FINANCIAL AND FISCAL COMMISSION

http://www.treasury.gov.za/press/monthly/0308/mpff.pdf
http://www.treasury.gov.za/press/monthly/0309/press.pdf
http://www.treasury.gov.za/press/monthly/0309/schedule_1.pdf
http://www.treasury.gov.za/press/monthly/0309/schedule_5.pdf
http://www.treasury.gov.za/press/monthly/0309/summary.pdf

FINANCIAL AND FISCAL COMMISSION
Submission: Medium-Term Expenditure Framework 2004-2007

EXECUTIVE SUMMARY
This submission is presented in terms of Section 214(2) of the Constitution of the
Republic of South Africa, read together with Section 9 of the Intergovernmental
Fiscal Relations Act of 1997.

Taking into account the relevant provisions of the Constitution, the Financial and
Fiscal Commission’s (FFC) responsibility is to make recommendations that inform
the intergovernmental policy-making process. The FFC has noted in the past that it
remains the role of the three spheres of government and their legislatures to
determine fundamental policy objectives and priorities. The Commission continues
to maintain this approach.

With respect to the Division of Revenue 2003/04, the Commission notes that
government’s response was the culmination of substantive consultation with
national, provincial, and local government, as well as other stakeholders.
Consultative discussions were held during 2002 in national and provincial forums,
the Budget Council, and the Budget Forum. The Commission also notes the role
played by the legislatures and organized local government in facilitating the
consultation process with stakeholders

The Commission concurs with the view that the current revenue-sharing
mechanisms need to be reviewed, as indicated in government’s response to the
Submission on the Division of Revenue 2003/04. The imminent release of Census
2001 results presents a window of opportunity for reviewing the system, in particular
with respect to the demographic data that is used in the revenue sharing formulae.
This submission takes into account the Commission’s recommendations for the
2001/04 MTEF Cycle and subsequent submissions on the Division of Revenue
2002/03 and 2003/04. It also considers government’s response to all these
recommendations. Furthermore the submission takes account of changes in
government policy priorities, such as those in the areas of social security, the
HIV/AIDS pandemic, and the rights of children.
Having considered the contributions of technical advisors and researchers, and of
principal stakeholders in the spirit of Chapter 3 of the Constitution, and having
considered the requirements listed in section 214(2)(a-j) of the Constitution, the
Commission hereby submits its proposals for the fiscal year 2004/05. These are
presented in the following page in summary form with the comprehensive text in
Parts A and B of the main boby of sumission.

Part A: FFC Review of the Intergovernmental Fiscal Relations System in
South Africa
With respect to expenditure assignment, the Financial and Fiscal
Commission:
1. Proposes that a comprehensive poverty alleviation package be designed to align
the system of social security cash grants and social insurance with the provision
by the three spheres of government of free basic services.
2. Recommends that the role of provinces as the appropriate sphere of government
for the functional and expenditure assignment of constitutionally mandated basic
social services (education, health care and social assistance), as opposed to
social security cash grants, be reaffirmed.
3. Recommends that the re-assignment of social security grants to the national
sphere not be implemented until the National Social Security Agency is legally
constituted and physically established.
4. Recommends that the National Social Security Agency be jointly accountable to
national government and the provinces. The governing body should include
representatives from both spheres of government. The agency should be able to
administer province-specific grant programmes, should they arise in future.
Moreover, the agency should be able to co-ordinate its delivery of grants with the
provision of welfare services by provinces, where the same beneficiaries are
involved.
5. Proposes that the assignment of responsibilities between the three spheres of
government be further clarified to enable provision of water and housing. The
delivery of housing and household infrastructure should be closely aligned to
enable integrated development planning.

With respect to performance measurement, the Financial and Fiscal
Commission proposes:
6. That national policy objectives be expressed as delivery programmes at the
appropriate sphere of government for the appropriate government department,
institution or enterprise. Delivery programmes should be directly linked to
spending and funding programmes.
7. That the indicators of policy outcomes, delivery outputs, and financial inputs be
used to evaluate the performance of these delivery, spending and funding
programmes.
8. That consideration be given to both the capital and operational components of
each of these indicators.
9. That government should clarify the definition of access to progressive realisation
of constitutionally mandated basic services so as to minimise the need for judicial
intervention in determining the provision of these services.
10. That the following indicators be used to describe the progressive realisation of
norms and standards for the different CMBS:

Policy outcome indicators:
• Changes in general development indicators, such as poverty,
literacy, and mortality rates;
• Changes in function-specific indicators, such as educational status
and morbidity and infection rates.
• Changes in the proportion of the poor receiving CMBS benefits; and
• Changes in the level of beneficiary satisfaction.

Delivery output indicators:
• Growth rate of beneficiaries of CMBS service and cash grant
programmes;
• Changes in the proportion of eligible populations receiving CMBS
benefits;
• Changes in the real value of personal income grants and service
delivery packages by type of CMBS; and
• Contributions to job creation, small business development, and black
empowerment.

Financial input indicators:
• Real growth rates of actual and projected spending on CMBS
programmes;
• Changes in the proportion of national, provincial, and municipal
spending by type of CMBS;
• Changes in the proportion of GDP spent by type of CMBS; and
• Changes in input costs/prices of identified services.

