The national Treasury argues that provincial expenditure has stabilized and is expected to remain stable for the next three-year planning period. The large provincial deficits of 1997/8 have been ‘turned around’ by staunching the growth in social service delivery costs. Social service spending is projected to remain stable over the medium term and this was made possible by holding personnel expenditure constant as share of provincial budgets. If this positive scenario is achieved, it would enable real expenditure increases in current and capital social services expenditures.

However, our analysis suggests that the national Treasury may have underestimated the upcoming pressures on provincial expenditures.

1. Social service spending pressures: The Treasury identifies a number of new and resurgent spending pressures on provincial budgets. In welfare the phase-in of the Child Support Grant will impact severely on the budgets of particularly the poor provinces since these have larger proportions of poor children. The likely introduction of inflation-linked increases in the Old Age Pension (OAP) and Disability Grant (DG) will halt the trend of real decreases in these grants and place further pressure on provincial Social Security budgets. A new pressure point in provincial welfare budgets is the likely introduction of the proposed Basic Income Grant although, at this stage, it is not certain what provinces’ role will be in the administration of this grant.

The most likely source of unaccounted for pressure on health and education budgets is salary expenditure. The IGFR reports that despite earlier decreases, this slice of the health cake consumed by personnel expenditure has started growing again. In the likely absence of reductions in staff numbers, personnel expenditure risks increasing even faster than projected. The impact of the Basic Conditions of Employment Act on payment for overtime and Sunday work will also reflect in provincial personnel budgets.

There is a pressing need for spending on educator development. While this is likely to be funded by national government, the resulting increase in salary bills will be a provincial responsibility. In education the suspension of the services of temporary teachers decreased the personnel budget. As the impact of this once-off decrease declines, personnel costs are likely to raise again as better-qualified teachers demand better remuneration.

Apart from personnel expenditure, the single most important factor that will impact on the cost of social service delivery in the provinces is HIV/AIDS. Although its impact is concentrated in the demand for primary and secondary health services, its effects will also be felt in welfare (greater demands for grants and institutional care) and education (greater absenteeism in educators and learners).

2. Inter and intra-provincial expenditure inequalities: Given that most equity enhancing financial mechanisms have been implemented the persistent inequalities are concerning. The sections on education, health and welfare below sketch the magnitude of these inequities. The one outstanding equity mechanism that has not yet been used is a conditional grant for capital backlogs. Unfortunately the IGFR does not offer any detail on the Treasury’s plans for the introduction of such a grant. Constraints to increase provincial capital spending from provincial equitable shares are listed as increasing demand for services, rising personnel expenditure, natural disasters and macro-economic constraints. None of these are likely to decrease in importance. It is therefore highly unlikely that provinces will be able to fund backlogs expenditure themselves, especially the poor provinces.
3. Provincial own revenue: The turn-around of provincial budgets was achieved while provincial own revenues and conditional grants declined. The IGFR announces a mechanism that will allow provinces to explore new sources of own revenue. However it does not mention progress in developing a borrowing framework for provinces. This is particularly disappointing given the provinces’ difficulty in financing capital expenditure.
4. Provincial debt burdens: On the face of it, the turnaround in provincial financing is impressive. Despite large debts in 1997/8, provinces managed to generate sufficient surpluses to service these debt commitments. Unfortunately, the IGFR does not indicate the remaining provincial debt burden, nor the interest rate, maturation structure of the debt and the identities of the creditors. Last year in parliament, the national Treasury indicated that provinces owed R3.5 billion. Of this amount the national treasury paid R1.4bn via a grant in terms of the Adjustments Estimate, leaving provinces R2.1bn in debt. Yet, the IGFR report declares that provinces will still pay over R3bn on debt. It is thus not clear whether provincial debts are decreasing or not. We are concerned that pro-poor expenditure may be squeezed out (as has been the case in the past) due to higher than anticipated interest rates and debt redemption schedule. Our concern is related to the fact that in 1998/9 it came to light that a large part of provincial spending over-runs were financed by bank overdrafts at the then prime interest rate of 19%.

We are concerned that the provincial budget plans for the next three years do not appear to reflect the above spending pressures. Given the Treasury’s hard line on provincial overspending, these new demands on provincial treasuries will not be financed by overspending. This means that either these demands will not receive financing or they will be financed at the cost of existing services. If the latter course is followed, the opportunities for additional non-personnel and capital expenditure in social services and infrastructure spending are likely to disappear. In fact, as has been the case in the last three years, social service capital and current expenditure is likely to feel the brunt of these pressures with a corresponding decline in social services in the poorer provinces.

