Presentation to the Select Committee on Finance

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Presentation to the Select Committeeon Finance
FFC Recommendations on the Division of
Revenue2007/08Ms S MakotokoActing Deputy
Director-General Systems and Capacity
Building24 May 2006Cape Town
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Contents

• Introduction
• Review of the Conditional Grants in South
  Africas IGFR System
• Review of LG Equitable Share Formula
• FFC Comments on NT RSC Levy Proposals
• Review of the Development Component of the LG
  Equitable Share
• 6. Conclusion

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1. Introduction

• Purpose of the Presentation
• To comment on the Financial and Fiscal
  Commissions Submission for the Division of
  Revenue 2007/08

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Review of Conditional Grants

• FFC Recommendations
• Conditional Grants should only be used address
  spillover benefits and to deal with the funding
  of programmes identified as a matter of national
  priority that still need to be institutionalised
  in provincial or municipal budgets. In the latter
  case, such conditional grants should be phased
  into the equitable share once programmes has been
  institutionalised by provinces and
  municipalities.

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Review of Conditional Grants (cont)

• Comments
• It is an appropriate direction that conditional
  grants must address or deal with the funding of
  programmes identified as matters of national
  priority however the institutionalisation of
  programmes by either municipalities or provinces
  could not suggest that the conditional grants be
  phased into the equitable share
• The ultimate measurable objective of the
  conditional grants should be indicated by the
  institutionalization of a particular funded
  programme (through conditional grant) into the
  municipal business processes. This will ensure
  that conditional grants are not used to fund
  similar outputs or national priorities over and
  over again.

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Review of Conditional Grants (cont)

• FFC Recommendations with respect to the design
  of conditional grants
• The grants should be targeted to specific
  spending programmes with associated conditions
  but overtime these conditions could be relaxed to
  allow for greater sub-national spending autonomy
  and the grants may, eventually, be made
  unconditional.

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Review of Conditional Grants (cont)

• Comment
• The conditionality of the grants should be
  sustained as long as the national priorities
  attached to the grants remain, however the
  conditions attached to the funds should not
  exerting an undue administrative burden on
  provinces and municipalities nor should they
  stifle sub-national spending autonomy

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Review of the LG Equitable Share Formula

• FFC Recommendations
• Government should revise the current estimated
  cost if basic services to reflect current
  realities.
• Government should consider raising the current
  basic services cost to R175.
• In the longer term, the efficiency of the LES
  formula in addressing its stated principles and
  objectives will be enhanced if a comprehensive
  review and assessment of the cost of providing
  basic public services is urgently undertaken.

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Review of the LG Equitable Share Formula (cont)

• Comments
• The dplg is of the view that while it is
  important to review cost parameters and have them
  reflect as far as possible the true cost of
  providing basic services, the cost parameters for
  the four services were revised in 2004 together
  with the revision of the formula
• In addition, raising/reviewing the basic services
  cost parameters in the formula should be done in
  a manner that takes into account the minimum
  standards for proving those services as set by
  the relevant sectors
• It must be borne in mind that regardless of what
  the true cost of proving basic services is, the
  amount provided for in the formula will be
  reflective of what government can afford as the
  grant is meant to subsidise the cost incurred by
  municipalities to provide services
• a comprehensive review of the cost of providing
  public services would indeed assist national
  government in addressing its long term objectives
  with respect to LG service delivery.

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FFC Comments on NT RSC Levy Proposals

• FFC Comments on a Local Business Tax (Coupled
  with a Business License Fee)
• The National Treasury proposal does not clarify
  explicitly whether municipalities will generally
  have some leeway in the setting of local business
  tax rates.
• Regarding the administrative convenience
  arrangements whereby SARS is a collecting agent
  for municipalities FFC does not necessarily
  doubt the administrative convenience of this
  arrangement, it is not clear whether this
  proposal serves the interest of enhancing the
  fiscal capacity of local government

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FFC Comments on NT RSC Levy Proposals

