Financial and Fiscal Commission. Training Workshop

Transcription

1 Financial and Fiscal Commission Training Workshop

2 Background Outline Constitutional Imperative Institutional Framework Economic Rationale Historical Background Current Structure The review Current Thinking 2

3 WHAT IS THE FINANCIAL AND FISCAL COMMISSION? The Financial and Fiscal Commission is established in terms of the 1996 Constitution through the Financial and Fiscal Commission Act. The role, function and powers of the Commission are determined by: The Constitution, The Commission must report to national and provincial legislatures The Financial and Fiscal Commission Act, and The Intergovernmental Fiscal Relations Act.

4 WHAT IS THE COMMISSION S KEY FUNCTION? The Commission must consider: The annual division of revenue between and among the three spheres of government Any other - Conditional or - unconditional allocations to provinces or Local Government.

5 Constitutional Imperatives Section 217 Spheres entitled to Equitable Share of Nationally Raised Revenue Why? Provinces have narrow based taxes but extensive spending responsibilities Vast variations in fiscal capacities Does not prescribe methodology for determining each province share of the provincial pool Only list factors to be considered when making such determination. 214 (2) (a-j) 5

6 Constitutional imperatives 214 (2) (a j) National interest National debt Needs and interest of national Ability to perform functions by provinces Fiscal capacity Developmental needs Economic disparities Provincial obligations Stability, predictability flexibility How does the formula take all these factors into account? 6

7 Institutional framework The ES functions within an IGFR system comprising of: National Treasury Budget Council Budget Forum TCF IGFR forums such as 10 X 10 Financial and Fiscal Commission FFC Interacts with various stakeholders throughout national budget process through its work cycle An Act of Parliament on the Equitable Division of Nationally Raised Revenue may only be enacted after the FFC has been consulted 7

8 Economic Rationale for Grants Dominant sources of revenue for Sub-national governments True for provinces in South Africa Necessary for the Fiscal Health of provinces Facilitate services delivery 8

9 Economic Rationale... Redistribution: Vertical gap Division of Nationally Raised Revenue between National, Provincial and Local no funding Is a consultative political process rule? Why? Revenue Own Revenue Provincial revenue pool: Motor Vehicle Licenses Gambling Taxes Hospital Fees Local: User Charges Property Taxes 3-7% 10-90% National Revenue Pool: Income Tax Corporate Tax VAT Fuel Levy Custom duties 9

10 Economic rationale... Redistribution: Horizontal gap 14.4 GDP-R Corrects for disparities in inter-regional resource mobilisation Fiscal harmonization or equalisation Ensures that individuals with similar circumstances in different provinces get similar benefits or services Intergovernmental spillovers 16.7 EC FS GT KZN LP MP NC NW WC Incentivize provision of service that would otherwise not be 10

11 Categories of grants... Broadly grants are classified into two categories Unconditional Conditional PES is both unconditional and non-matching No matching grants in SA Matching Schedule 5 Non Matching Schedule 4 Block grants 11

12 Methodology for distributing grants Numerous methods of allocating transfers are available Ad hoc based Origin of collection Cost reimbursement Performance based Formula based Used in SA between 1994 and 1998 (Decentralised decisions) Partial or Total 12

13 Principles of good transfer... Autonomy Priorities? Adequacy Equity Take into account both expenditure needs and fiscal capacity Incentives Transfer system Compliance? Simplicity Efficiency Predictability Does the PES formula comply with all these factors? 13

14 FFC Analytical Framework For the PES

15 Background to the PES PES is a transfer/grant mechanism that distributes funds among provinces Underpinned by the constitution Incepted in 1998 Components based and population driven Under-gone several reviews since inception 15

16 Historical Background During its 1996 submission the Financial and Fiscal Commission recommended a formula based approach to the division of revenue. At inception the formula comprised of seven components Each component uses certain variables as a needs indicator Weighted equally across province Education(40) Health (18) Social Security(17) Economic Activity(8) Backlogs(3) Basic(9) and Institutional component(5) 16

17 Historical background Formula has undergone numerous review since inception. In 2001 Backlog component In 2004 social security component Introduction of the poverty component In 2006: Demarcation Annual update of data What about other provincial functions? Can the weights be used as budgets guides? Notes: The 2004 review raised quite a Number of Issues. Demarcation was also problematic. 17

