Fiscal Responsibility in South Africa Ismail Momoniat, National Treasury, Republic of South Africa Website: www.treasury.gov.za Ismail.Momoniat@treasury.gov.za Kenneth.Brown@treasury.gov.za Dondo.Mogajane@treasury.gov.za
Background
Introduction SA is not a federal country, but a unitary country that is highly decentralised administratively and fiscally since 1994 Three spheres of govt, with local govt distinct sphere, not a creature of provinces Focus will be on provinces and not local govt Focus of presentation is on initial lessons after only 11 years of democracy Too early to draw conclusive lessons Lessons apply to SA, and cannot be applied to another country, so no attempt to apply these to a complex and highly populated country like India
System of Governance in SA National, 9 Provinces, and 284 Municipalities Provinces School education, health, social grants (Social services) Housing, Provincial Roads, Agriculture Poor fiscal capacity (own revenue 4%, national grants 96%) Local government Water, electricity, refuse removal, housing infrastructure, municipal roads Significant fiscal capacity, but varies between municipalities (Urban metros over 95% own revenue, Rural 30%) National government Over half actual spending on defence, justice (courts), prisons and police Other: higher education, admin, policy, regulatory
Fiscal capacity and functions Non-interest R362,6 bn out of R417,8 bn budget for 2005/06 Servicing debt at R53,1 bn, contingency res R2bn Provinces receive R209,3bn (57,7%) 9 provincial budgets aggregate to R215 bn Own Revenue only 4% : Motor car license fees, gambling Local Government receives R17,1bn (4,7%) Only one third of spending on public goods (no revenue) Two thirds spending user charge services (water/electricity) Taxes: Property taxes, regional levies (to be phased out) Own revenue around R90bn National Govt budget is R109bn (37,6%) Revenue-sharing system (Constitution) Size of grant depends on functions & fiscal capacity
Division of revenue 2003/04 2004/05 2005/06 2006/07 2007/08 R million Prelim in. outcome Estim ate Medium-term estimates National departm ents 108 459 121 101 136 262 146 800 157 817 Provinces 161 494 185 354 209 273 229 282 248 236 Equitable share 144 743 164 084 134 706 146 757 157 678 Conditional grants 16 751 21 270 74 567 82 525 90 558 Local governm ent 12 396 14 757 17 159 19 708 21 461 Equitable share 6 350 7 678 9 643 10 515 11 371 Conditional grants 6 045 7 080 7 516 9 193 10 090 Non-interest allocations 282,349 321,212 362,694 395,790 427,513 Percentage increase 15.4% 13.8% 12.9% 9.1% 8.0% State debt cost 46,313 48,901 53,125 56,603 59,381 Contingency reserve 2,000 4,000 8,000 Main budget expenditure 328,662 370,113 417,819 456,393 494,894 Percentage increase 12.7% 12.6% 12.9% 9.2% 8.4% Percentage shares National departments 38.4% 37.7% 37.6% 37.1% 36.9% Provinces 57.2% 57.7% 57.7% 57.9% 58.1% Local government 4.4% 4.6% 4.7% 5.0% 5.0% Percentage growth National departments 11.7% 12.5% 7.7% 7.5% Provinces 14.8% 12.9% 9.6% 8.3% Local government 19.1% 16.3% 14.9% 8.9%
Comparisons with India Vertical imbalance is dealt with through revenue-sharing, with some fiscal powers for provincial and local govts We have a Fiscal and Financial Commission It is permanent but has ADVISORY powers only National govt makes final proposal subject to approval by 2 Houses of Parliament Each govt in each sphere has power to determine its own budget Each govt in each sphere accountable to own elected legislature Greater and compulsory reliance on consultations and co-operative governance
Constitution of SA Section 214 requires annual Division of Revenue Act One national law applies to all provinces and municipalities No need for each province or municipality to have separate legislation on fiscal responsibility PFMA applies to all national and provincial govts, and MFMA applies to all municipalities How do we get consistency in fiscal responsibility objectives between states and between national govt? Uniformity and precedence of national economic policy, taxes etc
Tax Assignment National govt has 4 biggest taxes Personal Inc Tax, Corporate Tax, VAT, fuel levy Provinces can legally impose a surcharge on PIT and fuel levy, but do not as prefer revenue-sharing arrangement Provinces have motor car license fees Municipalities have property taxes and surcharge on electricity/water National legislation can regulate exercise of taxation powers of sub-national govts, given need for tax harmonisation and national economic policy objectives
