Rethinking fiscal decentralization in South Africa

Abstract

This article seeks to analyse the fiscal sustainability of municipalities in South Africa in view of increasing protests about the poor level of service delivery – especially in the smaller municipalities. International evidence also reflects disappointment with the classical view that government closer to people addresses the allocation problem more effectively with the lower spheres of government more accountable to the residents. The lack of “hard budget constraints” with revenue support in the form of grants and subsidies causes fiscal prudence to be eroded and in many instances local fiscal objectives are not aligned with that of the national government. Of crucial importance is the sustainability of the finances of the municipalities and this article identifies criteria with which sustainability at the local government sphere can be quantified. Two distinct dimensions are discussed, namely a static dimension as well as a dynamic dimension where the impact of changes in income and expenditures on debt ratios is measured. The results show that if grants and subsidies be deducted from revenue, most municipalities will not survive financially. In many instances revenue is only collected after a long lag if collected at all. Municipalities’ debt is increasing and backlogs in the expansion and maintenance of infrastructure are widening. The research results tend to support the view that government should carefully re-evaluate the number of municipalities allowed to manage their own budgets and that more stringent financial reporting be enforced.