18 Current structure of PES /horizontal division Six components with associated weights Education (51%) Learner enrolment, school age population Health (26%) Proportion of people with/without medical aid Basic (14%) Province share of national population Institutional (5%) Divided equally between provinces Poverty (3%) Proportion of poor (quintile 1 and 2) people in a province Economic output (1%) Contribution of provinces to GDP Institutional 5 Basic 14 Health 26 Poverty 3 Economic Output 1 Education 51 18

19 Determining the PES pool Provincial equitable share pool is firstly dertermined from national revenue National R274 b (49,5) Provinces R238b (43%) Local R42 b (7,6) Divided through the PES formula/ model R38b Conditional R200b PES 19

20 The PES Formula/model Specified as: P a = E i +H i +B i +P i +E i +I i Where P a = provincial allocation The PES model is deterministic E = province s share of education component H = province s share of health component B = province s share of basic component P = province s share of poverty component E = province s share of economic activity component I = province s share of institutional component Outcomes are precisely determined through known relationships 20

21 How it works: Calculating Education component School enrolment 1 Age cohort 5-17 % share school enrolment % share age cohort Snap Survey Census, 2001 (demarcated) 1 1 Weighted average Eastern Cape 2,139,668 2,151, % 16.6% 16.9% Free State 680, , % 5.9% 5.7% Gauteng 1,883,550 1,893, % 14.6% 14.9% KwaZulu-Natal 2,848,878 3,013, % 23.3% 23.1% Limpopo 1,782,954 1,798, % 13.9% 14.1% Mpumalanga 1,087,774 1,074, % 8.3% 8.5% Northern Cape 264, , % 2.2% 2.2% North West 753, , % 6.7% 6.4% Western Cape 969,065 1,094, % 8.5% 8.1% TOTAL 12,410,501 12,933, % 100.0% 100.0% 21

22 Health Component 2006 General household survey (demarcation) Weighting: With medical aid Weighting: Without medical aid Weighted total Weighted share Population with medical aid Population without medical aid 1 4 Eastern Cape 713 6, ,536 25, % Free State 439 2, ,072 10, % Gauteng 2,058 7,550 2,058 30,200 32, % KwaZulu-Natal 1,062 8,855 1,062 35,420 36, % Limpopo 374 5, ,052 20, % Mpumalanga 367 3, ,488 12, % Northern Cape ,884 4, % North West 468 2, ,240 11, % Western Cape 893 3, ,400 16, % TOTAL 6,505 40,823 6, , , % 22

23 Basic component 2007 Community Survey Total Weighted share Eastern Cape % Free State % Gauteng % KwaZulu-Natal % Limpopo % Mpumalanga % Northern Cape % North West % Western Cape % TOTAL % 23

24 Poverty component IES Survey 2000 (Q1+Q2) Basic component value Poverty index 1 Weighted share Eastern Cape 56.4% % Free State 45.7% % Gauteng 21.9% % KwaZulu-Natal 43.0% % Limpopo 56.3% % Mpumalanga 36.9% % Northern Cape 44.0% % North West 37.9% % Western Cape 14.6% % TOTAL % 24

25 Institutional component Weighted share Eastern Cape 11.1% Free State 11.1% Gauteng 11.1% KwaZulu-Natal 11.1% Limpopo 11.1% Mpumalanga 11.1% Northern Cape 11.1% North West 11.1% Western Cape 11.1% TOTAL 100.0% 25

26 Economic activity GDP-R, 2004 (preliminary) (R million) Weighted share Eastern Cape 122, % Free State 84, % Gauteng 519, % KwaZulu-Natal 251, % Limpopo 103, % Mpumalanga 102, % Northern Cape 33, % North West 97, % Western Cape 225, % TOTAL 1,539, % 26

27 Total shares Education Health Social Welfar e Basic Poverty Economic Activ ity Institution al Weighted Aver age 51% 26% 0% 14% 3% 1% 5% 100% Eastern Cape 16.9% 14.9% 13.5% 20.0% 7.9% 11.1% 15.6% Free State 5.7% 6.2% 5.7% 6.9% 5.5% 11.1% 6.1% Gauteng 14.9% 19.0% 21.5% 12.4% 33.7% 11.1% 16.8% KwaZulu-Natal 23.1% 21.5% 21.2% 23.9% 16.3% 11.1% 21.8% Limpopo 14.1% 12.0% 10.8% 16.0% 6.7% 11.1% 13.0% Mpumalanga 8.5% 7.6% 7.5% 7.3% 6.7% 11.1% 8.2% Northern Cape 2.2% 2.4% 2.2% 2.5% 2.2% 11.1% 2.7% North West 6.4% 6.9% 6.7% 6.7% 6.3% 11.1% 6.8% Western Cape 8.1% 9.6% 10.9% 4.2% 14.7% 11.1% 9.0% TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 27

