PUBLIC FINANCE N6 (SUMMARY)

MODULE 1: GOVERNMENT INCOME

Four categories of taxation
Subject of taxation:
- People or legal entities such as a company responsible for paying tax

Object of taxation:
- The income, wealth, property and spending power

Tax base:
- The portion of income, or wealth which is subject to taxation

Tax rate:
- (Tariff of taxation). In the case of personal income, it increases, the more one earns

The difference between deductions, exemptions and tax incentives

Deductions:
- Tax generally applies to net income, authorities allow certain deductions to be made

Exemptions:
- Certain bodies, such as non- profit making, are exempt from tax. Salaries and pensions earned by
heads of state, former heads of state, war veterans, etc. are also exempt from tax

Incentives:
- The government of the day might decide to use fiscal policy to stimulate the economy and growth. It
is possible that special exemptions are used to promote economic development: these might include,
exemptions to exporters; industries which take part in decentralisation activities and training.

General aims of taxation

Source of income:
- To gather enough money to pay for services expected by the citizens of a country

Economic regulatory function:

- To cool down economy; by taking away more from people, citizens have less to spend

Redistribution of wealth:
- More tax is taken from some than others

Types of taxation
Income taxation:
Personal income tax:
- Is responsible for the bulk of revenue of the state
- Determining which income should be taxable – by allowing exemptions and deductions
MLT-BBB-CCCCCCCCCCCCCCC Date Page 1 of 13 DDDM/ddd
  Deductions: The following expenses are deducted from the gross salary earned before the tax is
applied: personal medical aid; tool allowance; expenditure incurred because of physical ability;
pension fund, etc
 Exemptions: Certain individuals and organisations are exempt from taxation
 Rebates: Amount paid by way of reduction, return, or refund on what has already been paid or
contributed / A deduction from an amount to be paid or a return of part of an amount given in
payment

Corporate income tax:

- Is relatively new – Britain introduced it only in 1947 and America in 1909
Domestic company:
- Company or close corporation that is registered, managed and controlled in South Africa
Foreign company:
- Company registered elsewhere that is managed and controlled from abroad (another country)

Payroll taxation
- It is another form of tax based on income (taxes on the wages and salaries of employees)
- In South Africa the more common examples are: unemployment insurance and workman’s compensation
insurance
- Both these taxes are seen as a type of insurance in order to protect the employers and employees against loss
- If an employee becomes unemployed due to circumstances beyond his control, unemployment insurance
guarantees on minimum income for a period of time (usually six months)
- If a worker is injured in the workplace, workmen’s compensation insurance guarantees compensation for
medical costs as well as loss of income caused by the absence of the worker
- This type of insurance also protects employers against claims from workers due to injuries sustained in the
workplace

How is it possible that after an increase, someone may earn “less” than before, and what is does this called?

- When inflation is too higher, creeping may take effect.

- This means that although salary earners have received an increase, inflation and higher taxes rates mean simply
that he or she takes home even less than before.
- Many cases are cited when have been given an increase, but have ended up taking home less money.
- It is called Bracket Creeping or Fiscal Drag.

Wealth tax (Prosperity)

Property tax:
- Taxes which local authorities charge owners of real property, as rates and taxes

Taxes:
- Money that must be paid to the state, charged as portion of personal and business profits or added to the cost of
some goods or services
MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 2 of 13
Rates:
- Fixed price to be paid
- A tax on land and buildings paid to the local authority

Real property:
- Refers to land plus improvements

Personal property:
- Refers to goods such as furniture and motor cars

Estate duty
- Also known as death duty, and also succession duty
- The estate of the deceased becomes the object of taxation
- Estates consist of the properties that belonged to them at the date of death
- The executor of the deceased person pays the tax: 20% is charged on every 3.5 million
- Majority of citizens do not for it, when they die (pass away), as their estates are less than 3.5 million

Transfer duty
- It covers the costs of transferring ownership of property from one owner to another
- People or organisations that buy properties must pay the transfer duties
- The market prices of the properties determine the amounts of the transfer duties the buyers must pay

Stamp duty
- South African Revenue Service (Sars) has abolished the Stamp Duty Act (77 of 1968) with effect from
midnight on 31 March 2009. The abolition forms part of ongoing efforts to reduce the administrative burden
on taxpayers and simplify South Africa's tax system

Capital gains tax

- Is not a separate tax but is part of income tax
- It arises when people, trusts and companies sell assets
- SARS taxes capital gains at lower rates than it does ordinary incomes
- Capital gains tax applies when an asset is disposed of, in other words it changes ownership. Examples are
when a property is sold or company shares are acquired
- Tax levied on profit from the sale of property or investment
- Tax on capital gains, the profit realised on the sale of non – inventory asset that was purchased at a cost
amount that was lower than the amount realised on the sale

