FFC SUBMISSION TO THE SELECT COMMITTEE ON APPROPRIATIONS

FFC SUBMISSION TO THE SELECT COMMITTEE ON APPROPRIATIONS: COMMENT ON THE 2021 DIVISION OF REVENUE BILL 17 MARCH 2021 FINANCIAL AND FISCAL COMMISSION 1

PRESENTATION OUTLINE 1. 2. 3. 4. 5. 6. Background Fiscal Framework in brief COVID response in Intergovernmental Relations 2021 Division of Revenue Bill – Provinces 2021 Division of Revenue Bill – Local Government Concluding remarks and recommendations 2

1. BACKGROUND • • The stated purpose of the 2021 Budget is to strike a balance between economic recovery and restoring public finances as alluded to in the 2020 MTBPS. The President’s four major priorities stated in the 2021 SONA are to: 1. Defeat (contain and overcome) the coronavirus pandemic by strengthening the health system and undertaking a massive vaccination programme; 2. Accelerate economic recovery to overcome poverty and hunger, inequality and unemployment. The COVID-19 relief announced last year remains ongoing 3. Implement economic reforms to create sustainable jobs and drive inclusive growth through the Economic Reconstruction and Recovery Plan (ERRP), including the Infrastructure Investment Plan 4. Fight corruption and strengthen the state. The 2021 Budget is set against the backdrop of a protracted economic deterioration, made worse by the onset of the COVID-19 pandemic with heightened uncertainties. – The unemployment rate reached its new peak at 32. 5 per cent, poverty and inequalities deepened. – Widening of the deficit due to revenue shortfall and emergency government spending, coupled with rising debt-service costs, requires drastic steps to avoid a debt spiral. The Commission makes this submission on the 2021 Division of Revenue Bill – in terms of Section 214 (1) of the Constitution and Section 35 of the Intergovernmental Fiscal Relations Act (1997) as well as S 4(4 c) of MBAPRMA (Act 9 of 2009), as amended. 3

2. FISCAL FRAMEWORK IN BRIEF: DIVISION OF REVENUE 4

2021 DIVISION OF REVENUE: EXPENDITURE DEFRAYED FROM THE NATIONAL REVENUE FUND R million Debt-service costs (National Treasury) Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Provisional reduction to fund Land Bank allocation Compensation of employees and other adjustments Contingency reserve Total appropriation by vote Total direct charges against the NRF ex. transfers Provisional allocation for contingencies Total appropriation before subnational transfers Provincial equitable share Provincial conditional grants General fuel levy sharing with Local government Equitable share and conditional grants Main budget expenditure 2020 Budget 258 482. 1 4 000. 0 33 000. 0 (54 929. 1) 5 000. 0 743 614. 6 25 255. 3 1 852. 6 770 722. 4 573 989. 5 117 961. 5 15 182. 5 127 259. 5 1 850 668. 5 Source: Commission's own calculation using National Treasury Budget Review Statistical Annexure 2020/21 • Total national appropriation by vote reduced by R 2. 3 billion in the 2021/22 2021 Budget Difference 269 741. 1 11 259. 1 4 000. 0 (33 000. 0) (5 000. 0) 54 929. 1 12 000. 0 741 325. 6 (2 289. 0) 21 978. 3 (3 277. 0) 12 645. 2 10 792. 6 775 949. 0 5 226. 6 523 686. 4 (50 303. 2) 115 782. 5 (2 179. 0) 14 617. 3 (565. 2) 123 475. 8 (3 783. 7) 1 834 252. 2 (16 416. 3) Budget. Before subnational transfers, however, gained by R 5. 2 billion due to provisional allocation for contingencies (i. e. Covid-19 response). • Provincial equitable share and conditional grants were adjusted downward by R 50. 3 billion and R 2. 2 billion from 2020 to 2021 Division of Revenue Bills, respectively. • Local government equitable share, conditional grants and general fuel levy declined by R 4. 3 billion in total. Ø In comparison to these, revenue shortfall for the 2021/22 financial year is estimated at 5 R 132. 6 billion between the 2020 and 2021 Budget.

