Unit4- Organisation and functioning of government in terms of intergovernmental fiscal relations PDF

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UNIT 4: ORGANISATION & FUNCTIONING OFGOVERNMENT IN TERMS OF INTERGOVERNMENTALFISCAL RELATIONS (IGFR)1. INTRODUCTION To replace term “levels of government” (with its implication of hierarchy) the SA government adopted the terminology “spheres of government”.  Each sphere can be thought of a...

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UNIT 4: ORGANISATION & FUNCTIONING OF GOVERNMENT IN TERMS OF INTERGOVERNMENTAL FISCAL RELATIONS (IGFR) 1. INTRODUCTION  To replace term “levels of government” (with its implication of hierarchy) the SA government adopted the terminology “spheres of government”.  Each sphere can be thought of as being relatively autonomous from any other sphere, YET at same time having cooperative & interdependent relationship with other spheres.  3 spheres = municipal, provincial & national.  Interdependent autonomy = each sphere should be equally capable of carrying out its own affairs & raising its own revenues within boundaries set by Constitution.  This unit = explain reason for existence of each of spheres & how they cooperate to meet shared goal of promoting public interest. 2. FORMS OF GOVERNMENT  Necessary to distinguish between “federal’& “unitary” states:  Federal state:  One in which number of provinces (also called ‘states’ in USA) unite for certain common purposes.  Unitary state:  Political system in which all powers of govt. are vested in central/national govt. (as is case in RSA) & central/national govt. may delegate some powers to sub-units (provinces & municipalities) & may revoke such delegation.

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 Irrespective of form of govt. = in order for govt. to satisfy citizens’ material well-being, they must have adequate funds & these funds are obtained from different sources in society.  In case of RSA = national/central, provincial & local/municipal spheres of govt. must provide these goods & services. 2.1 National government  Consists of a legislature (Parliament), the President, Deputy President, Cabinet, Ministers, Deputy Ministers and traditional leaders.  According to Constitution, Schedule 4, national govt. has legislative & executive powers over, among others: - agriculture - cultural affairs - communication - education - economics & finance - health services, etc. 2.2 Provincial government  Each of 9 provinces has its own legislature, executive council, Premiers and number of members (MEC’s).  Schedule 4 & schedule 5: require provincial governments to cooperate with national govt. & also to cooperate with local govt. to provide & regulate, among other areas: - agriculture - casinos, racing, gambling & wagering - cultural affairs - education at primary & secondary levels - environment - health services

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- housing - public transport, etc. 2.3 Local government  Important sphere of govt. in that it delivers basic goods & services to members of society, on behalf of 2 other spheres of govt.  Responsibilities are specified in Part B of Schedule 4 & Part B of Schedule 5.  These goods & services are to be provided in cooperation with national govt. & provincial govt. & include: - provision of clean water - provision of electricity - refuse & garbage removals - provision of land for housing purposes - local economic development - road infrastructure.  Govt. of RSA requires substantial amounts of money in order to sustain myriad services that must be delivered.

3. LEGISLATIVE FRAMEWORK FOR REVENUE COLLECTION & ALLOCATION  These acts and policies have direct bearing on who may collect revenue, & how, where & when revenue may be collected & allocated/distributed to different

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spheres & structures of govt. in order to deliver efficient & effective services. 3.1 Constitution of the RSA, Act 108 of 1996  Key features include: i) Is one National Revenue Fund into which all monies received by govt. must be paid; ii) Money may be withdrawn from NRF only i.t.o. Appropriation Act/as a direct charge if provided for; iii) Provincial equitable shares are direct charges against NRF; iv) National legislation = establish a National Treasury to ensure uniform accounting & financial practices, standards & norms; v) National Treasury may stop transfer of funds to any organ of State; vi) National legislation must set conditions for guarantee of loans; vii) FFC must make recommendations to Parliament on equitable shares of 3 spheres of govt.; viii) Are Provincial Revenue Funds, equivalent to NRF; ix) Provincial & local governments are entitled to equitable share of revenue from NRF; x) Provincial & local governments may receive other allocations from national govt., either conditionally or unconditionally; xi) Additional revenue may be raised by provinces & municipalities, but national govt. has no obligation to compensate for such revenue if it is not collected as envisages; xii) Provincial & local taxes may be enacted only after re commendation by FFC & must be regulated in terms of Act of Parliament.

