Provinces and municipalities will be hit hard by deep spending cuts as the state battles to cut back expenditure to claw back fiscal stability.
According to the Budget Review, over the next three years, provinces and municipalities will have to adjust to significant changes in expenditure plans while improving accountability.
“The 2021 budget protects transfers that focus on infrastructure, service delivery and Covid-19 spending, while reducing those spent less effectively,” the review says.
Main budget revenue is projected to be R1.35-trillion, or 25.3% as a share of GDP in 2021/2022. This rises to R1.52-trillion in the outer year (2023/2024) of the medium-term expenditure framework (MTEF).
In total, 48.7% of nationally raised funds are allocated to national government, 41.9% to provinces and 9.4% to local government.
In 2020, the government announced it would not implement the final increase of the three-year public service wage agreement. Because most government employees are employed in provinces, the effect of this decision is most noticeable in provincial transfers. The provincial equitable share is reduced by R58.3bn in 2021/2022, R83.5bn in 2022/2023 and R64.1bn in 2023/2024. Downward adjustments to compensation account for about 85% of these amounts, according to the review. In addition, conditional grants are reduced by a net R10.9bn over the MTEF period.
Provincial governments will, however, receive an additional R8bn in 2021/2022 to continue the public health response to the Covid-19 pandemic and the potential for additional waves of infection.
Provincial governments are responsible for most of the public health system that provides care for Covid-19 patients. Provinces also have to manage schools and the provision of social welfare services.
In his budget speech, finance minister Tito Mboweni said that of the R10.3bn for vaccines, R2.4bn was allocated to provincial departments of health to administer the Covid-19 vaccine programme. The government would also put in place a no-fault compensation fund to cover claims in the unlikely event of any severe vaccine injuries, allocations to which will be announced in due course, Mboweni said.
According to the Budget Review, provinces can mitigate the negative effects of Covid-19 and the associated lockdowns on their revenues by improving efficiency, particularly in the procurement of health equipment. Local governments, many of which have experienced a severe deterioration in basic services in recent years, need to institute financial management reforms where there is significant underspending, the review states.
As part of government’s fiscal consolidation policies over the medium term, transfers to local government are reduced by R19.4bn, including R14.7bn from the local government equitable share, R2.7bn from the general fuel levy and R2bn in direct conditional grants.
The reductions in the direct conditional grants include R329m from the municipal infrastructure grant and R21m from the integrated urban development grant. These amounts have been reprioritised from underspending grants to fund a one-off councillor gratuity for nonreturning councillors.
The largest proportional reduction of R1.3bn to local government grants 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. Indirect conditional grants are reduced by R286m over the period.
Overall, reductions are likely to compromise service delivery — including the provision of basic services such as water and sanitation — especially in poor regions. Municipalities are at the coalface of service delivery and in the forefront in the fight to curb Covid-19.
The 2021 budget includes funding for initiatives to improve municipal revenue collection and support financially distressed municipalities.
In the Budget Review, the Treasury warns that above-inflation wage increases in local government wages will add to the financial pressure on local governments. In July 2020, most municipalities implemented the first year of a three-year wage agreement, negotiated separately from the national agreement that raises wages by 6.25% per year.
“Not all municipalities have budgeted for these increases. Unless municipalities rapidly improve efficiency, this agreement will compromise the local government fiscal framework and service delivery,” the Budget Review notes.
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