Consumption tax
Value added tax
- Tax levied on each successive stage of trading
- Imposed on supplies of goods

MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 3 of 13

 Import duty (Customs duty)
- Tax collected on imports and exports by the customs authorities of a country
- Used to raise state revenue
- It is based on value of goods called ad valorem
- The government use it to discourage importation of goods, and also to stop “dumping”

Excise duty
- Government imposes excise taxes on high-volume daily consumable products (like petroleum, alcoholic
beverages and tobacco products
- Also imposed on non-essential items (like electronic equipment and cosmetics)
- Discourage the consumption of certain products that are considered harmful, either to the health of the people
or to the environment
- Is often referred to sin or luxury duty

User charges, consumer tariffs and nominal levies

User charges
- Charged for the use of certain products and services
- Fixed cost is usually funded by tax
- Operational cost such as medical services provided, drugs prescribed, etc. becomes the basis for the user
charge

Consumer tariffs
- Provision of water and electricity
- There is direct quid pro quo (something for something / favour or advantage granted in return for something)

Nominal levies:
.....................................................................................................................................................................................
MODULE 2: CHARACTERISTICS AND FUNCTIONS OF THE GOVERNMENT BUDGET

The most important characteristics of budget:

- It is enforceable
- It reflects the political aspirations of the government of the day
- It take into considerations sound economic principles
- It attempts to satisfy the tension between purely political considerations
- It reflects the fiscal policy of the government
- It clearly outlines a hierarchy of authority

MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 4 of 13

Functions of the annual budget:
Reflect policy:
- It is a policy statement
- It is a statement of belief
- Ideals expressed in financial terms
- Political ideals are expressed poorly-people need to be uplifted
- It clearly outlines how elected representatives intends to implement their assigned mandate

Be a source of information:
- All members of the society are affected
- Ordinary voters and taxpayers wait for the budget speech

The budget also informs the following:

 the administrative authority-about the goals and objectives of the government; and how to
execute them in a practical sense
 financial institutions-about changes in the fiscal policy (tax); they keenly wait to see how
they should adjust their own goals and policies
 tax officials of all kinds-from personal accountants to officials from the SARS need to know
exactly what new tax laws apply
 international institutions, government and investors-the policies of other countries, especially
trading partners, private investors and entrepreneurs, and also different institutions involved in
aid and partnership programmes are directly affected by the change in tax laws, and economic
policy

Promote redistribution of wealth:

- This is the most emotional and controversial function
- In order for wealth to be distributed, it must first of all exist
- The person not paying tax at all will enjoy the same services as someone paying a high
percentage of their income in taxes, and so redistribution takes place
- This function becomes a political policy through an altruistic ideal
- Any redistribution of wealth should go directly towards making more wealth

Regulate the economy:

- By taxing people less, more money is placed into circulation
- When private expenditure rises, thereby causing higher inflation, higher taxes will place
less money into circulation-people will have less to spend
- Government may use a budget policy in order to control money supply (monetary policy)

Detail an operating programme:

- It translate overall political policy on the delivery of services
- To realise the goals and objectives of the government of the day

MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 5 of 13

 Three main steps in developing an operating programme:
- Identify the broad, overall policy and direction of the government
- Divide this policy into projects (provide more primary health care, for example) , and these
projects into specific activities (build more clinics in rural areas than hospitals in large cities).
- Schedule the activities of each department and ministry (health, education, protection services,
etc.) in detail sequence

The four components of an operating programme:

 Objective structure
- Reflect the broad objectives-aims, goals and policies which should be realised by any department
 Activities schedule
- Is the second component. Each government department is different
 Resource schedule
- give details about exactly what resources are needed to realise the objective
 Standard expenditure items are detailed in the financial schedule of a budget

The different resource schedules to be found in the budget are as follows:

- Personnel
- Administrative
- Stores and equipment
- Land and buildings
- Professional and special services

Co-ordinate and integrate activities:

- To provide an overall plan so that different ministries and department may plan together
- To make the delivery of services efficient and affective (the overall aim of public finance)
- Health department cannot build a hospital in an area where there is no water
- Goals and objectives of all departments should reflect in one document-giving a holistic-
view of what is to be achieved
- It allows people to be knowledgeable about the activities of each department
- It allows them (people) to prevent duplication and overlapping of activities

Control expenditure:
- The legislative authority wishes to make sure the executive authority realises the goals of the legislature
- The executive authority will have to make sure the administrative authorities have carried out their tasks to
specifications

Two types of controls:

Priori control:
- Priori means ‘before’
- Prescriptions are laid down as to how and when certain programmes need to take place
- A framework is provided in detail
MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 6 of 13
 - To ensure that the spending of public funds take place according to the two essential
principles public finance: effectiveness and efficiency

