Division of Revenue Bill Presentation to the Select Committee on Appropriations By Hassan Essop Economics Departement Stellenbosch University National Parliament ID: 596412
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Slide1
Considering the 2017 Division of Revenue Bill
Presentation
to
the
Select
Committee
on
Appropriations
By Hassan Essop
Economics
Departement, Stellenbosch
University
National
Parliament
,
Cape
Town, 2 May 2017Slide2
BriefAsked to consider the 2017 Division of Revenue Bill
Specifically:
“Whether
the 2017 Division of Revenue allocations to the various spheres of government are justifiable taking into consideration the constitutional mandate of the various spheres of government and capacity to spend the allocated funds by each sphere of government?”“Whether the current Division of Revenue allocations address the government's needs and interest, developmental needs of the country as well as economic and social disparities within the country?”“Whether the 2017 Division of Revenue allocations to the various spheres of government are in line with the current government spending priorities as stipulated in the National Development Plan and also reiterated by President Jacob Zuma during the 2017 State of the Nation Address?”
2Slide3
Brief reduced to the following questions
Are allocations in line with constitutional mandate given macroeconomic environment and fiscal limitations?
Are allocations focussed on government priorities?
Given NDP, SONAGiven recent proclamations regarding “radical economic transformation”Not a legal perspective3Slide4
Outline
General macroeconomic environment and fiscal limitations
Justifiability of allocations given constitutional mandate and economic realities
Ability to generate own revenueIncreased expenditure liabilitySNG’s implementation capacityFramework of NDP, SONA 2017 and recent statements4Slide5
General macroeconomic environment
Stagnant to low growth prediction
Regardless of source, NT at 1.3% GDP growth
Estimates for 2018 at 2%, 2019 at 2.2%.Probably overoptimistic in the absence of strong world growth and other factors (such as hard Brexit)High unemployment remains, 24.5% on average for 2 decadesNet increase of 587 000 in total unemployment in 2016Inequality remains high (Gini 0.77), with millions dependent on grants (Gini 0.59)Inflation outlook stable but sensitive to political and external risks
5Slide6
Declining incomes per person
6
Mandela era
Start of Mbeki era
Start of Zuma eraSlide7
General macroeconomic environment
High total public debt levels
(±50
% of GDP)Ratings downgradesLimits spending abilityImpacts well discussed, not focussed on hereCoupled with the decreasing levels of investment, high total debt, increased interest repayments means less funds to spendLower growth means tax revenue will be under pressureLow employment growth and lack of income growth amplifies pressure on tax revenue generationHighly likely to miss tax target by tens of billions
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Are allocations in-line with constitutional mandate?
Yes.
However, allocations do not imply that resources are used to achieve desired outcomes
Even if allocations are spent on desired outcomes it does not imply that such spending is efficient and achieves the best possible outcomeThis is applicable to all spheres of governmentAlso note that constitutional mandate requires allocation to be within fiscal limitsFiscal limits are narrowing8Slide9
Are allocations in-line with constitutional mandate?
Not commenting on technical changes to 2017
DoR
BillChanges are “tweaks” to improve efficiency in allocation and improve SNG spendingFFC’s concerns are minor; mainly related to definitions and limits, accountability andRecommended that these concerns are addressed with hasteClarity is key for rapid implementation of policySector specific allocations focus on sectors highlighted in the NDPAdditional spend on Higher Education and TrainingInfrastructure and economic developmentLimited focus on innovation
9Slide10
Some comments on Provincial Allocation
Provincial framework saw wages as % of total budget decline marginally from 60.4% to 59.8% from 2015 to 2016.
Also note that the FFC recommendation on measurement of public sector productivity has not been finalized
Given declining incomes wage demands within the public sector will increase post the 3 year settlement periodConditional grant allocations focus on appropriate areas, but:Decline in human settlements development grant disconcerting given latest views on land reclamationNote high level of average expenditure (96%) does not equate to money well-spent10Slide11
Some comments on Provincial Allocation
Health Facility Revitalisation Grants has been cut; reduction by itself not necessarily a bad step
In this instance the lack of clarity on many aspects of the NHI, accountability within the public health care system, management deficits, productivity measures and increased demand for services such as ARVs may compound reductions in the grant
A general comment would be to clarify ambiguities with all changesRegular review of Provincial Equitable Share formula is appropriateShould reward SNG that complies with Auditor General recommendations11Slide12
Some comments on Local Government allocations
Several grants will face cuts over the 2017 MTEF
FFC has noted concerns that these cuts affect grants that “perform well”
Whilst average spend of these grants (MIG, WSIG, URDG, PTOG) might be high, efficiency of actual spend is a more accurate measure of performanceSeveral studies (see Mohabir 2014) find actual spending to be inefficient in large numbers of municipalities across the countryNo clear action being taken to address inefficient spend, which is different from inappropriate spending, and lack of spending12Slide13
Are allocations focussed on government priorities?
Yes.
Large transfer to rural muni’s
61 rural munis receive 31% of transfers, only generate 5% of PITSpeaks to own revenue generation capacityHowever, cuts are requiredFiscal spacePublic sector innovation lackingAllocations not the main concern; spending and efficacy of spending should be
13Slide14
Ability to generate own revenueImportant as it improves accountability (not shifting responsibility to national), public sector innovation, improved efficiency and planning
Provinces generate ±3% of own revenue
De facto
national administrative offices?Grant to total revenue ratio 96% for provincial government, over 30% for local governmentCoupled with increased expenditure pressures over the past decade14Slide15
SNG tax coverage ratio: Reflects diminishing ability to cover increasing own expenditures (
Calitz
& Essop, 2013)15Slide16
DoRB, SONA and current claims of RET
Little doubt that
DoRB
is in line with current mandate and policyLong term policy has consistently emphasised market based plans, with focus on good policy to drive long run growthRadical Economic Transformation creates confusionNo clear, consistent definitionNo implementation planNo additional safety net plan due to increased costsMany other questions; as such cannot answer whether current allocations are in line with RET as policyEven RET must be in line with fiscal limits
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ConclusionUnfavourable macro and fiscal environment
Lack of clarity on “radical economic transformation” not useful to implementation/adjudication of current policy
Not clear that “radical” changes will achieve “a better life for all” in the short and medium run
Current allocations entirely justifiable within current fiscal limitsSeveral areas of concern but focus has not waivered from national policy17Slide18
ConclusionImplementation of policy and linked capacity constraints remains problematic
Role of provincial government as national
gov
agent vs sphere of government in own rightReduced ability to generate own revenue by SNG will place increased pressure on DoR Bill in futureReduced revenue generation capacity also reduces ability to issue debt, accountability and public sector innovationConstitutional question about the role of SNG should be revisited; de facto situation may differ from de jure position
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