Borrowing Powers Provinces and municipalities can only borrow for capital beyond a financial year Provinces and municipalities can borrow for bridging purposes within a financial year Provincial borrowing regulated by legislation Provinces have non-revenue generating activities, and minor tax powers Should they really borrow? We are open to giving more tax and borrowing powers in future, but need to ensure expenditure efficiency first
Intervention powers Specified and narrow intervention powers where a province or municipality fails to exercise its powers or responsibilities National govt can intervene in a province in terms of section 100 of Constitution Province can intervene over municipality ito section 139 of Constitution
Key Fiscal legislation in SA Constitution Chapter 13 of Constitution National Acts of Parliament Intergovernmental Fiscal Relations Act Provincial Tax Regulation Process Act Borrowing Powers of Provincial Govt Act Public Finance Management Act (PFMA) Municipal Finance Management Act (MFMA) Annual Budget Acts of Parliament Annual Division of Revenue explanatory memorandum & extensive tables National and provincial appropriation Act Tax legislation (Taxation and Revenue Laws Amendment Acts)
Fiscal Responsibility in SA
How do we understand fiscal responsibility in SA? Rules and legislation are necessary but not sufficient Can easily get around (ex-ante or ex-post?) Budget a plan at start of fin year, and actual may be significantly different Co-operation and buy-in are more important Budget preparatory process must be DEEPLY consultative process Between national and sub-national govts Between departments in each government Budget is a POLICY process, driven by policy priorities and spending pressures
Transformation in first 5 years of democracy 1994-1999 SA in a fiscal mess in 1994, with deficit close to 10% and inflation around 20% First priority of new Mandela govt was to get macroeconomic policy right Achieved with stunning success but low growth Second priority was to make the budget process more transparent and consultative Key budget reform was introduction of 3 year budgeting, debt management reforms Had to transform and modernise a bean-counting treasury with antiquated practices into a SMART treasury with policy assessment capacity
Budget Reforms since 1994 Three-year budgeting system National and provinces (1998/99 Budget), Municipalities Budget decentralisation and CERTAINTY Own budgets by provinces and Local Govt, grant certainty Division of Revenue Act and schedule of all national allocations per province, per municipality for each of three coming years Public Finance Mgt Act and Mun Fin Mgt Act modernising financial management in public sector Minister responsible for outcomes and policy, administrative head of dept responsible for implementation and outputs No bail-out/guarantees for provinces/lg Up-front allocation certainty, no ad-hoc in-year allocations Development of provincial/local fiscal framework
Low inflation and interest rates 20 18 16 14 Repurchase rate CPI CPIX Per cent 12 10 8 6 4 2 0 1998 1999 2000 2001 2002 2003 2004
Debt service costs as per cent of GDP Debt service costs 6% 5.5% 5.6% 5% 4% 5.3% 5.2% 4.9% 4.9% 4.7% 4.5% 3.9% 3.6% 3.5% 3.5% 3.4% As % of GDP 3.2% 3% 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
700 600 500 400 300 200 100 0 Debt to GDP 70 60 50 40 30 20 10 0 2006 2007 2008 2005 1997 1998 1999 2000 2001 2002 2003 2004 1996 1995 1994 R billion Per cent GDP Foreign debt Domestic debt Total net loan debt as % of GDP (right axis)
Medium term outlook 10 8 GDP growth Current account (% of GDP) CPIX inflation 6 4 Per cent 2 0-2 -4-6 2001 2002 2003 2004 2005 2006 2007
Three year budgeting In 1998 shifted from one-year incremental budgets to three-year rolling budgets Publish 3 year budgets, but appropriate only for one year only Use outer 2 years as baseline for next budget, and allocate only additional funds from contingency reserve and new revenue We ignored nay-sayers who said not possible Lays basis for better planning, more consultative budget processes and better intergovernmental fiscal relations
Intergovernmental Budgeting SA has grant certainty Three year allocations per province, per municipality, for EVERY grant Equitable share allocation main allocation to provinces (64%) Clear formula to divide funds Provincial formula linked to key social sectors Local govt formula linked to poor households Conditional grants Social grants (27%, previously from eq share) Infrastructure, tertiary hospital services Different formula for each conditional grant Annexure E in Division of Revenue Bill
