SUBMISSION TO PARLIAMENT on the DIVISION OF REVENUE BILL for 2002 / 20003 ---------------------------- FINANCIAL AND FISCAL COMMISSION – Budget Analysis Unit For Portfolio Committee 25 February 2002

PART I FFC Submission: Division of Revenue Bill The FFC notes that Government supports and concurs with most of its proposals and recommendations for 2002 FFC to be engaged with a review of the equitable share formula

Issues from government’s response and work in progress National sphere Constitutionally mandated basic services and related cost issues for all three spheres of government Contingency reserve Provincial sphere Provincial tax powers and provincial tax regulation process bill Capital grant scheme Local sphere Basic municipal services Local government equitable share formula issues Municipal borrowing and municipal infrastructure grants

INTRODUCTION Part II is a comparative analysis of recent past trends (1997 / 98 through to 2000 / 01) with projections for 2001 / 02, 2002 / 03 and the 2002 MTEF. Part II consists of analyses of the: Funding of the National Budget and the vertical division of revenue; Funding of Provincial Budgets and expenditure on social and infrastructure services Funding of Municipal Budgets Part III considers trends in the provision of Constitutionally Mandated Basic [Social] Services by provincial governments and reviews some issues relating to socio-economic disparities between provinces. 4

INTRODUCTION cont. Data sources include IFR 2001, MTBPS 2002, Budget Review 2002, SARB QBs. Data analyses made in terms of the following indicators: Nominal and Real growth rates; Relative proportions of GDP and Government Expenditure. Narrative analyses made in terms of Section 214 (2) a-j of the Constitution and the progressive realization thereof. 5

(1) ANALYSIS OF THE NATIONAL BUDGET 1.1 Macro-Economic Context Over the course of the forthcoming 2002 / 03 financial year, GDP is projected to grow by 9.37%. GDP inflation projections have been adjusted upwards to 6.1%. The inflation target is delayed to 2004 / 05. Hence real growth estimates adjusted downwards by 0.5% to 2.7%. Average, real economic growth between 1997 / 98 to 2000 / 01, has averaged 2.4%. 6

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(1) ANALYSIS OF THE NATIONAL BUDGET – cont. 1 (1) ANALYSIS OF THE NATIONAL BUDGET – cont. 1.2 Financing the National Budget Since 2001 / 02, nationally budgeted expenditure has risen faster than GDP. The proportion of government spending to GDP is expected to rise slightly to 26.6% in 2002 / 03. Actual tax revenue collected exceeded expectations. Projected Tax:GDP ratio for 2002 / 03 adjusted upwards to 24.5%. Significant deficit reduction to 1.43% of GDP in 2001 / 02. Further tax efficiency gains not planned for. Hence, projected deficit rises for 2002 / 03 to 2.1% 8

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(1) ANALYSIS OF THE NATIONAL BUDGET – cont. 1 (1) ANALYSIS OF THE NATIONAL BUDGET – cont. 1.2 Financing the National Budget cont. Due to decline of national deficit, debt-servicing costs anticipated to decline further during 2002 / 03. Countervailing trends include counter-inflationary interest rate increases and the impact of currency depreciation on foreign loan repayments. Contingency reserve provision at 1.15% of nationally budgeted expenditure higher than originally anticipated. Reduction of debt-servicing costs enables revenue available for distribution to the 3 spheres to grow faster than nationally budgeted expenditure. This enables progressive realization of CMBS. 10

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(1) ANALYSIS of the NATIONAL BUDGET – cont. 1 (1) ANALYSIS of the NATIONAL BUDGET – cont. 1.3 The Vertical Division of Revenue Real growth in spending of 3.5% by all 3 spheres of government anticipated. A distributional shift from provincial to national, and especially local government, is planned for 2002 / 03. This may reflect a functional shift towards infrastructure spending which counters the “crowding out” of capital expenditure. 12

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(2) ANALYSIS of PROVINCIAL BUDGETS 2.1 Financing Provincial Budgets New Fiscal Framework indicates a preference for Equitable Share over conditional grant allocations. This may reflect greater provincial capacity to implement national policy initiatives and assume budgetary autonomy. Conditional grant allocations used to initiate new policy initiatives, protect capital spending against displacement and enable institutional restructuring and capacity building. Provinces anticipated to shift back into deficit in 2002 / 03. This may reflect further spending pressures and the declining importance of own revenue. 14

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(2) ANALYSIS of PROVINCIAL BUDGETS – cont. 2 (2) ANALYSIS of PROVINCIAL BUDGETS – cont. 2.2 Expenditure Trends & Pressures Expenditure on the Health and Education functions (projected to grow at 0.4 and 0.9% respectively) are most at risk of real declines in value. The continuing shift of provincial resources towards the Welfare function has been recognized in adjustments to the PES formula. This is largely in response to increased take-up of the child support, foster care and care-dependency grants. Resource shifts towards the Housing and Transport functions are planned to counteract recent past trends. 16

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(2) ANALYSIS OF PROVINCIAL BUDGETS – cont. 2 (2) ANALYSIS OF PROVINCIAL BUDGETS – cont. 2.2 Expenditure Trends & Pressures cont. Significant real growth of conditional grant allocations aimed at starting-up new policy initiatives (e.g. HIV-AIDs, ECDP, provincial infrastructure) can be expected. Allocations to the Health component of the HIV-AIDs grant have been further augmented. However, a real decline in the nutrition grant is projected. This may disable progressive realization of a socio-economic right. Conditional grants geared towards the provision of socio-economic rights increase their share of provincial spending to 4.54%. 18

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(3) ANALYSIS OF MUNICIPAL BUDGETS 3.1 Financing Municipal Budgets Over the recent past, an average of 8% of municipal expenditure was derived from inter-governmental grants, 5% of which takes the form of Equitable Share allocations. Conditional grants to municipalities are geared towards (a) infrastructure and (b) institutional restructuring and capacity building. Approximately 90% of municipal budgeted expenditure is recorded as derived from own revenue sources. However, this masks important differences between categories and types of municipality. Municipal deficits have been rising since 1998 / 99. 20

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(3) ANALYSIS OF MUNICIPAL BUDGETS 3.1 Financing Municipal Budgets cont. The national budget process only plans for the transfer of nationally-raised revenue to municipalities. Own revenue and expenditure projections follow a separate budgetary process. Sharp real increases of approximately 16% and 33% for equitable share and conditional grant allocations are planned for the 2002 / 03 Budget. 22

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Part III CMBS: AIMS AND OBJECTIVES Assess the extent to which provinces have progressed in addressing their Constitutionally Mandated Basic Services (CMBS CMBS: Basic Education, Social Security, Primary Health Care TRENDS IN PROVINCIAL SPENDING 95% of PES is spent on Social Services 77% of Social Services in provinces is spent on CMBS. Social Services have increased their share of spending Education (41%), Health(19%) and Welfare(18%) Per capita CMBS spending on beneficiaries averages about R 2 323.

BASIC EDUCATION Spending on education between 1998/99 to 2000/01 has increased by 6 to 8%. There is no relation between spending on basic education and enrolment in province. SOCIAL SECURITY Provincial expenditure on SS has increased since 1998/99 SS coverage/enrolment has also increased Child support grant grew from 3% to 42% of the eligible, Old age pensions 85 to 89%,Disability 55 to 57%, Foster Care 25 to 38% and Care Dependency move from 20 to 37%.