There’s a school of thought that argues that the provinces should have limited taxation powers, writes Charlene Smith
Amid reports of budgetary chaos at provincial level, the Financial and Fiscal Commission is increasing pressure on the government to allow the provinces limited taxation powers.
The commission, which advises the minister of finance on provincial budgetary requirements, also wants central government to review the base on which it awards money to provinces.
“Provinces have become consumption federations, where their only expenditure responsibilities are to delegate and not to tax. International experience has shown that without accountability, provinces become amorphous,” says Colin Donian, acting director of the commission.
Its stance is supported by policy analysts from the Centre for Policy Studies and the Institute for a Democratic Alternative for South Africa (Idasa).
“The evidence that there is a problem [with the base on which provinces are allocated funds] is in the difference between budgets and actual expenditure,” says Donian. “There has been a significant deviation. Last year there was a difference of between R4-billion and R6-billion.
“We need to revisit the base. We started off [in 1994] with a set of questionable data and introduced split budgets. But now provinces believe they can overspend hopelessly because national government will bail them out. The Financial and Fiscal Commission is suggesting that budgetary splits have to be revisited.”
The lack of fiscal power is the provinces’ greatest single handicap. The Free State was recently shown to have huge budgetary problems, and last year the Eastern Cape had to be bailed out when it could not pay pensions.
Some experts on provincial funding say the next province that could begin showing budgetary strain is Gauteng. One expert points out that Gauteng’s emphasis on capital expenditure in the past year – which went up 60% – saw it under-budgeting on issues like food and medicines for hospitals.
Gauteng MEC for Finance Jabu Moleketi denies there have been shortages of medicines in Gauteng hospitals – “overcrowding, yes; queues, yes”. However, he says, hospitals have been tardy in collecting fees from patients and he is considering outsourcing to a collection agency.
Moleketi says Gauteng’s deficit for the current financial year will be 1,6%, compared to 2% the year before.
“In the next financial year we will balance the budget. Health is the only area that overspent – by R340-million. If we can increase the collection of fees and manage hospitals better, we can reduce losses.”
Moleketi says although wages account for 64% of the province’s R16-billion budget, they do not fall under his department but under a department in the premier’s office.
Gauteng’s challenges are not unique. While provinces want to deliver to constituents, they rely for 95% of their budget on central government and have the capacity to generate only 5% of revenue.
Provinces are arguing for an 85%:15% situation, so they can accelerate delivery of services. But present budgetary allocations and a lack of power to retrench staff mean that many provinces are crippled with budgets that have wage bills of 94% to 97%, and the remainder for services.
Says Donian: “If the government takes provinces seriously, it needs to ensure they are not political administrations but real political entities.
“Now they can pass blame upstairs to central government. But if they had taxation rights, Gauteng (as an example) could say, if you want a better health system, we will increase personal income tax by 2%. They won’t be able to blame chaos in hospitals on central government. They would become accountable.”
Donian says the key to successful provincial government is “political will and technical capacity. “Gauteng and the Western Cape are the two clear leaders. There is a second group, led by the Northern Cape, who despite enormous general budgeting difficulties and a very small budget to manoeuvre in are still doing financial management quite well.
“Other provinces are trying to improve. KwaZulu-Natal, which has had an enormous problem, is trying to dig itself out. Problems in the Free State have been breeding for the past year.
There is a school of thought, endorsed by the Department of Finance and supported by the Katz commission’s seventh report on taxation, which says the South African Revenue Service could not administer tax collection on behalf of provinces – and the provinces could not do it alone.
But Idasa and the Financial and Fiscal Commission counter that administration of taxes would be negligible. They suggest a surcharge on existing personal income tax (say 5%) should go to provincial coffers.
Peter Miller, KwaZulu-Natal’s MEC for finance, disagrees. He says a surcharge on personal income tax would only benefit richer provinces where more people are employed.
KwaZulu-Natal has seen its budget show a remarkable return in recent months to a sound footing. But, says Miller, “it has not come without a price. We cut education expenditure by R800-million. We cut health expenditure by R600-million.
`The biggest financial challenge is to increase money being spent on productive service provision and reduce the amount spent on the civil service. Too much of fixed costs are salaries, wages, pension benefits and medical aid.
“Actual personnel costs here run into approximately R11-billion. Add to that rates and taxes on buildings and transfer costs to pensioners, and R16-billion of the R17,9- billion budget is gone.”
Richard Humphreys of the Centre for Policy Studies says a fuel tax to help the provinces has been suggested, but “this would only benefit richer provinces that have heavy traffic flow. Provinces should levy taxes.
“I am also sceptical that getting rid of provinces would mean we don’t have these problems. They might manifest in many guises – this would generate another set of problems.
“If provinces were abolished, the most immediate cost savings would be a couple of hundred million in abolishing the different legislatures and premiers’ offices.
“Effective provincial governments cannot be built in five years, and I would argue that major crises in only four of the nine during that time is not too bad.”