28 Implementation of the equitable share weights, 2009/ / / / / /13 w eighted 2010 MTEF weighted shares 3-year phasing shares Percentage Eastern Cape 15.6% 15.5% 15.4% 15.2% Free State 6.2% 6.1% 6.1% 6.0% Gauteng 16.9% 17.3% 17.4% 17.4% Kw azulu-natal 21.6% 21.7% 21.8% 22.0% Limpopo 12.9% 12.8% 12.7% 12.6% Mpumalanga 8.2% 8.2% 8.2% 8.1% Northern Cape 2.7% 2.7% 2.7% 2.7% North West 7.0% 6.6% 6.7% 6.7% Western Cape 9.0% 9.1% 9.1% 9.2% Total 100.0% 100.0% 100.0% 100.0% 1. The re-alignment to the new boundaries for Gauteng and North West is not phased in over the 2010 MTEF.

29 Calculating the total EC shares EC = (16.9*51)+(14.9*26)+(13.5*14)+(20.0*3)+(11.1* 5)+(7.9*5)=15.6 Therefore Total EC allocation= Total PES share * total provincial pool R200b * 15.6 = ±R30b Model spread sheet 29

30 Question? Is there a way in which the PES formula can be manipulated to give more money to our province? The formula treats each province equally by using data which is independently collected. This eliminate possibilities of manipulation. Additional funding is motivated at the vertical level 30

31 The review: why the reforms Why review the formula? The removal of social welfare in 2004 prompted need for comprehensive review Misalignment between weightings and provincial spending The formula was challenged for its redistributiveness Arbitrary determination of weightings The FFC was requested to lead the review process 31

32 The review Driven by inputs from provinces the review focused on the following Channeling resources to poor provinces Is the PES Redistributive? Incorporation of Social welfare component into the formula Addressing economic disparities between provinces Alternate funding mechanism for provincial developmental needs Exploring new indicators for formula components 32

33 The review Balance between provincial discretion and national policy Finding alternative to demographically driven allocation formula Determining the formula s relevance to current policy trajectory Assessing the feasibility of a costed norms approach The model So what are the result of the analysis? 33

34 Results of the Review Addressing multiple objectives PES is overloaded with many policy objectives Whose priorities should be funded first? Basic nature of the PES Should the PES be an unconditional general purpose grant or conditional transfer? PES is generally redistributive Analysis of data indicates that the formula redistributes from richer to poorer provinces (In relative terms) Problem lies with other pillars of the decentralisation system 34

35 Results:Other pillars of Decentralisation System Expenditure assignments Matching allocations to agreed priorities Methodology for Quantifying expenditure needs Clarity on the nature of decentralised expenditure responsibilities Revenue autonomy fiscal capacity in the PES Conditional grants Borrowing 35

36 Current thinking :options for Reform First Option Reform within the confines of current system Address PES problem not related to the system Improve the Performance of the PES PES will retain most part of current structure Bring PES closer to equalisation grant Both on Expenditure need and fiscal capacity Divide the pool into sub-pools in line with objectives E.g. Remove economic activity (or integrated with another component) as it simply constitutes revenue sharing. Distribute (remainder) funds proportionally to the fiscal gap of provinces 36

37 Options For Reform... Where Fiscal Gap = Expenditure Need - Fiscal Capacity Fiscal capacity will be computed from forecasted receipts on revenue sharing and potential own revenue including surcharges Expenditure needs will be calculated using the per-client expenditure norm. Per client expenditure norm computes expenditure needs based on financial standard or norm per client I still don t understand 37

38 Options for reform... Methodology Requires categorisation of main expenditure functions Determination of overall budget envelopes for each category Identification of number of clients for each category The norm can be prescriptive or notional This methodology ensures budget feasibility Require national consensus on key priorities Option does not resolve the structural problems affecting the PES 38

39 Options for Reform... Second Option Reforming other pillars of the system Establish clear link between instruments and objectives Strengthen overall performance of basic social services delivery (Education and Health) Matching allocations to priorities Separate education and health from the PES Convert the components into separate block grants Funds are locked within functions under which provinces are flexible to use funds 39