Budget is a policy process Budgeting is at heart of policy-making, and needs to be consultative Budgets require prioritising of policies, which is essentially a POLITICAL process Minister of Finance requested Cabinet to form- a Ministers Committee on the Budget (sub-com of Cab) Budget Council and Budget Forum, for provinces and municipalities Compulsory consultations for Division of Revenue process and exercise of subnational fiscal powers No outside or independent agency can determine budget or allocations
Budgeting harder under decentralised system Need to co-ordinating policy, planning, budgeting processes National depts responsible for policy, prov/lg for implementation Setting up of sectoral Ministerial forums (MinMECs) between Ministers of national and provincial governments for education, health, welfare, housing Challenge of co-ordinating sectoral and budget forums, as each sector wants to maximise its funds Reducing sectoral collusion and allegations of unfunded mandates How do we link Budgets to PERFORMANCE?
Performance and Accountability challenges We are still striving to get more performance accountability Budget reforms to facilitate greater performance in public sector as a whole Has 3 year budgeting reached lower down to the level of project or facility? How do we get better customer accountability? How can we get better political accountability through legislatures Does pol failure increase risk of service delivery
Budget preparation process: pre-year Independent FFC makes (advisory) proposals Consultations with provinces and LG Budget Council of national/provincial Ministers of Finance Budget Forum incorporates local govt National Cabinet makes final allocations to 3 spheres of govt in October Equitable share formula used to divide funds between provinces and local govt (also conditional grant formulae) Pre-budget in Nov, followed by Budget in Feb Division of Revenue Bill tabled, to be passed by Parliament Contains memo explaining formulae Contains or ensures up-front payment schedule for transfers Provinces table own three year budgets in Feb/March National govt publishes Intergovernmental Fiscal Review in April
Key Budget documents Budget Review and Division of Revenue (DoR) Bill all part of National Budget contains memo explaining formula contains/ensure upfront payment schedule for transfers Intergovernmental Fiscal Review 1x month after national and provincial budgets tabled discusses 9 provincial budget trends for 7 years in year (2002/03), three years to follow, three years past covers LG information for current financial year Quarterly and monthly budget info on provinces 30 days after end of each quarter Strategic plans of departments tabled with budgets Annual reports of departments in Sept NT website www.treasury.gov.za
Initial Lessons from SA
First Lesson from SA Budget reform goes with fiscal decentralisation It is even more important for fiscally decentralised Co-ordinating policy and sector interests across tiers of government is really difficult but necessary Ignore the nay-sayers and implement 3 year budgets Budgets should not require line-item political and legislative approval Reserve line-item budgets (to the extent they are even necessary) for internal management purposes only
Budget Reforms and Fiscal Decentralisation Budget reforms are even more important for fiscally decentralised countries Are budgets sustainable? Is consolidated tax to GDP stable or declining? Is consolidated borrowing or deficit sustainable (ie consolidated debt to GDP stable or declining) Are provincial budgets comparable with each other? Standard chart of accounts, uniform budget formats etc How quickly can we produce consolidated budget information? How much are we spending on school education? Need to aggregate school budgets from 9 provinces
Second Lesson: Intergovernmental Grants Money is fungible, so unconditional grants work better than conditional grants, focusing on broad priorities related to entire budget Resist sectors who prefer conditional grants Cond grants for social grants and infrastructure Horizontal equitable share formula is redistributive between provinces How do we achieve equalisation? Needs versus performance? Data problems is it possible to get comparable usage and cost data for all
