21,274 23,669 25,674 27,365

Mpumalanga 7,289 8,194 8,961 9,551

Northern Cape 2,560 2,824 3,030 3,229

Northern Province 14,179 15,699 16,970 18,087

North West 8,863 9,716 10,366 11,049

Western Cape 9,870 10,615 11,129 11,862

Total 105,336 116,142 124,856 133,0781. Revised to include amounts allocated in the 2001 Adjustments Budget.

Conditional Grants to Provinces• Enables provinces & local govt. to implementation national

priorities

• Reforms introduced over the past years aim to:– Enhance accountability & transparency

– Better planning and budgeting for grants

• Draft 2002 Division of Revenue Bill to be published early

• Conditional grants increase from R13,6b in 2001/02 to R14,7b in 2002/03 and R17 b in 2004/05

• Major increases in – Housing subsidy grant

– Provincial infrastructure grant

– HIV/Aids grant

• Health administers major grants >40%

Conditional grants• Are there too many?

– Poverty alleviation fund is creating more!

• Fewer and and more effective, with no undue admin burden

• Consolidation and rationalisation of grants• Spending info is poor

– non-transfers and underspending

• LG cond grants rationalised– Infrastructure: CMIP, Water Capital, CPWP, LED

– Capacity-building and restructuring: Fin mgt, LG support, Mun Systems Improvement, other

Health Grants• Review of tertiary services and training grants

– Need to improve equity and access to tertiary services

– Central hospitals, training and redistribution of specialised services phased into new grants

• National tertiary services grant will fund 27 hospitals in all 9 provinces as opposed to 10 hospitals in 4 provinces

• Health professional training and development grant will aim to increase number of post-graduates and specialists working in poorer provinces

– This change will be phased in over 5 years

Health Grants2001/02 2002/03 2003/04 2004/05

R million Medium term estimates

Health

Central hospitals 3 271

Training and research 1 234

Redistribution of specialised services 182

National tertiary services 1 3 666 3 892 4 151

Health professional training and development 2 1 279 1 299 1 393

Hospital rehabilitation 500 520 543 576

Nkosi Albert Luthuli academic hospital 104 - - -

Pretorial Academic 50 70 90 -

Integrated Nutrition Programme 582 582 582 617

HIV/AIDS 34 132 240 353

Sub-Total Health 5 957 6 251 6 649 7 091

Other provincial grants2001/02 2002/03 2003/04 2004/05

R million Medium term estimates

National Treasury

Supplementary allocation 2 248 2 152 2 158 2 166

Provincial infrastructure 800 1 550 2 314 2 853

Flood infrastructure rehabilitation 600 400 200 -

Section 100 Grant 300

Sub-total Treasury 3 948 4 102 4 672 5 019

Education

Financial management and quality enhancement 213 224 234 248

HIV/AIDS 64 142 117 125

ECD 21 52 88 -

Sub-total Education 298 418 440 373

Housing

Housing Fund 3 226 3 740 4 138 4 346

Human Settlement (Urban Development) 100 104 109 116

Sub-total housing 3 326 3 844 4 247 4 462

Welfare and Labour

Financial management 10 11 - -

HIV/AIDS 13 47 64 68

Sub-Total Welfare 23 57 64 68

Total 13 551 14 672 16 072 17 013

Local government• This sphere grows fastest over MTEF period

reflecting a commitment to:– Deliver free basic municipal services– Expand infrastructure network to provide basic

services to more people– Provide adequately for governance costs– Cater for municipalities and district councils with

weak fiscal bases

• New municipal boundaries adding to fiscal stress: – Hence increased transfers from national required

Local government• Equitable share and operating grants

– transition grant (one year more)– water and sanitation operating grant– R293

• Infrastructure grants– Electrification grant

• Restructuring and capacity building

Local government transfers2001 Budget 2001 MTBPS

R millions 2001/02 2002/03 2003/04 2004/05 2001/02 2002/03 2003/04 2004/05

Equitable Share & Related

Equitable share 2 618 3 002 3 551 3 764 2 618 3 429 4 598 5 037 Transition grant 250 200 578 200 0 0 CWSS (operating) 692 644 662 702 692 644 662 702 Subtotal: Equitable share &Related

3 560 3 846 4 213 4 466 3 888 4 273 5 260 5 739

% increase 10,0% 23,1% 9,1%

Restructuring & capacitybuilding1 600 820 850 901 600 818 838 869

Infrastructure22487 2680 3095 2983 2487 3080 3694 3784

Electrification 0 0 0 0 0 210 210 210Total LG Allocation3

6 647 7 346 8 158 8 357 6 975 8 381 10 002 10 602

% increase 20,2% 19,3% 6,0%

Further work• Draft Division of Revenue Bill to be published

later this year– Will include explanatory memorandum– Response to FFC proposals

• Further work on conditional grants

• Provinces informed of all grant allocations this week

• Publishing of three-year allocations by municipality by Budget Day