40 Options For Reform National develop performance standards Funding risk are contained within sector Funds to be distributed through Per Client Expenditure Norm Remove the economic activity component from the formula Close the (supposed) vertical gap Introduce an Equalisation Grant Predetermined fixed funding rule (other functions) Distribution formula based on proportional fiscal gap (excluding education and health) 40

41 Other reform options under 2 Option 2 increases the Fiscal Responsibility and Accountability of Provinces Increase Revenue Autonomy by Activating the PIT and Fuel Levy Surcharges National Government must Create Fiscal Space for Provinces to Tax lessen Impact on Tax Payers 41

42 Local Government Formula

43 Costed Norms Approach

44 - THE COSTED NORMS APPROACH - AN INSTRUMENT FOR THE ALLOCATION OF FINANCIAL RESOURCES For the next three-year MTEF cycle, starting in 2001, the FFC proposes that constitutionally mandated basic social services be provided and that the preferred method for determining the necessary resources be the costed norms approach.

45 DEFINITION The costed norms approach is a formula based method for calculating the financial resources necessary for the provision of basic social service levels, given nationally mandated norms and standards.

46 -WHY USE THE COSTED NORMS APPROACH FOR THE S GRANT? Provides a basis for objective formulae to determine minimum amount of money a province needs to ensure delivery of basic social services, Facilitates reconciliation of decisions on budgets with service delivery to ensure accountability, Recognises the different resource needs of different provinces, but maintains a province s budget-making competency, Provides for allocation of resources in a transparent manner, and Formula allows for flexibility and responsiveness to policy needs.

47 THREE BROAD IMPLEMENTATION STEPS 1. Constitutionally mandated basic level of social services should be determined nationally and should be expressed in terms of norms and standards for each programme area. 2. Fiscal requirements should be determined by taking account of factors affecting provincial conditions and the macroeconomic framework. 3. Total costs of providing basic education, social security, and primary health services may then be calculated for each province.

48 THE VERTICAL DIVISION AND THE COSTED NORMS APPROACH The costed norms approach facilitates political negotiations around the vertical division. It can provide a set of alternative benchmark norms, with each norm being costed. The consequences of budget changes for norms and standards can then be immediately calculated for each sector. The trade-offs thereby become very clear and allow for betterinformed negotiations.

49 KEY RECOMMENDATIONS The provincial equitable share should provide for constitutionally mandated basic levels of social service provision and provinces should be held accountable for the delivery of such services; The FFC has used the Costed Norms Approach in arriving At the formulae for basic education, welfare and health services; Each province should be allocated a Basic (B)Element Basic (B)Element, which will include the provision of services not defined as Constitutionally mandated basic services;

50 KEY RECOMMENDATIONS COTINUED.. Each province should be allocated an Institutional Element set equal to the minimum cost of operating government institution; In view of urgent need, national conditional grand should be allocated to provinces to support the reduction of social infrastructure backlog

51 THE COSTED NORMS APPROACH AND THE SOCIAL SECTOR COMPONENTS

52 EDUCATION Learners divided into nine groups and distinguished Basic education = Ordinary and Special school, Cost per learner in a group is estimated using a series of weights multiplied by a cost per learner - taking account of differences. Total cost to a province is average cost per learner multiplied by the number of learners enrolled. A weighting is introduced to distinguish between funding appropriate and inappropriate age learners

53 LEARNER GROUPS All Special Learner Ordinary Learner Primary Learner Secondary Learner Poor Non-Poor Poor Non-Poor Rural C1 Urban C2 Rural C3 Urban C4 Rural C5 Urban C6 Rural C7 Urban C8

54 The Local Government Equitable Share (LES) Formula 54

55 Introduction Presentation Outline Overview of LG fiscal framework and the need for equalisation Evolution of LES Previous FFC recommendations and inputs Overview of current formula FFC LES analytical tools FFC LES simulation model Practical illustrations 55

56 Origin Introduction Sections 214 and 227 of Constitution Characteristic Unconditional Purpose Assist municipalities to fulfill their constitutional mandate Composition 3 Funding mechanisms Largest via a formula RSC levy replacement grant for district municipalities Special Councillor remuneration

