History of the FFC
South Africa is a unitary state with three levels of government - local, provincial and national. Each of these tiers of government is assigned certain powers, functions and financial resources. Each function may be exclusive, concurrent or shared.
The three tiers of government are superimposed on an existing tax (and public expenditure) regime, which is characterised by severe vertical and horizontal fiscal imbalances. In other words, while national government raises the vast bulk of aggregate revenues, its expenditure responsibilities are much lower. There is thus a mismatch between revenues raised and expenditure responsibilities. The converse mismatch exists at provincial level. Provinces only raise a small proportion of the revenues to meet their expenditure responsibilities. This vertical mismatch is known as vertical fiscal imbalance. Horizontal fiscal imbalance exists amongst provinces, and also amongst localities within provinces. There are massive relative differences amongst provinces' expenditure responsibilities, and existing (also potential) revenue sources.
A country characterised by these features, and with a sensitive political history, is dependent on a fiscal system which provides for intergovernmental fiscal transfers. It is essential that the relative sizes of fiscal resources which have to flow between and amongst governments and tiers are determined equitably and in a transparent manner.
A system of intergovernmental fiscal relations (with an emphasis on fiscal flows) however has the potential for political manipulation, unless it is based on equity, which in turn is based on sensible, reasonable, objective and quantifiable criteria. In addition, it is highly desirable to have an impartial and independent institution to ensure that the system developed and implemented contains the above mentioned characteristics. Thus was the inauguration of the Financial and Fiscal Commission.