This Selected Issues paper highlights that aided by the easing of political uncertainties after the national elections in early 1994 and by the cautious stance of policies adopted by the new administration, economic performance and investor sentiment in South Africa strengthened markedly. Nonagricultural value-added grew by 4 percent in 1995, led by a sharp increase in real gross private fixed investment. In contrast, developments in 1996 were characterized by a shift in investor sentiment and unrest in the foreign exchange markets.

Abstract

This Selected Issues paper highlights that aided by the easing of political uncertainties after the national elections in early 1994 and by the cautious stance of policies adopted by the new administration, economic performance and investor sentiment in South Africa strengthened markedly. Nonagricultural value-added grew by 4 percent in 1995, led by a sharp increase in real gross private fixed investment. In contrast, developments in 1996 were characterized by a shift in investor sentiment and unrest in the foreign exchange markets.

IV. THE NEW INTERGOVERNMENTAL STRUCTURE IN SOUTH AFRICA

134. South Africa has recently moved from an intergovernmental budget structure, which gave little effective discretion over revenue, expenditure, and borrowing to subnational levels, to one which provides considerable expenditure flexibility to the new nine provinces; local governments have not yet been incorporated into the arrangements. This section describes the new intergovernmental structures, assesses their features against a set of criteria, and notes their implications for other fiscal policies. The effects of the civil service wage agreement, and the financial situation of local governments are also described.

A. Intergovernmental Structures in South Africa

135. Until recently, there were three asymmetrical subnational government structures in South Africa. There were four states (Transvaal, Orange Free State, Natal, Cape), which were essentially administrative arms of the central government, with 95 percent of their financing arising from earmarked transfers from the national government; the state administrations had the right to reallocate expenditure within the same functional spending category, but not between functions, and were not allowed to borrow for any purpose.

136. There were 10 homelands: four TBVC “independent states” (Transkei, Bophuthatswana, Venda, and Ciskei), and six “self governing territories” (Gazankulu, Kangwane, Kwandebele, Kwazulu, Lebowa, Qwaqwa), each with their own government. The homelands had considerable discretion over their expenditure, and there was little accountability or transparency in their operations. These were financed by a limited own revenue base (10–20 percent of total resources), transfers from the central government, soft loans from the Development Bank of Southern Africa, and borrowing that was often guaranteed by the central government. Typically, the four states and ten homelands overspent—often by wide margins—and this was covered by further transfers from the central government. Finally, there were three “own administrations” associated with the tri-cameral parliamentary system covering the white, colored/mixed, and Indian populations.

137. The interim and final constitutions established three levels of government: national, provincial, and local. While the final Constitution became effective on February 3, 1997, legislation to support the new fiscal relations is expected to be passed later in 1997, and implemented from January 1998. The provinces and homelands were replaced in 1994 with nine provinces, each with its own government (ranked from smallest to largest in terms of budgeted expenditure in 1997/98: Northern Cape, Mpumalanga, Free State, North-West Province, Western Cape, Northern Province, Gauteng, Eastern Cape, and Kwazulu/Natal). The Constitution requires that the services provided by each province be of a similar standard.

138. Under the new intergovernmental relations, the national government will no longer compile expenditure and revenue estimates of the provincial governments, although it will be available to assist them to do so. Instead, with provincial governments responsible for determining their own budget process, the national government will focus on setting uniform norms and standards for the country as a whole (see below), controlling the national spending departments, and enhancing financial management and training. Aspects that are still to be determined include establishing and enforcing national priorities over the medium-term, setting those norms and standards, determining equitable revenue shares given the regional disparities, and handling unforeseen expenditure.

139. The Constitution also specifies that the Financial and Fiscal Commission (FFC) will provide advice on the development and maintenance of the new intergovernmental financial and fiscal relations. In addition, a Budget Council has been established as a co-operative decision-making body consisting of the Minister and Deputy Minister of Finance, the nine provincial Ministers of Finance, and officials of the Department of Finance, State Expenditure, and Provincial Treasuries. The Budget Council is charged with recommending the revenue-sharing arrangements to the national government, taking into account the FFC recommendations. The national government reserves the right to accept or modify these recommendations.

