Provinces that have already suffered from the fiscal consolidation imposed by Treasury over the last few years will be negatively affected by the low projected growth rate in their budget allocations over the next three years, the Financial and Fiscal Commission (FFC) says.
The medium-term budget policy statement (MTBPS) tabled in parliament by finance minister Enoch Godongwana last week acknowledged that “provincial and municipal governments face pressures from rising costs of basic and social services over the medium term as government contains spending growth and weak economic growth affects other sources of funding. While cost pressures are growing, municipalities are in worsening financial distress.”
The FFC — a constitutional body that studies and makes recommendations to government on its fiscal framework — presented its view on the MTBPS at a meeting of parliament’s two finance committees and two appropriation committees Tuesday.
Shafeeqa Davids, FFC specialist on the division of revenue between the three spheres of government, noted the total allocation to provinces will decrease by 0.03% in nominal terms between 2022/23 and 2023/24 and grow marginally by 2.8% over the 2023 medium-term expenditure framework (MTEF) period. This will have a negative impact on provincial governments she said.
Provincial and municipal governments face pressures from rising costs of basic and social services over the medium term as government contains spending growth and weak economic growth affects other sources of funding.
— Enoch Godongwana, finance minister
The MTBPS proposed a total provincial allocation of R1.7 trillion over the next three years, representing a nominal growth of 2% over the February budget allocation. The equitable share to provinces is expected to decline by 2.5% over this period and conditional grants to grow by 4.3%.
“The commission reiterates its recommendation that given this expenditure moderation, comprehensive reports should be compiled by affected government departments indicating how such moderation is likely to affect delivery of essential services and how tighter budgets would be managed,” Davids said.
Parliamentary Budget Office (PBO) deputy director Nelia Orlandi told MPs that while it appeared there is a reduction in the provincial equitable share, it had to be born in mind that provinces received an additional allocation in the 2022/23 budget for their Covid-19 response. The share did increase if the calculation was done on the 2021/22 budget allocation. The annual average growth rate in the provincial equitable share, she said, was 2.4% over the MTEF period, whereas in the February budget, it was only 1%.
Consolidated government spending is projected in the MTEF period is expected to grow at an average annual rate of 4% between 2022/23 and 2025/26.
Unemployment, poverty and inequality
With regard to local government, Davids noted that, on average, the local government equitable share will grow by 3% over the 2022 MTEF period and expressed concern that this allocation might negatively impact small and more rural municipalities, as many cost drivers of service delivery increase by more than inflation.
A total of R167.8bn is set to be transferred to municipalities in the form of conditional grants over the 2022 MTEF period. Local government conditional grants grew in real terms by 10% in the current financial year and are set to decline sharply by 2% in 2023/24 with further negative growth rates of -1% and -2% in 2024/25 and 2025/26, respectively.
The FFC recommended a fundamental review of local government transfers to ensure the proper equitable sharing of nationally raised revenue among the three spheres of government towards local government.
Overall, the FFC supported the MTBPS’ fiscal consolidation that aims to stabilise and reduce government debt and rein in debt-service costs, though it highlighted the significant global and domestic risks to Treasury’s plans.
This was in stark contrast to the PBO, which advises the finance and appropriations committees on financial legislation and which argued that fiscal consolidation was not an appropriate policy in the midst of widespread unemployment, poverty and inequality.
“We are concerned that the approach suggested may further constrain economic activity, erode the social fabric and escalate risks to societal and economic stability,” PBO director Dumisani Jantjies told MPs. “The approach in the MTBPS continues to narrowly view risks to the fiscal framework as focused on fiscal targets such as the deficit and debt to GDP.”
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