57 LG fiscal framework Funding requirements of a municipality equals: Expenditure Service delivery and developmental responsibilities Cost of governance, admin, planning and regulation MINUS Revenues Own revenues Transfers Borrowing Schedule 4 (B) of Constitution Water and sanitation Electricity (Category B) Roads and stormwater Municipal solid waste/refuse removal Municipal public services (environmental health, community services, security services, public safety, parks and recreation) Agency services (libraries) Section 229 of the Constitution Property tax (Categories A and B) User charges for water, sanitation, electricity (authorised municipalities) Surcharges on municipal services (authorised municipalities) Other (donations, etc.) Section 214 of the Constitution LGES, Infrastructure Grants, Capacity Building Grants, Grants-inkind, Transfers from provinces 57

58 Differences among Municipalities Average % HH without services Average Own Revenue Average GVA contribution to national GVA Type of Municipality Average Population Average % Poor Average Budget Size Grant Dependance Metropolitan Municipality 2,445,720 33% 27% R 13,688,520,038 61% 25% 9.763% Average Poor Municipality 180,026 70% 77% R 88,373,705 22% 62% 0.078% Fiscal Gap = Expenditure Responsibilities Own Revenues Gap can be vertical (per sphere) or horizontal (per municipality) LES intended to fill this funding gap 58

59 The importance of expenditure equalisation ethekwini Revenue P Rates 28% Grants 21% ethekwini Operating Budget 2008/09 = R17.5 Billion User charges 44% Other 7% Albert Luthuli Revenue Grants 69% Other 6% User charges 10% P Rates 15% Albert Luthuli Operating Budget 2008/09 = R130 million 59

60 Evolution of the LGES Changes to account for the costs of: Transformation (incl. re-demarcation) Data updates New Priorities such as FBS policies Increased demand for basic services 60

61 Evolution of the LGES (1) 61

62 Evolution of the LGES (2) 62

63 Previous Formula 2004 Funding Windows of the 2004 LES Allocations % R293 allocations % S-grant % I-grant % Nodal allocations % Free basic serv ices (w ater, sanitation and refuse) % Free basic electricity /energy % Total % 63

64 Shortcomings of previous formula 64

65 Previous FFC recommendations and inputs into current formula 65

66 The Current LES LES = BS + I + D RRC ± C Where: BS = Basic Services Component I = Institutional Component D = Development Component RRC = Revenue Raising Component C = Correction Component 66

67 Important Features of the LES In most cases, municipalities treated uniformly in allocation process Allocations are done within 3 year budget cycles (MTEF) Allocations 100% guaranteed in year 1 (DORA), 90% in year 2 and 0% in year 3 Funds follow functions i.e. Functions as authorised by Minister (CoGTA) and MEC for LG important Development component currently inactive Changes to parameters result in shifts in allocations from one municipality to another Total gains to LG via vertical division

68 Basic Services Component Purpose Enable municipalities to provide basic services and free basic services Attempts to compliment the MIG Characteristics Supports households earning less than R800 per month Recognises water reticulation, sanitation, refuse removal, electricity reticulation and environmental health as basic services Distinction between poor households actually serviced and poor households receiving no service 68

69 Basic Services Component BS = [Water Subsidy1 * Poor with Water + Water Subsidy 2* Poor without Water] + [Sanitation Subsidy1 * Poor with Sanitation + Sanitation Subsidy2 * Poor without Sanitation] + [Refuse Subsidy1 * Poor with Refuse + Refuse Subsidy2 * Poor without Refuse] + [Electricity Subsidy1 * Poor with Electricity + Electricity Subsidy2 * Poor without Electricity] + 69

70 Basic Services Component Servicing parameters W ith services without Cost of water Cost of sanitation Cost of refuse Cost of electricity Health Basket of services

71 Institutional Support Purpose Supplement the funding of a municipality for administrative and governance cost Deemed to be avenue to fund mainly poor municipalities Accrues to all municipalities, unlike I grant in previous formula Assumes high economies of scale in local administration with increased population Structure I = Base Allocation + [Admin support*population] + [Councillor Support*Number of seats] 71

72 Institutional Component I grant Baseline allocation Escalation with population 1 Councillors

73 Revenue Raising Component LES = (BS + I + D) - {(PR*T) + (RSC/FL*T)} Where BS = Basic Services Component I = Institutional Component D = Development Component PR = Predicted Property Rates RSC/F = Regional Services Council/Fuel Levy T = Tax Rate Differentiated Tax arrangements Tax rates Tax rates range Rating Prop rates RSC % A 6% % C 6% % % % % % %