3. COVID RESPONSE IN INTERGOVERNMENTAL RELATIONS 6

INTERGOVERNMENTAL RESPONSIBILITIES &PROCUREMENT ISSUES • • Disaster-response Covid-19 interventions were implemented mostly by national government. The Commission welcomes the R 10 billion allocation to deal with provincial Covid-19 interventions – This is supplemented by the R 6. 5 billion two-year allocation for vaccination procurement to the National Health Department – An estimated R 9 billion could be drawn on from the contingency reserve and emergency allocations The Commission calls for better alignment of responsibilities between spheres and well-synchronised implementation. It is of concern that the vaccination allocation may be incompatible with government’s goal of achieving herd immunity within 12 months period. Supplementary Adjustments Budget 2020/21 Health – Covid-19 intervention Municipal allocation Social and basic income grant Job creation and support for SMEs and Informal sector Salary income support (UIF) Tax relief Business loan guarantee scheme Total Amount (R billion) % share R 20 R 50 Provincial (4%) Local (4%) R 100 R 40 R 70 R 200 R 500 National (92 %) 100% Source: National Treasury 2021 Budget Review, page 3. 2021 MTEF Funding Vaccine rollout Provincial H. Dept. Current purchase Amount (R billion) R 2. 40 R 1. 30 National Department of Health R 6. 45 SAMRC GCIS Contingency Rev. Total R 0. 10 R 0. 05 R 9. 00 R 19. 30 7

4. 2021 DIVISION OF REVENUE BILL – PROVINCES 8

OVERVIEW OF PROVINCIAL GOVERNMENT ALLOCATION • • The 2021 Budget makes for provision a total R 1. 5 trillion and R 356 billion in PES and provincial conditional grant allocations, respectively, over the 2020/21 MTEF period. The Commission notes the fluctuations of annual MTEF forward estimates with concern as this created uncertainty and undermines the integrity of MTEF. – Initial over optimistic MTEF estimates not only send wrong spending signals but also destabilise provincial budgets during implementation. Table 5: Provincial allocation baseline changes R’ Billion 2020 Budget 2020 SAB 2020 MTBPS 2021 Budget 2020/21 2021/22 2022/23 2023/24 PES 538. 4 578 604 - Conditional grants 110. 8 118 123. 1 - PES 538. 5 - - - Conditional grants 106. 8 - - - PES 520. 7 514 522 523. 1 Conditional grants 107. 6 115. 4 119. 8 122. 5 PES 520. 7 523. 7 524. 1 525. 3 Conditional grants 107. 6 115. 8 119. 3 121. 5 Source: National Treasury, 2020 & 2021 9

PROVINCIAL EQUITABLE SHARE AND FORMULA • There are overwhelming concerns that the provincial equitable share formula is not responsive to the unique needs of the various provinces. • PES formula reforms have been on the agenda of the government and the Commission over the past decade - with recommendations made by the Commission in 2010, 2018 and 2020. • In the FFC Submission for the 2021 Budget, the Commission recommended that the PES formula incorporate certain aspects of the costed norms approach, to amongst others acknowledge the higher cost of delivering services to vulnerable groups. • Challenges and concerns on the PES cannot be resolved solely by changing the formula – vertical division of revenue issues needs to be considered alongside relative accountability. 10

CONDITIONAL GRANTS FOR PROVINCES • • The total provincial conditional grants allocation for the 2021/2 financial year amounts to R 115 billion increasing from R 110 billion in 2020/21 financial year. Several provincial conditional grants underwent reprioritisation reductions owing to the Covid -19 pandemic. – The Education Infrastructure Grant experienced the largest reprioritisation from initial estimates, amounting to a reduction of R 6. 6 billion. Table 6: Baseline Changes to selected provincial conditional grants R’ Million Human Settlement Development Grant Comprehensive Agriculture Support Education Infrastructure Grant 2020/21 2021/22 2022/23 2020 Budget 16. 621 13. 414 13. 871 SAB 14. 892 13. 708 14. 000 1. 620 1. 672 1. 559 1. 592 11. 710 12. 255 11. 689 12. 229 2021 Budget 2020 Budget 1. 522 SAB 1. 191 2021 Budget 2020 Budget 11. 008 SAB 8. 787 2021 Budget 2023/24 14. 024 1. 618 12. 678 11

