The End of the Road: A critical review of the local government fiscal framework
A new study on municipal failure in South Africa
[There is] a financial cul-de-sac that many of the local municipalities and districts have already reached across the whole country, with a few and limited exceptions
- Auditor-General of South Africa, July 2020
In post-1994 South Africa, a central role for local government was envisaged in the new developmental state that would deliver the promised better life for all. Some 25 years later, local government has failed to be at the forefront of delivering transformative service delivery to all South Africans, and to contribute directly to meaningful and sustainable improvements in the standard of living. Many municipalities are in a state of financial distress, and universal access to affordable, quality services has not materialised.
The most important contributing structural factor in our assessment is the overarching fiscal framework within which a municipality is located. The post-1994 fiscal framework for local government was designed to ensure that there was sufficient revenue available to pay for the extended range of services and responsibilities that municipalities would have. The foundation of the framework was the assumed ability of municipalities to raise significant amounts of own revenue. Our research suggests that in aggregate, local government is probably only able to fund less than 50 per cent of (current budgeted) operating expenditure from property taxes and income from the sale of municipal services. This can be compared to the White Paper on Local Government’s assumption that local government could fund 73 per cent of operating expenditure from these sources.
At the same time, the social wage is being eroded: affordable and subsidised access to basic services is an important part of the state’s strategy to reduce the cost of living for poor households, and thereby compensate them in part for their lack of income. The current form and operation of the local government fiscal framework is eroding the social wage to an alarming extent, and thus contributing to increasing poverty and deepening inequality.
We are in an unsustainable situation that is threatening the entire developmental agenda.
The central underlying cause of the current situation is that the operating expenditure requirements of the current structure of local government simply cannot be covered by its revenue-raising arrangements. The gap between the two would be even greater if free and subsidised basic services were delivered as required to address household poverty and inequality. Concurrently, the amount of money that could be saved via the reduction of expenditure ‘leakages’ from the system is insufficient to fill the funding gap, and there is no realistic prospect of national transfers making up the shortfall.
Our only option is to revisit the basic design of local government. More privileged than those who drafted the 1998 White Paper on Local Government, we have 20 years of empirical data in respect of the optimal pricing of services to meet household affordability targets, much better (albeit incomplete) information around the actual costs of delivering those services, and a clearer understanding of the limits of inter-governmental transfers to make good any shortfall. We must use that information to develop an empirical basis to clarify our options in respect of the operating and financial structure of local government, so that we are no longer having these debates on a partisan or partial information basis.
Dr Tracy Ledger and Mahlatse Rampedi are the authors of The End of the Road: A critical review of the local government fiscal framework, which is due for release on 26 August 2020. They are researchers in the Local Government programme at the Public Affairs Research Institute (PARI). https://pari.org.za/local-govt/
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