Ex post facto control:

- It is a latin words which mean ‘after’
- After the event will arise the facts
- Control the results of various activities and programmes
- To see whether the programme has been executed according to laid down prescriptions
- To evaluate the results of programmes and projects

Promote public accountability:

Public accountability means government must accept responsibility for what they do and are therefore
accountable to society
- It is vital that parliament has the supreme authority over the executive and administrative bodies of
Government
- Two lesser bodies must remain fully accountable to the elected representative in the legislature
- Useful for demanding and encouraging accountability
- Serves as a reference when mismanagement is suspected or investigated
- When departments need more money, the National Treasury must encourage them to stick
to the budget

.....................................................................................................................................................................................
MODULE 3: COMPILATION OF A GOVERNMENT BUDGET
Budget concepts
Revenue: The source of funds – income tax, corporate tax, etc
Expenditure: The spending of public funds – this is detailed so that it should be clear to see exactly who gets what
funds
Capital expenditure: This is spending on infrastructure or services which last longer than a current year
Operational expenditure: The funds needed to run a department
Policy directives: At all times any budget should reflect the overall policy of the government of the day
Budget year: The fiscal year of the public service runs from 1 April until 31 March; local government runs from 01
July until 30 June each year

Budget for the central government – the annual budget

Budget cycle:
Preparation:
Giving instructions:
- Government departments are given guidelines by the Treasury
- National Treasury concern is concerned with the overall financial and economic situation
- Departments might be told to limit spending to not more than certain percentage increase over the previous
financial year
MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 7 of 13
- The overall policy direction and priorities are communicated to these various departments

Preparation of the draft budget:

- A finance division of each government department provides a written motivation report
- The motivational report must be accompanied by estimates of what it will cost to continue with existing
activities and to develop and initiate new activities
- This means that the Treasury can clearly see what is planned and how much it will cost

Review of the draft budget:

- The operational departments submit the draft budget to a budget department
- The draft budget consolidates the estimates of expenditure
- The budget department will then check if the budget complies with departmental policy

Consideration of draft budget:

- The executive authority needs to view and approve the draft budget
- The budget department submits one document to the Minister of Finance
- The executive authority may now determine whether the draft budget meets the policy directives

Approval:
- Once the executive authority approves the budget, it is then printed and submitted to the legislature
- In a democratic government only the legislative authority (parliament) approves the raising of taxes,
expenditure of this revenue
- The budget speech is made in parliament by the Minister of Finance

Aims of the budget speech

- To announce publicly the plans of the various departments
- To give the broad outline of the social needs
- To give indication of the financial state of the government
- To announce new policies, goals and explain increases in expenditure
- To announce tax proposals, changes in income and consumer tariffs

Execution:
The budget is then used to check spending – the following is important:
- Funds are made available for specific purposes itemized in the budget documents
- Ministers may approve of excess spending, but only up to an amount of 2%
- Funds allocated must be spent within that financial year
- Funds are not simply spent within the approval of the accounting officer
- Approval of the legislature is needed if departments consider spending funds on anything other than what they
voted for

MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 8 of 13

Control:
- The control of expenditure is a vital component of the budget cycle
- Control measures must be exercised in order for the expenditure to take place according to the wishes of
parliament
- Various powers and authority are invested in the Auditor - General, Accounting Officers and Standing
Committee on Public Accounts

- The main tool of control is the audit – this is the examination of financial records
- There are two different forms of control, namely the priori and ex post facto control

Types of budgets
The revenue budget:
- All income or revenue paid into one account – the State Revenue Fund

The expenditure budget:

- Forms part of the budget which is read and tabled in parliament

There are stipulations and restrictions through government departments may spend:
- only up to 45% of the previous year’s budget, from 01 April – 31 July
- not more than 10% of the total amount of the previous year
- not more than 100% of the previous year’s budget

The Adjustment Appropriation Bill:

Transfers:
- A function may be transferred from one department to another – the funds needed for this also have to be
transferred

Suspension of funds:
- In order for these funds to be allocated to other state departments, they would first have to be suspended from
the office

Roll–overs:
- Commitments were made in a previous financial year, but were not, realised or completed

Unforeseen or unavoidable circumstances:

- Treasury Committee has to approve each submission

Budget Information:
Four factors are essential for classifying information:
Financial responsibility:
- the institution needing finance should be clearly identified

MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 9 of 13

Purpose of expenditure:
- every project or task will start with an objective
Expenditure items:
- once the specific objective is detailed, specific goods and services should be mentioned in order to realise the
objective
Source of financing:
- the source of the funding itself will be the budget vote, a fund or account