Expenditure responsibilities

140. The Constitution specifies some exclusive areas of competency for the provincial and local governments, but there is joint responsibility between the national and provincial governments for the largest expenditure: non-tertiary level education, health, welfare, and to a lesser extent, housing. In 1997/98, almost two-thirds of provincial expenditure is expected to go to education and health, of which over three-quarters is for the payment of wages and salaries (Table 1).28 The Constitution also specifies that conditions of service for national and provincial civil services will be legislated at the national level, although provinces retain the right to hire and fire. Major national concerns include defense and foreign affairs, most of police and economic services expenditure, and interest payments.

Table 1:

Indicators of Revenue, Expenditure, and Social Diversity among Provides

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Source: Financial and Fiscal Commission, May 1996; RDP, Indicators of Poverty, October 1995; 1997/98 Provincial Budgets; Budget Review 1997/98; and Fund staff estimates.

Health and welfare combined for Mpumalanga, and shares refer to 1996/97 Budget.

Per capita collections per province relative to national average in 1995/96 fiscal year.

141. To implement these requirements, provinces maintain the major responsibility over education and health, subject to the norms and standards set by the national government. Housing is currently a responsibility of the national level, but may be shifted to the provincial level at a later stage. The establishment of civil service wages and salary rates for both the national and provincial governments is centralized. The level of government responsible for the provision of all or part of welfare services is to be determined.

Revenue responsibilities and distribution

142. While the Constitution is explicit concerning the assignment of expenditure responsibilities, it requires only that there be an “equitable” distribution of nationally raised revenue between the national, provincial, and local levels. Provinces may not charge taxes, levies, duties, or surcharges on corporate income, value added, property rates, or customs duties; they may charge a flat surcharge on the tax base of personal income or excises.

143. In May 1996, the FFC published recommendations on the distribution of nationally collected revenue between the national and provincial governments (the vertical share), and between the provinces themselves (the horizontal share). Regarding the vertical share, the FFC recommended that the current ratio of national to provincial government expenditure shares shift in favor of the provinces by 0.5 percentage points a year. This was based on the assumption that the demand for services from the provincial authority will grow with the population, while many services provided at the national level will not do so (e.g., defense).

144. Regarding the horizontal share, the FFC recommended that the inter-provincial allocation of resources be based on (i) a minimum standards component to ensure that the education and health standards in each province meet the national objectives; (ii) a spillover component for academic hospitals; (iii) a fiscal capacity equalization component to compensate provinces with small tax bases; (iv) an institutional grant set at a flat amount per province to defray the cost of basic legislative and administrative costs; and (v) a distributional factor based on the population of each province, with an added weight for the share of the rural population as a proxy for poverty. While the formula should remain unchanged for at least three years to provide for stability in planning at the provincial government level, the formula would be phased-in over six years to limit adjustment costs.

145. The national standards component is intended to ensure a minimum level of basic human capital in the form of primary and secondary education, and primary health care. The education component would ensure that there are sufficient funds to employ primary school teachers in the ratio of one teacher per 40 children with a secondary school teacher-student ratio of 1:35, as well as to fund average non-salary costs.29 The formula is not intended to address backlogs in infrastructure in some provinces relative to others. The health component would be based on 0.5 trip a year to primary care facilities for those with private health care, and 2 trips a year for those without (rising gradually to 3.5 trips a year as the primary care system is expanded).30 The small spillover component would finance training of doctors at academic hospitals which have externalities for other provinces (Gauteng and Western Cape have these facilities and thus have high shares of health in total expenditure).

146. The fiscal capacity equalization component is based on the principle that provinces should generate some revenue to cover part of their expenditure, particularly at the margin. As indicated in Table 1, provinces currently derive around 95 percent of their total revenue from transfers from the national government. The FFC notes that if virtually all revenue continues to come in the form of transfers on which the provinces have no discretion, there would “be an invitation to spend recklessly, because the provincial government would be absolved from having to justify its expenditure programme to its constituency, while the total obligation to raise taxes would rest on the national government.”31 To address this potential problem, the FFC suggests that provinces be allowed to levy a flat surcharge of up to 12 percentage points on the personal income tax rate that is collected in their territory. Personal income taxes that accrue to the national government would then be reduced by a uniform 7 percent for all provinces, although the transfer from the national government to each province would be reduced by just half of the 7 percent (regardless of the rate the province chooses for the surcharge). Apart from the small “institutional capacity” grant, the remaining funds would be distributed on a per capita basis, with the portion of the rural population weighted by 1.25 times;32 after having subtracted the above items from the total pool of funds, this component would comprise around 45 percent of the total transfer.

