NJ Schoeman
Professor in Economics
University of Pretoria,
Lynwood Road
South Africa
e-mail: niek.schoeman@up.ac.za
Tel. no. 27 124203455
ABSTRACT
In this paper the fiscal performance of local municipalities in South Africa is analysed against the backdrop of wide spread demonstrations against bad service delivery. In the introduction, the theory behind fiscal decentralisation is discussed with special reference to critique against decentralised service delivery (“second generation thought”) and the conclusion is that in many instances local governments are least equipped to perform the duties delegated to them mainly because of a lack of skills and managerial capabilities, finances as well political factors. In view of the lack of data on performance by local authorities a few criteria have been selected to use as proxies of performance such as debtors outstanding, the ageing of the debt, the revenue collected compared to economic growth in the area, dependency on grants and priorities in terms of expenditure as well as the fiscal sustainability of local governments. An attempt has also been made to group municipalities according to their performance in terms of the criteria defined.
The methodology includes an estimation of optimal revenue collection given the size of the gross value added in the region as well as an intertemporal analysis of the fiscal sustainability of municipalities. The outcome is a reason for concern with approximately 16% of municipalities excluded from the analysis because of lacking information while 21% could be described as fiscally unsustainable. In terms of sustainability both Metro’s and grade B municipalities have to deal with growing debt which will put pressure on own sources of revenue as well as grants from National Government. Revenue mainly comprises income from service delivery such as the distribution of electricity and water while property income also provides some income (albeit at a much lower level). An interesting feature is that revenue from both water and electricity correlates with per capita income in the municipal area. This means that as GVA per capita increases more services are required up until some point where a saturation level is reached. Given the importance of revenue from the sales of water and electricity this means that local governments would be more sustainable the closer their per capita value added gets to the optimum as defined. It could also mean that local governments cannot be sustainable if their per capita value added is substantially below such optimum levels.
The conclusion is that a large number of municipalities are not fiscally sustainable and current debt levels will in future increase to the extent that it will create a substantial additional debt burden to central government.
Key words: Local government; fiscal sustainability; South Africa.
JEL: H71; H72
Primarily, the paper has a macro focus