Parts of the expenditure budget:

- The organisational unit is the authority responsible for a particular service
- Each unit will then have a budget vote – here the objective of the expenditure is stipulated
- The objective of the budget vote is broad and general
- The budget vote will list programmes such as administration, laying of pipes, construction of dams, etc
- Each programme will consist of an objective (a sub-objective of the budget vote itself), a description and
structure

Provincial revenue:
- All the problems and considerations which apply to a national government, also apply to any provincial
authority
- The following are the main sources of income for provincial government:

National government grants:

- This is the main source of income for provincial governments
- The constitution states that all revenue collected nationally must be divided equitably (fairly) between the three
spheres of government
- Some provinces, though, feel the formula is not fair as the portion they receive is less than their contribution to
the State Revenue Account

Taxation:
- Provinces are allowed to levy taxes on betting (totalisator and bookmakers), motor vehicles-licenses, gambling
fees and gambling taxes

Levies and general activities:

- Levies might include licenses for hunting and fishing; general activities might include fees for hospitalisation,
professional services, etc.

Local government finance:

- The principles of good governance, accountability, effective and efficient expenditure which apply to the
executive and administrative authorities nationally, should also apply to local authorities
- The main differences between the budgets of the national legislature and that of local authorities:

MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 10 of 13

  Capital budgets and operational budgets are drafted separately
 The expenditure and revenue budgets are drafted separately
 There is only one main budget
 A budget vote listing programmes and projects is drawn up for each service
 There is no distinction between collective, particular and quasi-collective services

.....................................................................................................................................................................................
MODULE 4: CAPITAL BUDGETING

Capital budgeting:
- For the purpose of acquiring buildings, land, machinery, equipment and general infrastructure
- This expenditure will last for longer than a period of just one year; the normal timeframe for any budget

Operating or current expenditure:

- For the operation of government departments; the day to day running expenses, for maintenance of
infrastructure such as that of school
- To pay for the running of school – e.g. salaries of teaching staff, administration of personnel, etc.

Separate capital budgets

- Capital expenditure forms an integral part of operating expenditure
- The two work hand in hand to provide a financial plan for realising an objective in the provision of public
services
- Drafting a separate budget might be advantageous for the following reasons:
 Equitable financing
 Stabilising effect
 Greater control

The process of capital budgeting

Capital development programme
Certain criteria are used to prioritise projects:
 High priority for original construction for essential extensions
 Desirable completion
 Useful completion
 Dispensable completion

Operating budget
 No capital budget can be undertaken and financed without the operating budget
 Building a large project, such as dam, will mean added expense to the taxpayer
 If it is financed by using a loan the following three items will have to appear:
 Loan repayments
 Operating costs
 Maintenance
MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 11 of 13
Budget issues and problems
- Political consideration: In Switzerland no capital project can begin without a community voting for it
- With the purchase of equipment, machinery or construction of, say, a building, capital assets are created
- Many major issues such as community needs, cost escalations, technological changes
- Volatile domestic economies could mean drastic fluctuation in loan repayment

Sources of capital finance:

Central government:
- Both capital and operating expenditure are financed from the State Revenue Fund
- Capital projects may be financed from external loans or from internal revenue such as taxes
- Central government has only one source of finance – this is the State Revenue Fund into which all revenue and
loans are paid
- All capital and operating expenditure are funded from this one account
- This source should not be confused with external loans or internal sources

Local government:
Internal capital sources
Tax fund:
- At local government level this might include property tax, user charges, nominal levies, fines and licenses
- Is used to pay the annual instalment which is made up of interest and capital redemption on the loan itself

Consumer tariffs:
- For example such particular services as provision of water, provision of electricity, refuse removal and
sewerage systems
- This tariff is often used to pay the cost of the loan (interest and capital redemption)

Capital reserve funds:

- These funds are accumulated from revenue derived from the tax fund and consumer tariffs
- Funds can be for either specific or general purposes
- Specific purposes, e.g. parking meter fees and tariffs charged for other types of parking

Land trust funds:

- Local authorities often have control of land, sometimes called commonage
- It might be sold and the proceeds of which should be used for the benefit of the public

External capital sources:

Three external sources are generally recognised:
 Donations from private individuals or organisations
 Loans or grants by other authorities
 Loans on the capital market

MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 12 of 13

 Format for capital budgets:
Aspects that will be included if the capital budget has been drafted separately:
 A budget vote for each service
 For each capital project of a budget vote
 Financial sources (internal or external)

.....................................................................................................................................................................................
Compiled by : Hlangabeza MT Date:
M.T. Hlangabeza 01/02/2019

MLT-BBB-CCCCCCCCCCCCCCC 28/01/2015 Page 13 of 13