Borrowing arrangements

147. The Provincial Governments Borrowing Act was passed in 1996 and defines the borrowing rights of the provincial governments as specified in the Constitution. The bill prevents provinces from borrowing to finance current expenditure (with the exception of bridge financing that is repaid within twelve months). Borrowing for capital expenditure must meet the approval of a loan coordinating committee, which the Minister of Finance chairs and who has veto power. Borrowing by a province (including borrowing through provincial enterprises or development corporations) is capped by a limit on the annual gross interest payments (including all forms of finance charges and deferred interest) relative to current revenue. The provision of a national guarantee on provincial borrowing requires an Act of Parliament.

Arrangements for 1997/98

148. While the FFC’s proposals are being considered, the Budget Council has recommended a somewhat different approach for 1997/98, Before sharing revenue between the national and provincial levels, a claim on nationally collected revenue was given to certain prior expenditure commitments, comprising: (i) interest on public debt (including debts of the former TBVC states); (ii) increases in civil service salaries; (iii) expenditure that had originally been initiated under the Reconstruction and Development Program (see Section I); and (iv) a contingency reserve and certain extraordinary items, while taking into account the projected budget deficit reduction.33 After funding this “top slice,” the balance of the revenue collected was divided between the national and provincial governments using the same share as in the 1996/97 budget after subtracting the same items, which yielded 77.4 percent of the remaining revenue accruing to provinces. The distribution to each province (the vertical distribution) was broadly in line with that recommended by the FFC.

B. Assessment of the New Intergovernmental Arrangements

149. International experience with intergovernmental relations suggest the critical factors that determine success includes the following areas:

(i) Expenditure issues, such as how allocative efficiency is reconciled with national priorities and standards, how national standards are enforced without resorting to unfunded mandates, and whether provinces have sufficient administrative capacity to operate effectively;

(ii) Revenue issues, such as how the national and provincial revenue assignments are specified, and how the revenue and expenditure assignments link responsibility with accountability; and

(iii) Borrowing and macroeconomic issues, such as whether the arrangements enable control over the deficit for general government; and whether the general government deficit can be adjusted for macroeconomic needs.

Expenditure assignments

150. Expenditure assignments are allocatively efficient when responsibility for each type of expenditure is assigned to the level of government that is closest to the final beneficiaries of these outlays. The new arrangements are consistent with this approach: the national government maintains a strong role in the provision of public goods such as defense and foreign affairs, while responsibility for most of the other expenditure items is allocated to the provinces. The establishment of broad national norms and standards in important expenditure areas reflects an appropriate balance between allocative efficiency and equity goals.

151. Studies of fiscal relations in other countries suggest that it is also desirable for the national government to remain responsible for expenditure that has a strong aggregate demand impact that is subject to the business cycle (such as unemployment benefits, which are small in the case of South Africa), and where there is a need to pool risk. The latter concern suggests that it would be more efficient for the national government to be responsible for the provision of old-age and other pension benefits—it currently sets the statutory amounts and eligibility criteria—especially since enrollment in these programs has been increasing and the need varies by province.34 A similar case could be made for the new nationally legislated child allowance (see Section III), where the take up rate is currently very uncertain. Further, the operating offices for the pension and child allowance benefits should remain under the national government to ensure proper vetting procedures. If responsibility for these programs were kept at the national level, total transfers to provinces would have to be reduced by around 12 percent. Other welfare assistance could be the concern of subnational levels, so that these programs are tailored toward the specific needs of the area.

152. It is important that the norms and standards set by the national government do not become unfunded mandates, and that the provincial priorities for their own expenditure are consistent with those for the country overall. In this regard, it is timely that the Department of Finance is developing a three-year medium-term expenditure framework, with close co-operation of the provinces, which together will set national and provincial priorities within a sustainable expenditure envelope (see Section III). The medium-term expenditure framework will also have another advantage; given that it is based on existing policies, it will indicate the cost to the provinces of conforming to the national standards, and the transparency of this approach will reduce any incentive for the national government to set unfunded mandates that the provinces will find hard to meet.

153. One aspect that is still to be determined is how the norms and standards set at the national level are to be monitored and enforced. To perform this function, an effective method to share provincial expenditure data needs to be established, as well as a system to centrally monitor the delivery of services (as opposed to just the expenditure) according to nationally set social objectives. Thus far, provinces are required to submit monthly cash plans at the start of the fiscal year, and to provide two budget updates during the year; it is possible that more frequent sharing of expenditure data will be required.