74 Changes in allocation shares Previous formula focused funding on rural municipalities Introduction of new formula saw a reverse trend, aided by introduction of health component Differentiated tax approach attempted to reverse trend 74

75 Technical Design Issues Measure of Poverty Income less than R800 used since 1998 including updates of census No inflation adjustments (link with social grants??) Imputed expenditure more accurate Data Updates Updates with census? Once every 10 years? Ability to account for migration? Basic Services Component Accurate costing of municipal services is required to inform vertical and horizontal divisions Institutional Component No Costing of what constitutes an effective local admin undertaken I grant large for metros and urban areas, should they receive it?? Funds more needed in rural areas? Revenue Raising Component Not efficient to use actual PR collected and can be unconstitutional (S227(2)) Tax bands applied in steps, not a smooth gradient Development Component Internationally, most Intergovernmental transfers of a social nature Should official remove component??

76 LES and Broader LG Policy Differentiated Approach Already effective in MIG Extend to LES?? Appropriately funding Rural municipalities Funding should be linked to broader rural development policies Appropriately funding Urban municipalities Increased migration to urban centres Role of Metros/urban municipalities in economic development Municipalities in-between the extremes? Separate formulae to achieve different goals? Funding Maintenance through the LES and link with MIG Increasing maintenance backlog (lack of funds or poor budgeting) No link between additional opex with new infrastructure via MIG grant How would the subsidy be measured?

77 FFC LES Simulation Model Developed in 2009 to assist LES Review Depicts data on specific municipalities Analyses changes to preset parameters Changes analysed per municipality and by categories of municipalities Spatial Characteristics and Density Census and CS Population Categories Poor Households Income 2004 Gross Value Added (Economic Activity) 77

78 Practical Illustrations Overview and description of current LES formula spreadsheet used by NT FFC LES simulation model Overview of model Simulations Measure sensitivity of current parameters Analyse shifts in allocations and ability to target municipalities Changes to poverty measure to assist poor HH Changes in I Component to assist poor municipalities Methods to increase funds to urban municipalities 78

79 8- Way forward Defining elements of the results chain from financial inputs to physical outputs, outcomes and developmental impacts requires non-financial data to measure efficiency and effectiveness; Analysing linkages between policy objectives, the legal framework, institutional and governance capacity, service delivery levels and modalities, accountability mechanisms and developmental impact; Assist development of capacity of Parliamentary Budget Office. What value can we add?

80 Budget Analysis 80

81 Overview of Presentation 1. Introduction 2. Definitions and indicators 3. Budget process and outputs 4. Situational analysis 5. Medium term trends and budget analysis for provinces Medium term trends and budget analysis for municipalities Conclusions and Way forward

82 1- Introduction What does budget analysis involve? With financial data available: Review of past trends which affect future budget needs and policy priorities; Budget summaries and examinations of completeness, accuracy and conformance with regulations especially expenditure control; Estimation of resources required or available for programs, legislation and projects; Testifying before examining and fund granting bodies. With non-financial data available: Undertaking unit (beneficiary) cost and benefit analyses; Estimating value for money (efficiency, effectiveness), equity of allocations, rate of backlog reduction.

83 1- Introduction FFC Budget Analysis Unit Objective: To assist Parliamentary finance and appropriations committees to understand, review and suggest amendments to short- and medium-term budgets; Philosophy: Budget legibility and transparency for accountable institutions; Nature of recommendations: Report formats, [non-financial] data required, link to policy priorities and strategic plans, institutional capacity, transmission mechanisms

84 2- Definitions and indicators Medium to long term Medium-term one to three years; long-term - three to seven years; Data sources National Treasury for ENE (Mar 2010,11,12), PBER (Aug 2011), LBER (Aug 2010), MTBPS (Nov) and BR (Mar); other national departments; Compare three-year past trends against three-year budget forecasts for revenue, spending and deficits; Performance indicators derived from Constitution, Chapter 13, Section 214 (2) a-j; e.g. national interest, needs and obligations; service delivery obligations, fiscal capacity, efficiency of and disparities between provinces and municipalities; stability versus flexibility.

85 2- Definitions and indicators Short term IYM Short-term less than one year, involves in-year monitoring or IYM; Data sources National Treasury for Sec 32 (PFMA) reports on quarterly spending of provinces, Sec 71 (MFMA) reports on quarterly spending of municipalities, adjustment budgets; Compare quarterly (from monthly) revenue collections and spending disbursements hockey stick effect Under-spending, over-budgeting, rollovers, fiscal dumping or saving? Over-spending, under-budgeting, virements or deficit financing? Who has the power to re-allocate between departments, provinces or municipalities?