Third Lesson: Transparency, Information and Accountability It is a continual struggle to get all levels of government to publish information Start with budget implementation information, through monthly reports Opens up possibilities for greater accountability by Parliament, public etc Information delayed is accountability denied! Culture of publishing ALL relevant info on website on same day How quickly do we collect and publish
Regular reporting Financial management improves dramatically if we start Publishing of monthly in-year reports on budget implementation Requiring financial statements from all departments and entities to submit for audit within 60 days of end of fin year, and audited and tabled in Parliament within 6 months Many benefits follow from above, including inyear accountability, better management and a further feedback mechanisms to improve budget allocation process
Fourth Lesson: Build Treasury capacity Third lesson is to reform all treasuries to play a leadership role in budget process Budgeting is too important to leave to accountants! It is positively dangerous National Treasury must develop its policy assessment capacity to inform budget allocation process National Treasury also needs to create an enabling framework for better governance, management and accountability
National Treasury capacity In a decentralised country, National Treasury in SA has dedicated unit for intergovernmental fiscal relations Dedicated unit to work with provinces and municipalities Assessing credibility of provincial budgets (informal and perhaps to publish such assessment) Printing Intergovt Fiscal Review (IGFR) and consolidated budgets Ensure each (nat, prov or mun) treasury prepares quarterly reports for its Cabinet or Exco Ensure that national Treasury do a consolidated quarterly report for all provinces?
Key challenge is to ensure Budget Credibility National Treasury assesses provincial budgets as an advisory service to provide an independent perspective, and point out budget risk Is tabled budget credible? Are projections realistic? Is the deficit fully funded? Focus on a balanced budget rather than a deficit target? Continual challenge is to ensure implementation is according to planned budget
Fifth lesson: One collection agency Success of one national collecting revenue agency (SARS) for the major taxes You cannot spend or divide revenue that you fail to collect! We divide revenue ANTICIPATED to be collected before the start of the financial year
Last lesson: Check relevance of Conventional Assumptions To what extent does conventional theory of fiscal decentralisation really work in a developing country? Does greater tax capacity lead to better accountability? Do developing countries have effective accountability and auditing mechanisms? How can we get better financial or service accountability when we have a shortage of auditors, doctors etc?
Theory and practice SA has clear expenditure and tax assignment, and GRANT CERTAINTY Why are provinces fiscally more responsible than municipalities? Provinces have weak tax powers, municipalities have strong tax powers What further taxes do we devolve? Why should be move away from one tax collector? Why should we prioritise tax rate autonomy over other taxation reforms? What need for borrowing if govts struggling to spend on capital?
Other factors also impact: Public Service Subnational govts tend to have personnel intensive functions like teachers, nurses, and personnel expenditure a high proportion of their budget (eg in education 80%) Bargaining system for public service centralised or decentralised? Mobility and uniformity in conditions of service between states? Are public servants under one pension fund? Is it a benefit fund? How do you share burden of funding shortages?
Local Government We are still implementing our reforms with municipalities, so not as developed as with provinces Have undergone three major transitions (including change in boundaries) since 1993 Provincial govt should do unto municipalities what they want central govt to do unto them! Every govt has a propensity to be gate-keeper over funds they control Need three year grant certainty, predictability etc for local govt as well, and also for projects that you control
Conclusion Has decentralisation worked in SA? Don t know, too early to tell Reform process still not completed Short-term assessment vs medium to long-term Has decentralisation led to better delivery? Would delivery have been better if centralised? No, if national depts with delivery responsibilities are taken into account Not clear if provinces or local govt would do better! Mixed story of early successes and failures No easy solutions to complex problems