154. Realizing actual efficiency gains in expenditure can be undermined by institutional constraints on the administrative capacity of some provincial governments (including overstaffing, poor technical skills and training, inability to formulate and implement effective spending programs), and inability to develop modern and transparent expenditure management systems (including adequate financial control, reporting, accounting, and evaluation of expenditure programs). Improvements in a number of areas to achieve sound public expenditure management systems, especially for the provinces that have the weakest administrative capacity, have been identified (Box 3). Although the need is large, the process is likely to take time. It requires: (i) a clear definition of assignments to avoid duplication and waste; (ii) the establishment of clearly defined intergovernmental transfers that result from a formula-based approach; (iii) modern and comprehensive standardized budget classifications and accounting procedures; (iv) rolling plans that are exchanged between governments and regularly updated; (v) modern and computerized accounts-based systems to enable monitoring and control of all phases of government to help prevent arrears; and (vi) common audit and evaluation channels. The national government is also considering the possibility of centralizing wage payments to ensure that there are no wage arrears; in such an event, wage payments will be deducted from the transfers to each province. As explained below, however, provinces could influence the size of the wage bill through their employment policies.

Revenue responsibilities

155. The Constitution specifies that the national government should tax the bases that are mobile, sensitive to income changes, and are unevenly distributed across regions; this suggests a national focus on taxes on corporate income, natural resources, and foreign trade. Accordingly, the FFC’s recommendations to provide limited taxing powers to the provincial governments are appropriate. As the FFC notes, arrangements which assign almost all taxing powers to the national government are undesirable since they separate spending authorities from revenue-raising responsibilities and obscure the link between benefits of public expenditures and the taxes needed to finance them.35

156. The FCC recommends that the personal income tax is an appropriate base for a subnational surcharge since its base is typically less mobile than that for other taxes. To minimize distortions, the tax base—as opposed to the rate—should be the same country-wide. A surcharge on the personal income tax can, however, be difficult to administer. It requires knowledge of a taxpayer’s residence (as opposed to the place of employment), creating problems for taxpayers that currently earn less than the income threshold where they would be required to submit a tax return (currently R 60,000 a year), and for individuals that earn income across several provinces. An alternative would be to set the personal income tax surcharge on the basis of the location of the employer, although, if employers were allowed to register in any province for tax purposes, there would be an element of tax competition between provinces. Nonetheless, given that the top marginal personal income tax rate is already fairly high in South Africa, an alternative to the surcharge would be to base the system on an indirect tax. While there would also be serious co-ordination problems for multi-stage taxes like the VAT, selected excise taxes are possible candidates. As these would encourage avoidance of such taxes by crossing provincial lines, these tax rates may also need to be fairly similar across provinces.

Budget Features of the Nine Provinces

Northern Cape (population 0.9 million; received 2.5 percent of 1997/98 transfer):

  • - large distances with little economies of scale in spending

  • - low rate of job creation and high share of budget spent on welfare

  • - difficulties attracting skilled public staff; lack of co-ordination between ministries

Mpumalanga (population 3.0 million; received 6.0 percent of 1997/98 transfer)

  • - recent improvements in capacity to deliver and budget planning processes

  • - need for improved expenditure data by department

Free State (population 3.1 million; received 6.9 percent of 1997/98 transfer):

  • - second poorest province with large welfare needs

  • - need for improved budget planning and a strategic plan

North-West Province (population 3.9 million; received 8.4 percent of 1997/98 transfer):

  • - traditional sectors of mining and gambling in decline

  • - large rural population with high illiteracy and poverty rates

  • - difficulty attracting skilled civil staff

Western Cape (population 4.0 million; received 10.9 percent of 1997/98 transfer):

  • - relatively wealthy with potential for tourism and industrialization

  • - poverty levels are half the national average

Northern Province (population 5.7 million; received 12.9 percent of 1997/98 transfer):

  • - large rural share; high rate of poverty; poor basic infrastructure; low tax capacity

  • - large civil service with low productivity

  • - budget process and co-ordination among departments need strengthening

Gauteng (population 8.6 million; received 16.1 percent of 1997/98 transfer):

  • - relatively wealthy with strong tax capacity based in Johannesburg-Pretoria area