CONDITIONAL GRANTS FOR PROVINCES Years 15000 2015 10000 2016 5000 2017 Provincial roads maintanance Expanded public work programme Provincial Disaster 2018 0 HIV, TB, malaria and community out. . . • 20000 Educational Infrastructure grant • 25000 Human Settlement development • 30000 CASP • Constant reprioritisation has had a negative impact on the Human Settlement Development grant – a key instrument to deal with the growing housing backlog. The separation of the Informal Settlement upgrading programme from the Human Settlement Grant is a concern to the Commission as this may impede integrated spatial planning. HIV/AIDS, TB, Malaria and Community Outreach grant shows exponential year-onyear growth – which may be representative of failing health prevention measures. The PES must be guarded as the default funding mechanism for provincial expenditure responsibilities. Parliament and provincial legislatures should receive regular reports on the impact of budget cuts on service delivery to beneficiaries – especially the vulnerable Million R • 2019 2020 2021 12

5. 2021 DIVISION OF REVENUE BILL – LOCAL GOVERNMENT 13

INTRODUCTION • • The Covid-19 pandemic has threatened the viability of many municipalities and compounded their deep seated financial, fiscal, governance and service delivery challenges. While the COVID-19 situation continues to evolve, it should be noted that it is already creating legacies for the local government sector, including the following: – Many municipalities will be left with wider deficit due to the rapid expansion of Covid 19 related expenditures in the face of widespread revenue under collections – The Covid-19 has amplified challenges of citizen access to basic services (housing, water, and sanitation) – Many municipalities will be left with higher debt as revenue collections fall far below the norm – While the lockdown has accelerated the use of technologies (a legacy that needs to be captured) - it has amplified inequalities as many communities cannot access this technology – The need is amplified for long term change to make local government work effectively, efficiently and be accountable. The political landscape will also change dramatically in 2021 because of the municipal elections - a process that will come with its own governance and fiscal challenges. Other major developments include the roll out of the District Development Model and the review of the Local Government Capacity Building system. – These initiatives, if fully undertaken, will move the sector forward and quicken the 14 recovery process.

LOCAL GOVERNMENT FISCAL FRAMEWORK AND LOCAL GOVERNMENT EQUITABLE SHARE • • The share of local government allocations rises over the MTEF, from 9% in 2021/22 to 9. 7% in 2023/24. – This growth is not because more resources will be transferred to the sector, but is relative, to reductions to the public‐service wage bill that affects the national and provincial spheres substantially. Total local government transfers will decline by 2% over the MTEF as part of the fiscal consolidation measures - R 15, 5 billion from the local government equitable share allocation, R 2. 7 billion from the General fuel levy & R 2 billion from the conditional grants. – the decline of 4% in the real average growth rate of the LES allocation may adversely affect the delivery of basic services to the poor and vulnerable - who are counting on government for relief from Covid-19 circumstances and rising unemployment. – the Commission therefore implores municipalities to strengthen their revenue collection systems and plug revenue leakages, through harnessing new smart technologies. – the use of new technologies, one of the legacies of the Covid-19 pandemic, needs to be sustained as an investment; and embedded in all municipal strategies, especially for marginalised local communities. 15

AVERAGE REAL GROWTH RATES IN LOCAL GOVERNMENT TRANSFERS Average real growth 2017/18 -2020/21 12% Average real growth over MTEF 11% 10% 8% 6% 4% 4% 3% 2% 2% 0% -2% -1% -2% -4% -6% -7% -8% Local government Equitable share Conditional grants General fuel levy sharing with metros 16