With respect to constraints on the provision of constitutionally mandated
basic services, the Financial and Fiscal Commission recognises:
• That government revenue is also used for purposes other than the
provision of CMBS, such as infrastructure and economic
development, the criminal justice system, security and protection,
and administrative services;
• That the capacity to raise tax revenue faces collection efficiency,
investment disincentive, and political accountability constraints;
• That the capacity for deficit financing is limited by investor
perceptions of the public sector’s capacity and willingness to service
and redeem debt; and
• That debt servicing crowds out resources that would otherwise be
available for the provision of CMBS.

And therefore, with respect to poverty targeting, the Financial and Fiscal
Commission proposes:
11. That the costs of poverty targeting to minimise errors of exclusion and inclusion
be weighed against the costs of providing free basic services universally.
12. That ongoing studies on the impact of social security provision on income
poverty, CMBS service provision, access to property, and asset poverty be
carried out.
13. That the impact of user fees for the basic social services of education and
health be considered carefully in terms of their impact on poverty alleviation.
14. That the impact of tariffs for the basic municipal services of water, electricity,

16. and public transport similarly be given careful consideration in terms of their
impact on poverty alleviation.

With respect to norms and standards, the Financial and Fiscal Commission
proposes:
15. That norm-setting take account of resource constraints and the need for
flexibility in the event of emergencies and new policy challenges. Norms and
standards can be adjusted according to resource availability, environmental
factors and policy imperatives.
16. That current norms and standards for established public services be based on
current or moving averages or on minimum international standards. Norms and
standards for new public services in response to constitutional mandates,
environmental factors, and other policy imperatives can usually be based on
minimum international standards.

With respect to the collection of data to support the development of the
intergovernmental fiscal system, the Financial and Fiscal Commission:
17. Recommends that provincial and municipal treasuries place their government
budgets and financial statements on departmental and government websites.
18. Proposes that provincial (followed by municipal) treasuries should collate,
publish and place their Provincial Growth and Development Strategies and
Integrated Development Plans on departmental and government websites.
19. Proposes that all official and recognised data sources be identified and audited.
A Census-planning group should be established and charged with developing a
plan for identifying and filling information gaps relevant to the intergovernmental
fiscal system and division of revenue.
20. Proposes that Census-related and regional GDP data collection and release
cycles be co-ordinated with budgetary, capital and operational, and strategic
planning cycles. These might further correspond with the electoral cycle. The
cycles for national, provincial, and local governments could be staggered.
21. Proposes that greater effort be made to reduce the time lag between the
collection and release of national statistics.
22. Proposes that national departments, in collaboration with Statistics South Africa,
collate, verify, and publish data on beneficiaries receiving Constitutionally
Mandated Basic Services, as well as departmental complements of personnel,
and capital assets for their relevant functions. Data should encompass the
service delivery programmes of all three spheres of government.
23. Proposes that socio-demographic data collected during and between official
Censuses identify the population eligible for receipt of social services and
household infrastructure. Further, a methodology for updating and projecting
eligible populations and household infrastructure backlogs should be
established.
24. Proposes that socio-demographic data from the Census and other surveys
should measure policy outcomes, notably of poverty indicators and access to
Constitutionally Mandated Basic Services.
25. Proposes that Statistics South Africa collate various measures of the extent,
cause, and alleviation of poverty to enable a comprehensive analysis of
measures to alleviate poverty.
26. Proposes that a national effort be made to define, identify, and measure the
value, level and rate of depreciation of public sector capital stock, using
consistent standards developed by the Accounting Standards Board.

With respect to funding instruments, the Financial and Fiscal Commission:
27. Proposes that the provision of CMBS be funded through a mix of general
purpose and specific purpose revenue sources.
28. Proposes that the design of conditional grants be negotiated between the
transferring and recipient authorities.
29. Proposes that the role of special purpose grants be circumscribed so as to avoid
distorting the horizontal (and vertical) distributions intended by the Equitable
Share formulae.
30. Recommends that the design of capital grants be based on the progressive
eradication of infrastructure backlogs through the use of a dedicated conditional
grant, which recognises the link between the progressive provision of CMBS
and the concomitant infrastructure requirement.
31. Recommends that the capital grant funds be allocated using an equitable
sharing formula derived from the FFC’s proposed capital grants scheme1.
With respect to fiscal capacity, the Financial and Fiscal Commission:
32. Proposes that a national effort be made to measure the potential revenue base
of provincial and municipal spheres of government.
33. Proposes that socio-demographic and regional economic data be collated for
the municipal sphere and aggregated to equate with national socio-demographic
and economic data. This type of data should be disaggregated to the lowest
possible level.

With respect to budgetary and strategic planning, the Financial and Fiscal
Commission proposes:
34. That linked programmes of delivery, spending, and funding attached to national
policy objectives be outlined for and by national, provincial, and municipal
governments for all identified Constitutionally Mandated Basic Services.
35. That the institutional implications of defining programmes in terms of the linkages
between their delivery, spending, and funding components be researched.

With respect to co-operative governance, the Financial and Fiscal
Commission proposes:
36. That the roles of the Budget Forum and Budget Council be reviewed so as to
effectively coordinate the processes around integrated development planning
and budgeting among the three spheres of government.