Chair, the Financial and Fiscal Commission is required by both the Constitution and the Intergovernmental Fiscal Relations Act to give comment on government's annual Division of Revenue Bill. The Intergovernmental Fiscal Relations Act also requires the Minister of Finance to consult with the commission prior to the introduction of the Division of Revenue Bill. In preparing its commentary on the Division of Revenue Bill, the commission assesses and analyses the equitable allocation of revenue amongst the three spheres, and horizontally within each sphere of government, taking into account key principles of intergovernmental fiscal relations in South Africa.
The commission's overall finding is that it is in agreement with the general spirit in which the 2007-08 Division of Revenue Bill has been drafted, a view which the DA endorses. In its commentary, the commission makes submissions on the macroeconomic implications of the division of revenue proposals. It is these submissions that I would like to further comment on. It is correctly stated that the Bill is premised on important economic assumptions that underpin the macroeconomic projections used to determine the overall resource envelope underlying the Bill. What is referred to here is a set of macroeconomic forecasts which will determine the value of important fiscal variables. As we are all aware, very often market outcomes will deviate from the forecasts, resulting in - as you have seen over the last three years - substantial budget revenue overruns. These overruns have been increasing from R11,6 billion for the 2004-05 financial year to R44,5 billion for 2005-06, and an estimated R32,8 billion for 2006-07. If prior estimations are anything to go by, it would not surprise me if the final figure for 2006-07 is even higher.
Now, I am aware that tax revenue buoyancy is primarily a factor of new revenue resources, improvements in tax administration compliance in collection and, importantly, higher nominal gross domestic product. I am also aware that Treasury has determined the average responsiveness of gross tax revenue to changes in nominal GDP.
Without detracting from the efficiency of Sars, it is the accuracy of the forecasting of nominal GDP which perhaps bears closer scrutiny. The overruns have not escaped the attention of the International Monetary Fund, which has in the past expressed concerns about "the repeated underestimation of tax revenues". The IMF said in 2005 that overruns needed:
... careful investigation, possibly leading to adjustments in revenue forecasting methods and procedures. Reliable revenue projections are particularly important for the design of credible medium-term expenditure plans.
In a written response to the IMF's concerns, the Treasury said it agreed that its revenue forecasting should be improved, and yet, as we have noted since then, the overruns remain indeed increased in size.
It is with these points in mind that the commission's recommendation of independent verification of underlying macroeconomic assumptions - not policy assumptions, the Minister is quite right in respect of policy assumptions, that is a preserve of the ruling government - cannot be dismissed lightly. Likewise their recommendation that this process be institutionalised, which they are correct in saying, would raise even further the transparency and credibility of the forecasts moving forward.
Following on the whole question of revenue overruns is a related matter of the ratio of revenue to domestic product. This ratio, as the commission points out, is expected to be as high as 28,2%. Now, the commission raises a pertinent question as to whether the tax burden is too high and therefore, as it puts it, inimical to economic growth.
Now, it is not my intention to debate here any of the levels of taxation or recent changes to these levels, or the nature of such changes announced by the Minister in his recent Budget Speech. That could possibly be dealt with in the Budget debate. Where I do seek clarity is on the government's policy or philosophy in respect of the whole question of taxation. So, it is not the technicalities of the tax numbers that we need to hear, but rather the underlying philosophy.
Leading on from that, I am not aware of what informed the often-quoted benchmark of 25% revenue to GDP as being the optimal desired percentage revenue burden. This is a figure that Treasury itself has often mentioned. Is this still appropriate? If not, what informs government's thinking as to the change? As indicated, the ratio is now well beyond that figure, and that is even before the imposition of the royalty tax, as well as any windfall tax on the synthetic fuels industry or on the mineral resource industry as a whole.
I have to identify with the sentiment of the commission expressed, namely that policy choices should be informed not only by up-to-date needs and the capacity of the economy, but by international benchmarking experience. Surely there has to be a case against ad hoc changes to the fiscal regime in favour of the certainty of a stated policy or philosophy by government which, barring exogenous shocks, would be implemented by government over a stated timeframe and under certain conditions. Surely it is this certainty that will help produce a positive climate for investment.
Finally, I would like to mention two specific comments which the commission made, which I find myself in agreement with. The first is in respect of the Municipal Infrastructure Grant where it recommended that the formula be reviewed to take into account the operational and maintenance needs of infrastructure roll-out.
While it is accepted in principle that municipalities, in line with section 17(2) of Municipal Finance Management Act, should fund the maintenance and operations from their own budgets, the reality is that some municipalities just do not have sufficient resources to do so. I am reliably informed by officials in the programme that this often results in costly projects degenerating into all but unusable condition as a result of the reality of a lack of sufficient resources for operations and maintenance.
Secondly, and briefly, in respect of the national housing allocation, the commission proposed that the formula should take into account the variations in regional costs for constructing subsidised housing, and ensuring uniform standards across the provinces.
While I appreciate the government's desire not to unduly further complicate the formula, it has to be acknowledged that the recommendation stems from the significant impact that variations in regional costs have on the quality, completion and lifespan of the government-subsidised houses, not least of which is the cost of land which differs significantly across regions.
The resulting implication is that the cost of meeting the same quality and the standards set out by the national Department of Housing can differ greatly, depending on the location of the housing project. Notwithstanding, the DA supports the Bill. Thank you. [Time expired.] [Applause.]