LOCAL GOVERNMENT CONDITIONAL GRANTS 30% 27% 2021 MTEF 10% 5% 0% 3% 2% -4% -10% -12% -20% Total capacity building grants Equitable share formula 2023/24 2022/23 2021/22 2020/21 -30% 2019/20 • 2018/19 • Over the 2021 MTEF municipalities are set to receive R 143 billion as direct conditional grants, and R 24 billion in indirect conditional grants. Overall, despite cuts, conditional grants are set to increase by 3% in real terms during the 2021 MTEF, albeit from a very low base. The steady decline in basic services infrastructure and capacity building transfers in real terms over the MTEF, means the shift from consumption spending (LES) towards capital spending (conditional grants) observed in the 2020 budget was short lived. 2017/18 • Total Infrastructure grants 17

CONDITIONAL BASELINE CUTS • Over the MTEF municipal conditional grants baseline sees cuts of R 2 billion. • According to government, the basis for these baseline cuts is underspending. • The Commission would like to emphasise that underspending may be a symptom of bigger challenges which need to be investigated with a view to resolving the issues first - before any cuts are contemplated. • The public transport network grant, municipal infrastructure grant and the direct integrated national electrification programme grant will account for over 90% of the cuts. • The public transport network grant will get the largest cut (R 1. 3 billion) due to the fact that 54% of the 13 cities receiving this grant have not successfully established public transport systems. The projects will be halted in three of these cities. 18

BASELINE REDUCTIONS PTN MIG grant INEP (Direct) EPWPG LGFM MDR EEDSM ISD RRAMS IUDG - 30 - 21 NDPG PTN – - 200 - 146 Baseline Reductions (R billions) - 250 - 329 - 400 - 106 - 70 - 43 - 19 MIG grant INEP (Direct) EPWPG LGFM - 600 MDR EEDSM - 800 ISD -1 000 RRAMS IUDG -1 200 -1 273 NDPG -1 400 19

6. CONCLUDING REMARKS AND RECOMMENDATIONS I. The Commission notes the fiscal policy stance consistency in the 2021 Budget. Achieving both economic reform and managing government’s debt simultaneously is a difficult balancing act. The Commission is concerned that sight may be lost of the Constitutional imperatives. As the government is negotiating for a sustainable fiscal path, it should not lead to the retrogression of the socio-economic conditions of South Africa’s citizens. II. The Commission calls for active engagement to ensure the alignment of the economic policies and planning of Subnational Governments towards the achievement of the national Economic Reconstruction and Recovery Plan. These are pivotal in tangible services delivery directly to citizens. Budget allocations alone will not yield these, merely providing the means. III. Mindful of the Covid-19 circumstances, and the quickened fiscal deterioration: the Commission notes the financial and performance dysfunctionality – fiscal leakages, wastage and inefficiencies, requiring I. III. IV. V. VI. A decisive and coherent strategy and the political will Implementation of the fiscal consolidation, targeting cuts at areas of underspending and questionable performance Eradication of duplication of functions – ie, the merging to (not “or”, ) closing of departments and public entities Investment in the use of technology and other areas of improving the capability of public sector personnel Eradication of contract mismanagement and procurement irregularities Zero Based Budgeting, based on expenditure reviews and mindful of the importance of pricing and costing public services Consequence management and accountability mechanisms must be effective. 20

6. CONCLUDING REMARKS AND RECOMMENDATIONS (CONT. ) V. On tax proposals of the 2021 Budget, the Commission notes the fiscal revenue position of keeping money back in the pockets of individuals by adjusting the tax bracket to increase disposable income, simplifying tax incentives, and reducing company tax to boost investment in a revenue neutral manner. The Commission urges government to monitor the impact of this tax relief, relative to the impact of areas expenditure changes, e. g. Social Grants. VI. On the Division of Revenue and Appropriation, the 2021 Budget as policy statement can only ultimately be assessed in terms of its final outcomes – equally for the revenue estimates. The Commission notes the heightened uncertainty in the 2021 Budget consolidation and the precariousness in striking the balance between tax, expenditure and debt level changes. VII. The 2021 Budget in promoting growth and avoiding retrogression of the socio-economic conditions of citizens, should be more specific in supporting local demand localised product procurement in order to support value chains. 21