Grants for provinces and municipalities take a cut
Grants have been cut to limit growth in government expenditure and ensure public debt is sustainable
Most grants for provinces and municipalities have been reduced as part of efforts to limit growth in government expenditure and ensure public debt is sustainable.
The reductions took into account past performance and whether there had been significant real growth in allocations in recent years in order to manage the effect on services, according to the Budget Review. Grants that have persistently underperformed have been reduced by larger amounts.
The review highlights that provinces and municipalities account for most public spending in SA, so building a capable state that is able to deliver on its developmental mandate requires provinces and municipalities to have the capacity to spend efficiently. However, this has not always been the case and wasteful spending and corruption continue to undermine the ability of the government to translate budgeted resources into the delivery of services.
The review said that where provinces and municipalities fail to meet basic standards “national government is prepared to impose consequences, including by intervening and withholding transfers.... If a municipality or province does not adhere to grant conditions or is not spending its allocated funds, then further transfers can be withheld or reallocated to another recipient.”
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The government expects to collect tax revenue of R1.43-trillion (26.3% of GDP) in 2020/2021. Over the medium-term expenditure framework period, after budgeting for debt-service costs, the contingency reserve and provisional allocations, 48.2% of nationally raised funds are allocated to the national government, 43% to provinces and 8.8% to local government.
Total consolidated spending will amount to R1.95-trillion in 2020/2021, R2.04-trillion in 2021/2022 and R2.14-trillion in 2022/2023. Relative to the 2019 budget, main budget non-interest expenditure will be reduced by R156.1bn over the medium-term expenditure framework period.
The largest proportional reduction to local government grants in 2020/2021 has been made in the public transport network grant, because only six of the 13 cities receiving the grant have successfully launched public transport systems. The three cities that have shown the least progress — Buffalo City, Msunduzi and Mbombela — have been suspended from the grant and will not receive allocations in the 2020 medium-term expenditure framework period.
Overall, public transport spending is reduced by R13.2bn over the next three years, mainly on allocations to the Passenger Rail Agency of SA (Prasa) and the public transport network grant. The reduced allocation to the agency is mainly due to underspending in previous years, which resulted in huge cash surpluses.
Larger reductions were also made to grants to urban municipalities, which have more capacity to offset cuts by increasing their own-revenue investments, according to the budget documents.
Furthermore, proposed changes to the wage bill, once effected, will result in reductions to the provincial equitable share in the 2020/2021 adjustment budget. These reductions will be fully offset by the lower compensation spending by provinces as a result of the revised wage agreement.
Allocations to the human settlements sector are reduced by R14.6bn over the medium-term expenditure framework period, implying fewer subsidy houses, serviced sites, and related bulk and connector infrastructure. The municipal infrastructure grant is reduced by R2.8bn over the same period, slowing provision of infrastructure such as water and electricity connections to poor households.
The government has also shifted the emphasis of housing policy from building costly subsidised units to providing serviced sites where residents can invest in improvements, according to the budget documents. Funding for this purpose is ring-fenced in the informal settlement upgrading components of the human settlements development grant and urban settlements development grant. Other changes aim to improve the effectiveness of conditional grant spending.
The review emphasises the need to eliminate wastage. “The resulting collapse of basic functions like water reticulation, sewage treatment and safe roads in some parts of the country imposes hardships on communities and increases the cost of doing business.
“For public spending to achieve value for money, the fundamentals of governance need to be fixed at all levels. The 2020 budget protects the transfers that deliver the greatest value, while reducing those spent less effectively. Improving spending efficiency requires greater accountability from provinces and municipalities, especially to the residents who are entitled to these services. Over the period ahead, the national government will continue to fund provinces and municipalities, work with them to build capacity, and ensure that underperforming subnational governments face consequences.”
The 2020 budget includes funding to support pilot initiatives to improve municipal revenue collection. The Treasury will work with selected municipalities that have large outstanding debts to bulk suppliers, including Eskom, as a result of customer non-payment. Smart meters will be retrofitted in these municipalities to test whether revenue collections increase sufficiently to pay for the meters and recover associated costs. If so, further rollout of smart meters may be funded by borrowing against future revenue increases.
In his budget speech, finance minister Tito Mboweni said that while some of the cuts are good for the fiscus, “in many cases we are also making difficult and painful sacrifices. It is therefore important that we direct our constrained resources to areas that have a high social impact and have the largest economic multipliers”.
In the Budget Review, Treasury director-general Dondo Mogajane said expenditure cuts “will inevitably have negative consequences for the economy and social services. But these short‐term costs are necessary to put the country onto a more sustainable footing”.