  • - produces half of direct taxation and poverty levels are one-third the national average

  • - planning and finance link strengthened via medium term expenditure framework

  • - large risk of underestimating welfare payments which are provincial responsibilities

Eastern Cape (population 7.5 million; received 17.1 percent of 1997/98 transfer):

  • - rural share at 65 percent; low job creation; high welfare needs; low tax capacity

  • - lack of administrative capacity and infrastructural development

  • - difficulties integrating former homeland states into an integrated civil service

Kwazulu-Natal (population 9.5 million; received 19.3 percent of 1997/98 transfer):

  • - large infrastructural backlogs

  • - low level of capacity in many departments, especially in local government

  • - need for better links between planning and finance

Sources: IDASA Budget Information Service, Budget Watch, March 1997; and Table 1.

157. Several other issues arise in the context of the FFC’s recommendations. The FFC recommends that the surcharge on the personal income tax be capped (at 12 percent). However, the link at the margin between additional expenditure and additional revenue will not be effective after this level is reached; should any further expenditure be undertaken, given that the provinces would not be allowed to augment their revenue through an increase in the surcharge, the national government will as now have to choose between declaring the province in default, or transferring additional resources. In addition, the flexibility that the link between different levels of expenditure and different levels of the surcharge provides to provinces depends in part on the overall degree to which provinces have meaningful discretion over their own expenditure. As noted above, much of their expenditure is already determined by the norms and standards set at the national government and by the centralized setting of civil service wages and conditions (see below). Finally, the independence granted to provinces in determining their tax revenue surcharges may come into conflict with the announced policy of the national government to maintain the tax to GDP share at about its current level. This suggests a need to adjust total revenue accruing to the national government to the extent that higher collections are made at the provincial level to maintain the overall tax share.

Aggregate borrowing and macroeconomic stability

158. The establishment of an institutional forum to consider macroeconomic coordination of budget policies within a multi-year setting is a sound principle. It is also appropriate for the central government to maintain strong control over borrowing and debt; on balance, the rules based approach that has been adopted is preferable to a discretionary approach because it is more transparent and stable. Any borrowing should be in the own name of the province, although this may be hard to enforce in practice.

159. One difficulty for macroeconomic stability arises as a result of the large level of resources that are allocated to provincial governments, which therefore may have to play an active part in fiscal management. This issue was highlighted in the 1997/98 Budget, where over half of the reduction in the projected deficit as a share in GDP came from a decrease in provincial transfers. In this context, an issue arises concerning how revenues are to be allocated as they vary over the business cycle. One approach could be to keep the level of resources made available for recurrent expenditure—such as education and health—constant in real terms, while varying the level of provincial capital spending. Another approach, which is followed in some countries, where provincial revenues are based on a formula, is to have discretionary transfers of the national government during downturns which are financed by national government borrowing. The establishment of a contingency may be helpful in this regard.

C. The Civil Service Wage Agreement

160. The three-year wage bill agreement described in Section III raises a number of issues regarding several of the new intergovernmental arrangements. Civil service costs are the largest component of provincial expenditure, but wage levels are negotiated at the national level which limits provincial discretion over their own expenditure, which was one of the goals in establishing the new intergovernmental relations. While provincial governments have the right to hire and fire, the wage setting provisions are especially constraining because provinces also have to meet the national standards covering, for example, the teacher-pupil ratios at the primary and secondary education levels, and teacher salaries are the largest expenditure item for provinces.

161. Further, the interplay between the civil service agreement and the distribution of revenue on the basis of formula has several implications. Provinces receive allocations based on existing staff rather than current need. However, given that the civil service agreement essentially attempts to specify the total cost of provincial and national government salaries, savings from “right sizing” are to be used to fund further wage increases for those that remain. This implies that provinces that initially have either sufficient or too few civil servants in absolute terms will find their wage costs increased due to the savings that accrue to the provinces where there is currently an excess of personnel; this seems to disadvantage provinces that do not start with excessive civil services. This could be corrected by reallocating transfers among provinces in a discretionary fashion, but it would contradict the stable nature of the revenue sharing arrangements and would not provide an incentive for a province to downsize.

