Provinces and municipalities will share R2.95-trillion over the next three years, according to the 2025 draft budget that was rejected by the cabinet on Wednesday, prompting the postponement of the budget presentation to March 12.
Of this amount, R2.4-trillion goes to provinces and local government receives R552.7bn.
With subnational governments receiving 49.7% of total noninterest spending, the focus is firmly on structural reforms to address persistent financial, accountability and service delivery challenges.
Despite increased allocations, rising personnel costs, infrastructure backlogs and weak revenue collection continue to strain provincial and municipal finances.
The Treasury has warned that improved governance and efficiency are critical to achieving sustainable service delivery.
Of provinces’ allocated R2.4-trillion over the medium-term expenditure framework, R633.2bn is allocated through the equitable share in 2025/26 and R134.6bn in conditional grants.
Transfers are projected to grow at an average annual rate of 4.5%, reaching R833.8bn by 2027/28.
Personnel costs — particularly in education and health, which serve 13.5-million learners and more than 53-million South Africans without private medical insurance — remain a key fiscal pressure, consuming more than 70% of some provincial budgets.
To assist with the 2025 public-service wage agreement, provinces will receive an additional R4.8bn in 2025/26, rising to R5.4bn in 2027/28.
A provisional R29.1bn is earmarked for provincial education departments, including R10bn for early childhood development.
In health, R28.9bn is allocated to support compensation costs and improve service delivery, with R16.3bn set aside for compensation costs in provincial health departments and will be distributed through the provincial equitable share.
Reforms to the education component of the provincial equitable share — including better representation of learners with special needs and adjustments based on poverty levels — have been finalised but deferred to 2026 due to data constraints.
Municipalities will receive R552.7bn over the medium-term expenditure framework, accounting for 9.6% of nationally raised funds.
The local government equitable share will rise to R106.1bn in 2025/26, reflecting a 5.2% average annual growth rate.
Despite these increases, more than 70% of municipal budgets now rely on intergovernmental transfers amid declining revenue collection from property taxes and service charges.
Urban municipalities remain more resilient due to diversified revenue streams, but rural municipalities face acute financial distress.
The Treasury’s municipal debt relief programme is faltering, with 47 out of 71 municipalities defaulting despite relief measures.
The Treasury has issued final warnings to several municipalities, including Mangaung Metro, Richtersveld and Inxuba Yethemba.
Termination from the programme will require municipalities to repay their debt and accumulated arrears in full while facing credit control measures from Eskom, such as legal proceedings and the introduction of prepaid bulk electricity systems.
Since the medium-term budget policy statement in October, in which compliance with debt conditions by municipalities had risen to 76%, 11 municipalities have now had one-third of their debt written off after meeting the conditions of the programme. Three additional municipalities are due for relief.
Conditional grants: Streamlining and performance-based incentives
Reforms are under way to improve the efficiency of conditional grants, which total R134.6bn for provinces and R53.9bn for municipalities in 2025/26.
Changes to the intergovernmental fiscal framework include the introduction of a new urban development financing grant.
The new grant is intended to strengthen the management of infrastructure investment in municipal entities that supply water and sanitation, electricity, energy and solid waste management services.
Allocations will be paid to metros based on the achievement of targets related to management accountability, transparency and institutional capability; financial performance, including better collections, cash flow, debtors management and capital investment; and service delivery efficiency, such as reduced losses and better quality and reliability.
This grant will have baselines of R518m in 2025/26, R678m in 2026/27 and R709m in 2027/28.
To promote improved financial management and service delivery, metropolitan municipalities will also benefit from performance-based incentives, with additional funding allocated to metros demonstrating progress in revenue collection, debt management and service delivery outcomes.
In response to persistent challenges in water and sanitation services, R494m has been reprioritised to address wastewater infrastructure backlogs in 21 struggling municipalities.
Treasury warns that implementation will be closely monitored to avoid misuse.
Spending efficiency and governance concerns
While provinces have reduced irregular expenditure from R55bn to R20.7bn, accruals and unpaid invoices rose to R37.1bn in 2023/24, particularly affecting health and education services.
Medico-legal claims — a long-standing issue — continue to drain provincial health budgets, though liabilities have decreased from R111.2bn in 2019/20 to R76bn in 2023/24. Treasury credits improved patient record management and enhanced safety protocols for this decline.
In municipalities, poor financial management and leadership vacancies undermine service delivery. The Treasury has reiterated that vacant senior management positions must be filled to improve accountability.
With disasters becoming more frequent, The Treasury has launched a multilayered disaster risk financing strategy to improve response times and resilience.
Surveys of 40 high-risk municipalities revealed average delays of five months to access disaster funds, worsening recovery challenges.
Underfunded disaster risk reduction measures, ageing infrastructure and capacity gaps in smaller municipalities remain persistent hurdles.
Reforms aim to reduce reliance on slow budget reallocations and improve data accuracy for quicker responses.
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