• Comment
• The dplg concurs with the above comments by the
  FFC.
• In addition, regarding the Local Business Tax,
  the constitutional issues pertaining to the
  various options are cited in the National
  Treasury document titled Options for the
  Replacement of RSC and JSB levies but without a
  firm legal opinion being offered.
• What is required is a firm definitive legal
  opinion so that we have viable options from a
  constitutional perspective
• With regard to the administrative arrangements
  within, as long as the local business tax has
  some element of local government fiscal autonomy
  especially with regard to municipalities granted
  the power to set the tax rates, local government
  fiscal autonomy is enhanced
• In addition the issue of staff who administered
  the RSC levies at municipal level is not
  addressed by the NT document especially if SARS
  is to be a collecting agent

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FFC Comments on NT RSC Levy Proposals

• FFC Comments on VAT zero rating of municipal
  property taxes
• The FFC notes the advantages listed by National
  Treasury and further notes that if the national
  fiscus is willing to sacrifice some tax revenue
  to accommodate this measure, this proposal will
  help to streamline municipal property taxes
  within the VAT system.

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FFC Comments on NT RSC Levy Proposals

• Comment
• Although the dplg has no problem with the
  proposed, it must be noted that the option will
  benefit only local municipalities and
  metropolitan municipalities but not district
  municipalities, as the district municipalities
  have no power to levy rates, with the exception
  of district management areas.
• Hence, this option is not an appropriate option
  to replace RSC levies for district
  municipalities.

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FFC Comments on NT RSC Levy Proposals

• FFC Comment on Grants
• The FFC supports the transitional arrangements
  for the replacement of the RSC/JSB levies since
  they are temporary and are meant to ensure that
  municipalities are not negatively affected by the
  abolition of the RSC/JSB levies

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FFC Comments on NT RSC Levy Proposals

• Comment
• Although the dplg support the transitional
  arrangements for the replacement of the RSC/JSB
  levies, it does not support the notion of Cs
  entering into funding arrangements with Bs.
• This option could complicate the relationships
  between Bs and Cs.

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FFC Comments on NT RSC Levy Proposals

• FFC Recommendations regarding a long term revenue
  instrument replacement proposals
• The need for wider discussion about the overall
  objectives of local government revenue and
  expenditure assignments and how these are
  expected to be aligned with the new proposals.
  .The replacement of RSC/JSB levies should be
  viewed as an opportunity for aligning the local
  government fiscal framework with assignments of
  powers and function FFC comments.

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FFC Comments on NT RSC Levy Proposals

• Comment
• The dplg concurs with FFC comments that the
  replacement of RSC/JSB levies should be viewed as
  an opportunity for aligning local government
  fiscal powers with the division of powers and
  functions.
• In addition the decisions as to which categories
  of municipalities (A, B or C) are assigned the
  new local taxes or a mere grant funding should be
  based upon the powers and functions that
  individual municipalities perform. The current
  exercise of the review of the two tier local
  government system will impact on the division of
  fiscal powers and function.

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Review of the Development Component of the LG
Equitable Share

• FFC Recommendation
• the development component will not result in an
  overall increase in the LES The Commission thus
  recommends that a development component should
  not be added to the current LES formula
• the development needs of LG should be better
  accounted for in the LES formula by designing a
  formula that more fully accounts for the full
  expenditure needs of LG.

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Review of the Development Component of the LG
Equitable Share (cont)

• Comments
• The dplg is of the view that not enough
  exploration on the merits and demerits of either
  inclusion/non-inclusion of this component or
  aspects of development in the formula has been
  undertaken and therefore such a recommendation
  may be premature
• Section 214(2)(f) if the Constitution should
  ideally be explicitly addressed by government
  when determining the equitable division of
  revenue to local government
• This is not explicitly done in the current
  formula and its being set at zero was done
  specifically so that government would explore the
  feasibility of its inclusion
• Until such time that government (together with
  the FFC) has determined beyond doubt that there
  is no feasible way to address the developmental
  needs of local government through the formula,
  its inclusion should remain a possibility
• It is also the dplgs view that the explicit
  separation of 214(2)(f) from basic services and
  institutional needs of LG expressly requires
  government to explicitly address developmental
  needs within the formula.

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Conclusion

• It is recommended that the Select Committee takes
  note of the comments made herein which may affect
  future financial years, particularly those
  relating to the LG Equitable Share and the
  replacement of RSC levies
• THANK YOU

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