162. Finally, because the wage bill is set in nominal terms, shocks to GDP or the adoption of a more ambitious deficit reduction program affects the wage/nonwage split of each province. This was evident when the deficit target (excluding extraordinary revenue) was lowered—in accordance with the GEAR—from 5.6 percent of GDP in 1996/97 to 4 percent in 1997/98. In consequence, wages and salaries are now 49 percent of non-interest expenditure of the national and provincial governments, compared to 44 percent in 1995/96 (the year before the civil service agreement became effective). Table 1 shows the share of wages at the provincial government level is even higher and hence that the compression of the wage/nonwage split may have been more extreme.

D. Local Governments

163. Local governments play an important role in the fiscal system of South Africa, although they have not yet been incorporated into the new intergovernmental structure. Spending by the 835 municipal budgets was around 7.5 percent of GDP in 1996/97, including capital expenditure of 1.8 percent of GDP. Six metropolitan councils and their substructures account for half of total local government expenditure. Loans amounting to 55 percent of planned capital expenditure were budgeted in 1996/97. In principle, local governments have a substantial tax base compared with provincial governments, as own revenue accounts for 90 percent of their collections (charges on utility services electricity, water, and sewerage), which are bulk purchased from suppliers and sold to final users, property rates, and a turnover tax of 0.25 percent). In recent years, local governments have collectively had a deficit of just 0.2 percent of GDP; borrowing is restricted in the same way as for provincial governments.

164. Until recently, there were two groups of local governments. White local authorities (WLCs) which had significant revenue raising capacity and fiscal autonomy; revenue was mainly derived from local property taxes and the sale of electricity and water purchased from the utility companies; grants from the national government and the TVBC states were equivalent to just 3 percent of their total revenue. Black local authorities (BLCs), in contrast, lacked economic activity and hence a revenue base to be self-sufficient, and were therefore effectively wards of the state; their revenue from housing rents and utility charges was limited by payment boycotts, with the consequence that over 85 percent of the BLCs’ revenue came from intergovernmental grants. Partly in response to this structure, debt to local governments, especially the BLCs, have recently increased due to nonpayment by households of the property rates and services provided to them by local governments. These debts have reached R 6.5 billion or 25 percent of annual property rates and service income, threatening the viability of several local governments. In turn, local governments owe R 26 billion.

165. The Constitution requires that local governments receive an “equitable” share of nationally raised revenue, which suggests that local governments will in future receive a higher share of their resources from the national government, with offsets from the provincial governments. In the interim period, the Local Government Transition Second Amendment Act of 1996 enables the national government to set limits on the rate of growth of local government expenditure. For each municipality, this rate of growth was set at 10 percent for 1996/97, and was reduced to 8 percent (for both current and capital expenditure) for 1997/98. The Act also envisioned monitoring at the provincial instead of the national level; this function is expected to be devolved in 1998/99. Finally, to start to alleviate the debt problems, “Project Liquidity” was launched in 1996, with teams from each province charged with visiting every municipality and reporting its cash flow problems, conducting detailed assessments, and making appropriate recommendations.

28

Specifically, around 40 percent of provincial government expenditure is for primary and secondary education, teachers and technical colleges, and special education; almost 90 percent of this expenditure is for personnel costs; 22 percent is for health services, although in provinces such as Gauteng that supply academic health facilities this share increases to 34 percent of total expenditure, with 55 percent of this expenditure for personnel costs; and 20 percent of their expenditure is for social security and welfare, where the provinces simply serve as a channel for payments made to individuals under national government norms.

29

In 1996, the average salary of a teacher, including bonuses, was R 61,000 a year, and non- wage costs were around 40 percent of wage expenditure. This implied an average grant per child of R 2,250 a year.

30

The average cost was R 240 a visit in 1996.

31

Financial and Fiscal Commission, The Allocation of Financial Resources from the National and Provincial Governments for the 1997/98 Financial Year, May 1996, page 14.

32

Rural shares of total provincial population vary from less than 15 percent in Gauteng and Western Cape, to more than 90 percent in Northern Province. Table 1 seems to indicate a positive correlation between poverty and rural population shares.

33

Since all borrowing accrues to the national government to pay for its expenditure, the total amount of revenue available for distribution between the national and provincial levels has to be reduced by the magnitude of the change in the programmed budget deficit so that the burden of adjustment is not borne only by the national government.

34

For example, the share of welfare in total expenditure in the Northern Cape is double that in some other provinces.

35

Nevertheless, not all taxing powers should be assigned to provincial or local areas because this deprives national government of a macroeconomic tool and has income inequality problems.