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The Intergovernmental Fiscal Review (IGFR 2000) reports on medium-term trends in provincial budgets and service delivery. The provincial and national Treasuries deserve praise for stabilizing provincial expenditure. We also want to highlight the promising proposals for the improved administration of conditional grants. The substantial improvement in local government coverage is also encouraging. The accuracy of the data will improve over time.

Our major concern with the document is that it underestimates new spending pressures on provinces. These include new provincial spending pressures and deepening inter-provincial inequity. In the continued absence of substantial opportunities to increase own revenue, provinces are likely to respond to these pressures by decreasing current and capital expenditures vital to social service delivery.

The national Treasury argues that provincial expenditure has stabilized and is expected to remain stable for the next three-year planning period. The large provincial deficits of 1997/8 have been ‘turned around’ by staunching the growth in social service delivery costs. Social service spending is projected to remain stable over the medium term and this was made possible by holding personnel expenditure constant as share of provincial budgets. If this positive scenario is achieved, it would enable real expenditure increases in current and capital social services expenditures. Our analysis suggests that spending pressures on the provinces will prevail. Our argument follows the adequacy and equity of provincial education, health and welfare budgets. We subsequently show that own revenue projections will not relieve this pressure.

Provincial education budgets decline by 0.4 per cent in total over the period considered, although there are large variations between provinces (Table 1). Only three provincial budgets are stable or grow over the period, while the greatest number of Education departments are experiencing declines over this period.

The needs of the two new provincial education-funding priorities, namely norms and standards funding and the need for better- qualified educators, will seriously test the adequacy of these projected budgets for the next three years. IGFR 2000 also makes mention of the fact that an early childhood development phase is soon to become an important part of education funding. These programs will have to compete with other spending priorities but, given the overall decrease in education budgets (table 1), it is unlikely that these priorities will be sustainable within the proposed budget framework. For example, there is a pressing need for spending on Educator Development. While this is likely to be funded by national government, the resulting increase in salary bills will be a provincial responsibility. The paucity of funds will impact more heavily on departments in the poorer provinces. Provinces, such as Western Cape, Gauteng and Northern Cape, are better able to absorb real cuts in expenditure as their current per learner education spending is far above the average.

One glimmer of hope is that the IGFR 2000 predicts that learner numbers are likely to stabilise over the medium term. This, together with concerted attempts to improve the quality of schooling (such as in the "Whole School Evaluation" policy), provides hope that at least some of the expected spending pressures might be negotiated. Many of these proposals are medium to long term changes, and this should not mean that funding responsibilities must be avoided because of planned improvements in the public schooling system.

Table 3 provides per learner expenditure for 1999/00 and 2000/01. Since it refers to learners in both public ordinary schools and independent schools these figures are not strictly speaking comparable, especially in those provinces where there is a sizeable independent schooling sector.

The more affluent provinces have much more consistent per learner expenditures compared to poor provinces. Stable access to available resources has enabled them to plan their public schooling system better. This is nowhere more evident than in wide variation in matriculation results for period between 1994 and 1999.

Poor provinces thus have as priority both redress in terms of non-personnel expenditure, as well as giving learners the benefits of better- qualified educators. This means that per learner spending on personnel in poor provinces, especially in public schools, is unlikely to catch up with the more affluent provinces over the medium term. It is even less likely that such a funding dilemma can be solved in the context of stable and declining budgets.

Table 5 shows that total provincial health expenditure remains is expected to remain stagnant over the next three years. Nevertheless, there are wide provincial variations in the projected growth rate, with the Eastern Cape, Northern Cape and Western Cape set to see real decreases over the medium term.

For example:

• In 1999/2000 the difference between Gauteng and Northern Province was R350 and between Gauteng and Eastern Cape R245. The budgeted difference for 2000/01 is R430 and R384 respectively.
• In 1999/2000 the difference between Western Cape and Northern Province was R189 and between Western Cape and Eastern Cape R84. For 2000/01, the difference is set to increase to R257 and R211 respectively.

All nine provincial welfare budgets are projected to decrease over the MTEF period, except for Gauteng. Part of this decline is a result of the expected savings generated from the clean-up of the social security system. The phasing out of the State Maintenance Grant (SMG) and the application of a stricter means test for DG recipients further contributes to the decrease. The Northern Cape (-17,1%) and the Western Cape (-7.2) budgets predictably show the greatest decline in funding since they had the largest number of SMG beneficiaries. Poorer provinces will therefore not benefit from this ‘saving’.

Three issue are of concern with regards to equity across provincial welfare budgets. First the take-up rate for the CSG was low in the poorer provinces, but this situation is improving. As was indicated above, almost three-quarters of eligible children have not yet applied to receive this grant. The bulk of these children are in the poorer provinces.