86 3- Budget process and products With implementation of Money Bills Amendment Act of 2009; annual budget process will be transformed: Budgeting becomes negotiated between Executive and Parliament ; National, provincial and municipal financial years?; Medium term budget landmarks Budget Review and Recommendations reports (due July), Review of LBER (due Sep 2010) MTBPS (Nov 2010) and Division of Revenue / Appropriation Bills (Feb to Mar 2011) In-year monitoring quarterly Sec 32 and Sec 71 reports (Feb, May, Aug, Nov), adjustments budgets (Oct)

87 4- Medium-term trends and forecasts - Situational analysis (1) Nominal versus real annual growth; growth path stability or volatility; Since 2005/06 when economic growth peaked at nearly 6% per annum, the trend has been that of deceleration, and a decline of just over 1% p.a. in 2009/10. Over the next three years, growth is anticipated to pick up and reach 3.7% in 2012/13. By contrast, growth of general government spending has been accelerating and has averaged nearly 10% p.a. in 2008/09 to 2009/10. This is projected to decelerate sharply over the next three years to just over 1% p.a. While countercyclical during the early recession (though not the boom), government spending is now inducing large deficits which will have to be whittled back over the medium-term.

88 4- Medium-term trends and forecasts - Situational analysis (1) The proportion of GDP devoted to state spending has increased from 29.4% in 2005/06 to 34.1% in 2009/10. This is projected to decline slightly over the next three years. There has been, and continues to be, a clear shift away from national to provincial and municipal levels of government. Provinces increase their share of general government spending from 34% in 2005/06 to 36.5% in 2011/12. The relative importance of municipalities grows even more markedly from 22% to 27.4% in 2012/13.

89 5.1- Medium term trends and forecasts Provincial governments Funding (1) In 2005/06, 4.5% of provincial revenue was own raised. By 2012/13 however, this ratio is projected to continue its downward trend to 2.7%. Thus, while government is decentralizing its spending, revenue is highly and increasingly centralized, leading to characterizations of provinces as lacking fiscal autonomy. Fiscal autonomy is also being eroded by an increasing preference for conditional over unconditional grants. Conditional grants made up 11.8% of provincial funding in 2005/06. By 2012/13, this is anticipated to rise to 19.9%.

90 5.1- Medium term trends and forecasts Provincial governments Funding (2) While the Provincial Equitable Share grows by less than 1% p.a. over the next three years, conditional grants grow by over 4%. Provinces generated small surpluses in 2006/07 and 2007/08, have swung sharply into deficit over past two years, but are optimistically projected to reverse course over the next three years.

91 5.2- Medium term trends and forecasts Provincial governments Spending (1) The largest component of provincial spending is education, but its share has declined by 3% over the past 4 years to 42%. Education budgets have grown rapidly over the past two years, but below the average for provincial spending. Save for the past two years, health spending has been slightly below average. The contribution of health has remained roughly constant. Spending on infrastructure was well above average during the boom years, but has been well below average during the recession, with high levels of volatility recorded. Capital spending is pro-cyclical and serves as a shock absorber by government. Administrative services are similarly pro-cyclical but due to the large personnel component exhibit less volatility.

92 5.2- Medium term trends and forecasts Provincial governments Spending (2) Personnel spending was relatively subdued during the boom years, leading to a build-up of wage demand pressures. Higher than inflation increases and the occupation-specific dispensation have led to 9-12% real annual increases in the wage bill during the recession. Personnel costs are projected to rise very moderately over the next two years and even decline in the outer year. Actual and budgeted spending on goods and services is more volatile, growing when resources allow and decelerating or declining when budgets are tight. As indicated earlier, capital spending is the most unstable and pro-cyclical component of provincial government budgets. This is passed on by national government through its capital conditional grant programmes.

93 6.1- Medium term trends and forecasts Municipal governments Funding (1) The aggregate of local government spending is dominated by metropolitan and urban municipalities; and aggregate trends therefore strongly reflect urban rather than rural localities. Own raised revenue constitutes 69% of municipal funding; and whilst this ratio has been declining in recent years, the trend is budgeted to reverse itself over the medium-term. The share of own revenue derived from property rates and service charges has been and is projected to continue rising (to 16.4% and 37% respectively). The recent disestablishment of the RSC levy has been compensated for by, respectively, a conditional grant, the LES and now the fuel levy sharing arrangement with the metropoles. This transition has imposed high volatility on municipal budgets, especially through conditional grants from both national and provincial governments.

