Provinces and municipalities will be hardest hit by a slowdown in spending as government accelerates its drive to reduce expenditure and restore fiscal stability.
“Provincial and municipal governments face multiple pressures over the medium term as government reduces spending growth, and poor economic performance affects other revenue and funding sources,” finance minister Enoch Godongwana said in his medium term budget policy statement.
The reduced expenditure comes at a time when local authorities’ revenue collection has been severely depressed because of the Covid-19 pandemic.
Over the 2022 medium term expenditure framework period, transfers to provinces and municipalities will grow below inflation. This could compromise service delivery — including the provision of basic services such as water and sanitation — especially in poor areas.
Provinces are responsible for basic education and health services, roads, housing, social development, and agriculture. Municipalities provide basic services such as water, sanitation, electricity distribution, roads and community services.
Over the next three years, government proposes to allocate 48.4% of available non-interest expenditure to national departments, 42% to provinces and 9.6% to local government.
Allocations to provinces will drop over the medium term. In the 2021/2022 financial year, provinces were allocated R661bn. This will decrease to R658bn in 2022/2023 and to R647bn in 2023/2024. Allocations will increase slightly to R676bn in 2024/2025 financial year.
Allocations to local government will also remain stagnant over the medium term — R146bn in 2022/2023; R148bn in 2023/2024; and R158bn in 2024/2025.
Over the next three years, spending will remain restrained. To avoid a widening of the budget deficit, changes to spending will be funded through improved revenue performance or through reprioritisation and reviewing existing programmes, according to the MTBPS.
It also points out that many municipalities have insufficient capacity to fulfil their financial responsibilities.
“This is evident in overreliance on external financial consultants: municipalities spent over R1bn on financial reporting consultants in 2019/2020, even though financial reporting is a core responsibility of their internal finance units.”
National departments will be allocated about R765bn in 2022/2023, down from R817bn in 2021/2022. Funding will drop further to R743bn in the 2023/2024 financial year, before rising marginally to R774bn in 2024/2025.
Education and culture, which is allocated R1.2-trillion over the medium term, remains the largest expenditure item, “confirming government’s commitment to skills development”, the MTBPS states. This is followed by social development programmes, which will be allocated R975bn, and health (R746bn) over the medium term.
Spending on the community development function (R736bn over the medium term), which mainly provides basic services to households, grows at the fastest rate over the 2022 MTEF period, with an average increase of 5.5% per year. Over the same period, social development spending will contract as the special Covid-19 social relief of distress grant is due to conclude on March 31.
Some of the big winners in the proposed adjustments for the current financial year include Stats SA which is allocated a further R457m, bringing its total allocation for the 2021/2022 financial year to R4.9bn. Home Affairs is allocated an additional R741m, which will see its budget rise to R9.4bn. The Department of Health’s budget will be adjusted upwards by R2.2bn, bringing its total allocation to about R65bn. Defence is allocated an additional R1.8bn that will increase its budget to almost R49bn. The Department of Transport’s budget faces a cut of R1.2bn, reducing its total allocation to R65.4bn.
Godongwana said government remains committed to supporting free higher education. In the 2020/2021 government spent R44.7bn on this function, and this has been increased to R56.8bn in the current year. Over the medium term, funding for higher education will total R158.8bn.
Godongwana also announced that the 2021/2022 fiscal framework includes R3bn in the contingency reserve for additional Covid-19 vaccine purchases and R11bn as a provisional allocation to Sasria for risk coverage in the wake of the July unrest.
He said most of the adjustments, R20.5bn, are to cater for the higher-than-budgeted public sector wage agreement.
The MTBPS highlights government’s continued commitment of resources to core functions and social priorities, despite slower spending growth in recent years in line with fiscal consolidation. The social wage accounts for almost 60% of consolidated non-interest spending over the medium term, with healthcare, education and social protection accounting for the bulk.
Over the medium term, Treasury will continue working with departments to assess the efficiency, effectiveness and performance of selected programmes. General findings from spending reviews conducted in 2020/2021 suggest the need to: improve design to ensure the development of policies that are affordable in the current context, and avoid overlapping mandates; review procurement processes to eradicate corruption and ensure delivery of cost-effective solutions; and contain compensation spending through a combination of headcount and remuneration measures.
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