Second the majority of current DG beneficiaries are residents of the Western Cape and Northern Cape. Poorer province’s coverage of the DG is still minimal. The low coverage is a result of historical imbalances created by apartheid and the lack of infrastructure in the affected provinces. The IGFR indicates that while the Western and Northern Cape have DG take-up rates of over 60% the take-up rate in disadvantaged provinces is generally below 30%.

Thirdly the current revenue sharing formula only calculates provincial allocations on the basis of the, OAP, DG and CSG recipient numbers. These target populations are weighted for the distribution of expenditure on each of the three grant types. The impact of the means test on provincial take-up is reflected by an income adjustment based on the provincial share of the poor population. However, provinces are responsible for the payment of approximately six grant types. The most noticeable omission from the formula is the Foster Care Grant (FCG). This grant will be in increasing demand as HIV/AIDS related mortalities increase (Table 6). The failure to include the FCG in the formula could lead to serious under-budgeting or overspending by provincial governments, especially in provinces with high infection rates such as KwaZulu-Natal, Mpumalanga and the North West.

Unfortunately, the IGFR does not propose any new mechanisms to improve provincial own revenue. There is no mention of the required consolidated legislation on provincial borrowing and there are no new sources of provincial revenue. The strategy is clearly to optimise the use of current tax bases. There is indeed merit in this strategy, however, it will not ease the pressure on provincial social service expenditure over the current MTEF period.

As the Treasury has been working on a revision to the provincial borrowing framework for some time, it is unfortunate that the IGFR 2000 makes no mention of the content and aim of these efforts. There is a need for consolidated legislative framework since the 1996 Borrowing Powers of Provincial Governments Act is based on the Interim Constitution and the 1999 PFMA has since introduced new restrictions on provincial borrowing. The Treasury itself, in chapter 4 of the IGFR, points out that capital investment, notably in health facilities, is necessary to revive the collection of hospital patient fees in the longer term by attracting paying patients (p. 88 and p. 92).

Overall, own revenue levels for 2000-1 (R3.6 billion) are 12 per cent below 1996-7 levels. This is problematic given the increasing pressures on provincial social service expenditures mentioned above.

The volatility of growth rates in road traffic revenues, which make up 45 per cent of budgeted own revenues (in 2000-1), is attributed to fee schedule revisions in the provinces or inconsistent efforts by collecting agents (p. 77).

Hospital patient fees, which make up 11 per cent of budgeted own revenues, are under threat, primarily as paying patients are no using public sector health care facilities (p. 83). Further, the IGFR acknowledges that fees were "eliminated" by introducing free healthcare for pregnant women and children under the age of six. (p. 84). Possible improvements in billing systems and new incentive pilot projects might help to slow down the decline of hospital patient fees revenues from hospital patient fees. But, with the bleeding of the client base to private care, the possibility of improvements are limited despite the "somewhat optimistic" budgeted collections for 2000-1 (p. 85).

Gambling revenues make up 13 per cent of budgeted own revenues, primarily derived from horse racing. Casino levies are likely to make up a growing share of own revenue in the future, but the IGFR states that this is hard to predict due to a revision of the legal framework by the National Gambling Board and "the highly contestable nature of the industry" (p. 89).

To boost provincial own revenues, the IGFR recommends that provincial treasuries should assume a stronger oversight and management role, driven by directorates for own revenues. This is a useful recommendation, given the current institutional fragmentation of responsibility for own revenues across different departments and agents.

The IGFR explains that the Budget Council recommended an "allowed list" approach for provincial taxation legislation. This would involve provinces making a submission to the Minister of Finance at least ten months before the beginning of the fiscal year for which the introduction of the tax is planned. The idea seems to be to give the Minister discretionary powers to decide on the "consistency" of the provincial request with section 228 of the 1996 Constitution. If the minister deems that there is "consistency", tax powers would be granted in separate national legislation that would allow any province to enact such a tax at any time (p. 93). The Treasury intends to devise a tightly centralised procedure for authorising provincial taxes.

We are concerned that the provincial budget plans for the next three years do not appear to reflect the above spending pressures. Given the Treasury’s hard line on provincial overspending, these new demands on provincial treasuries will not be financed by overspending. This means that either these demands will not receive financing or they will be financed at the cost of existing services. If the latter course is followed, the opportunities for additional non-personnel and capital expenditure in social services and infrastructure spending are likely to disappear. In fact, as has been the case in the last three years, social service capital and current expenditure is likely to feel the brunt of these pressures with a corresponding decline in social services in the poorer provinces.