94 6.1- Medium term trends and forecasts Municipal governments Funding (2) Municipalities do not report deficits on their capital accounts, but external loans are recognised as a source of capital funding. Municipalities generate operational surpluses averaging 5-6% of funding. During the boom years, these surpluses more than covered the value of external loans for capital; and are projected to do so for the next two. However, during the recession (2008/09 to 2009/10), the operational surpluses have declined below that of loans. This implies net deficit financing. The capital accounts make up 21% of municipal spending compared to about 7.5% of provincial spending.

95 6.2- Medium term trends and forecasts Municipal governments Spending (1) Disaggregated data by function (e.g. water, electricity, transport) is only available for one year, hence no trends have been analysed yet. Personnel constitutes nearly 25% of municipal spend and this has been rising slowly. Budgeted wage restraint over the medium-term does not stop this trend. Bulk purchases of electricity and water are also projected to rise well above the government average, reflecting expectations of tariff increases.

96 6.2- Medium term trends and forecasts Municipal governments Spending (2) Repairs and maintenance reflect a more procyclical pattern, rising and decelerating faster than average during the boom and recession respectively. However growth has been and is projected to above average. This item increases its contribution from 5.3% to 6.3% over the seven year period of analysis. As with provincial governments, capital spending is the most volatile and pro-cyclical. Average real annual growth averaged 25% over the past three years but is projected to decline by 4.6% over the next three. The impulses for capital spending volatility are derived from all sources of capital revenue, but especially inter-governmental grants.

97 7- Conclusion (1) Government revenue tends to be pro-cyclical and at municipal level, may even exaggerate the business cycle on local economies. This places limits on the capacity of government to act as a counter-cyclical force. Governments generally ensure a relatively stable growth path for personnel and essential goods and services. Basic services such as education and health at provincial level and water and sanitation at municipal level are more consistently funded along stable growth paths. If certain portions of the budget are relatively fixed, others must be more flexible shock absorbers, exhibiting exaggerated procyclicality.

98 7- Conclusion (2) At all levels of government, capital spending is the first to be cut during recessionary periods but also most likely to be rapidly increased during the boom golden rule of budgeting. To a lesser degree, this is also true of repairs and maintenance, non-essential goods and services; as well as administrative, training and infrastructure services. Whilst this may be an operational necessity, cutbacks in infrastructure and training are counter-productive to laying the foundations for future growth.

99 8- Way forward? (1) Defining elements of the results chain from financial inputs to physical outputs, outcomes and developmental impacts requires nonfinancial data to measure efficiency and effectiveness; Analysing linkages between policy objectives, the legal framework, institutional and governance capacity, service delivery levels and modalities, accountability mechanisms and developmental impact; Assist development of capacity of Parliamentary Budget Office. What value can we add?

100 Data and Information

101 Data and Information The Data and information Unit plays an integral part of the Research and recommendations team The DIU is in charge of all the data that the research team uses in developing their research papers, the data is also used in updating and also development of new models.

102 PROJECTS 1. Audit of Data Conduct an audit of data used within the IGFR system and housed by various official statistical agencies Data cleaning and mining for easy use by the researchers Take part and represent the FFC on the National Statistical System 2. Update of Models Use the latest official data to update the FFC models 3. FFC data Architecture and warehouse development Management of information and data to be used for the support of FFC research.

103 Architecture of DIU Data Warehouse Data is obtained from different sources and in different formats, They are formatted into excel spread sheets then uploaded into the SQL server for storage Business objects then universes are created over the Dbase for the development of reports If there is recent data it also goes through the same process so as to update the data warehouse Data Custodian National Treasury Stats SA SARB Etc Spread sheet SQL Dbase Table format Universe Pre designed reports DIY reports

104 Project support Project specific data requirements Budget Analysis Fiscal Policy Education Health Social Development Local Government IGFR FFC Models

105 Project Support Data Warehouse Source Type Period FFC Projects Fiscal Policy Budget Analysis Local Government IGFR Model Simulation PES LES Costed norms Etc FFC Outputs DOR Submission IGFR Submission

106 End 106

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