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3.2 Public Finance Management Act, 1999 (Act 1 of 1999)  Focuses mainly on NATIONAL & PROVINCIAL spheres of govt.  Purpose of Act: i) To regulate fin. management in national & provincial governments; ii) To ensure that all revenue, expenditure, assets & liabilities of govt. are managed efficiently & effectively; iii) To provide for responsibilities of persons (e.g. accounting officers) entrusted with fin. management in government.  Aim of Act:  To secure transparency & accountability & sound management of revenue, expenditure, assets & liabilities of institutions of govt. to which Act applies. 3.3 Financial & Fiscal Commission Act, 1997 (Act 99 of 1997)  Promulgated to give effect to constiutitonal arrangements w.r.t. establishment of the FFC & related matters.  FFC act as CONSULTATIVE body on fin. & fiscal matters for organs of State in national, provincial & local spheres of govt.  Must also make recommendations & give advice on fin. & fiscal matters to organs of State in all 3 spheres of govt. 3.4 Division of Revenue Act (DORA)

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 In terms of section 10 of Intergovernmental Fiscal Relations Act, 1997 = Minister of Finance must introduce DORA each year, for next fin. year in National Assembly when annual Main Budget is introduced & is to be voted upon.  DORA must specify: - Share of revenue raised nationally that each sphere of govt. will receive; - Each province’s equitable share of provincial share of that revenue; & - Any other allocations to provinces or local govt. from national government’s share of that revenue, as well as any conditions on which those allocations are/must be made.  After recommendations of FFC are received & before DORA is introduced in National Assembly = Minister must first consult with provincial governments. 3.5 (Annual) Medium Term Budget Policy Statement  MTBPS is issued by National Treasury in October of each year.  Outlines government’s fiscal framework, as well as expenditure plans & policies (by including proposed division of revenue between national, provincial & local governments over 3-year period).  This results in increased certainty with regard to medium- to long-term planning.  MTBPS – not only sets out equitable division of nationally raised revenue between 3 spheres of govt., but also explains rationale behind such division of revenue.

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3.6 Intergovernmental Fiscal Relations Act, 1997 (Act 97 of 1997)  Was promulgated to: - Promote cooperation between national, provincial & local spheres of govt. on fiscal, budgetary & financial matters, & - Prescribe process for determining the equitable sharing & allocation of revenue raised nationally. - It strengthens the provisions of the Financial and Fiscal Commission Act. 3.7 South African Revenue Services Act, 1997 (Act 34 of 1997)  Purpose = provide for efficient & effective administration of revenue-collecting systems of RSA &, for this purpose, to reorganize SARS & to establish an advisory board. 4. INTERGOVERNMENTAL FISCAL RELATIONS  According to section 4 of Constitution = govt. in S.A. is divided into 3 spheres (national, provincial & local).  These spheres are distinctive, interdependent & interrelated with respect to administration & legislation.  National govt. may raise bulk of tax revenue (refer to pp. 75-76, 6.4.1), provinces may raise only insignificant portion of their required revenue from society (e.g. motor vehicle licenses, hospital fees, etc.)  Therefore provincial govt. must rely heavily on intergovernmental transfers.  Same situation for municipalities, especially those located in impoverished areas.

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 This situation creates a fiscal imbalance (mismatch in terms of revenue generation & service provision in 3 spheres of govt.).  Fiscal imbalance = evidenced by serious revenue shortfalls for prov. and municipal spheres of govt.  This situation can be rectified only by effective fiscal system that makes provision for intergovernmental financial transfers & equitable division of revenue raised nationally between 3 spheres of govt. 3.1 Fiscal equalization  To address fiscal imbalance = Constitution, Intergovernmental Fiscal Relations Act, Financial & Fiscal Commission Act & DORA have collectively created mechanism of revenue sharing, so that taxes collected nationally can be distributed across all 3 spheres in equitable manner. 3.1.1 Revenue sharing  Revenue raised nationally must be shared, both vertically & horizontally.  Vertical revenue sharing:  Aim? To address vertical imbalance that exists in terms of revenue capacity between 3 spheres of govt.  Vertical division – allocates funds to national, provincial & local spheres in line with their responsibilities.  Also consider financial efficiency of provinces & local govt.s, developmental needs, obligations & need for stable allocations of money & for flexibility to tend to emergencies.  Horizontal revenue sharing:  Entails distribution of total provincial pool of revenue across provinces.

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 Each year: Budget Council, FFC & National Treasury draw up formula for revenue sharing by 9 provinces (provincial grants formula).  Takes into account demographics, infrastructural backlogs, economic profiles of provinces (indicate demand for education, health, welfare, etc.) 3.1.2 Intergovernmental transfers  Exist as grants (conditional & unconditional) to cover special needs/purposes:  Transfers to equalize average revenue of provinces & municipalities (horizontal effect);  Transfers for special programmes (housing development); and  Transfers from contingency fund. 3.1.3 Unconditional grants to provinces  Made without any conditions being imposed by donor govt. on how they should be spent.  Purpose?  Creating horizontal equality between govt.s at SAME LEVEL. 3.1.4 Conditional grants  Specific conditions imposed by donor govt. & are in addition to provinces’ equitable share (unconditional grants).  Used for specific purpose they are appropriated for.  Aim?  Compensating for cross-border services or meeting costs of national functions administered by provinces/municipalities.  Examples: tertiary health services, professional health training, rehabilitation of hospitals, provision of low-

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income housing, municipal & prov. infrastructure investment, HIV and Aids programmes, etc....