Budget adds to problems in delivery to the poor

Financial markets approved of last week’s budget saying it demonstrated commitment to fiscal consolidation (by increasing revenue and curbing expenditure). But who will bear the cost of this?

Trade unions and opposition parties have criticised the "slap-in-the-face" one percentage point hike in value-added tax as a regressive tax option given its disproportionate impact on the poor and working class. For workers who spend a significant portion of their income on transport costs hikes in the fuel and Road Accident Fund levies will cause further pain.

The poorest South Africans should also be concerned about the budget’s proposed cutback in provincial and municipal infrastructure grants. Cuts to the municipal infrastructure grants imply less funding for the provision of basic services compromising poor communities’ quality of life over the medium to long term — especially in municipalities unable to leverage their income.

Unions have blamed the Treasury for these choices but they were decided in the context of policy priorities — whether explicit or implicit — that forced leveraging of "undesirable" revenue options and painful budget cuts including a rising public sector wage bill and free tertiary education.

These choices have come at a high price for a stretched fiscus. Perhaps the starkest admission in last week’s budget speech was former finance minister Malusi Gigaba’s concession that "we would like to be able to allocate more to each sphere for service delivery and a larger share to local government but the reality is that the rising cost of servicing our national debt leaves fewer resources available to invest in services across all three spheres of government".

While this argument points to the opportunity cost of servicing debt necessitating unappealing tax options they are also the consequence of the South African Revenue Service’s inability to collect sufficient revenue against uncurtailed state-owned enterprises’ liabilities.

Something had to give with weaker tax collections and higher expenditure obligations negatively affecting tax morality. Underspending of provincial and local grants presented a low-hanging fruit for hard-pressed Treasury officials who acknowledged that the implied delay in infrastructure roll-out represented a "big trade-off".

Local government’s R13.9bn medium-term funding cuts have had a huge impact on municipalities relative to other government spheres. These trade-offs were not clear in the budget but should be part of the emerging debate on policy options and choices to plug the gap between expenditure and revenue.

While allocations to local government’s equitable share will grow over the medium term — with total direct allocations to local government increasing at an annual average rate of 7.5% — the intended focus on supporting free basic services means much of this will go into covering the bulk costs of water and electricity.

Worse it could be spent on salaries. The Treasury has found that in a sample of municipalities receiving larger cuts of the equitable share these financial gains were passed on in the form of personnel expenses potentially "crowding out the service-delivery impact". As staff numbers remained static salaries were significantly higher.

In its Budget Review the Treasury urges communities to engage their municipalities on this spending but it is typically only resource-rich groups that are be able to do so.

Increases in the equitable share and a more redistributive design — assuming that it is productively spent — means little if there is no bulk infrastructure in place to deliver the services.

The Treasury argues that the formula of the municipal infrastructure grants "reduces the impact of reductions on smaller municipalities" but also concedes that project-based grants such as electricity and water will "be postponed".

If grant spending is re-adjusted upwards in financially healthier years which are hopefully to come why has there been the underspending that prompted (or justified) the pruning of local government’s conditional grants?

Cutting back on unproductive spending does little to address serious delivery failures which affect the poorest South Africans. This is a concern that should not be shouldered exclusively by the Treasury and should inform the policy priorities for Co-operative Governance Minister Zweli Mkhize. Perhaps part of the problem is that Mkhize is the seventh minister in 10 years in this challenging portfolio.

The Treasury provides a sobering analysis of some of the reasons for the underspending in a report to Parliament in 2017 including unrealistic budgeting poor expenditure management liquidity and delays in paying creditors. These are all alarming indicators of systemic failure not of cash-flush institutions.

Gigaba indicated that he hopes cities will leverage more of their own funding for infrastructure — although already hard pressed they will need to pursue a range of revenue-raising options including the possibility of development charges.

Accessing financial markets or leveraging development charges however are clearly not options for the country’s poorer less economically viable and more grant-reliant municipalities which means that they typically have significant backlogs and will be the most compromised by budget cuts.

Another group of municipalities likely to struggle to access financial markets are newly merged or reconfigured ones without track records of financial due diligence processes.

Disproportionate urban investment (in favour of already developed areas) is likely to accelerate urbanisation given that this is where services will be more easily accessed. This will push migrants to cities at an even faster and possibly unsustainable pace.

It is also likely that service delivery protests in fast-growing informal settlements are likely to continue or even accelerate as more migrants arrive in search of a better life. Pressure on resources in cities especially around housing commonly manifests in protests.

In poorer municipalities stalled infrastructure projects may directly trigger protests especially where communities are keenly aware of time-frames for the delivery of basic services such as piped water.

Residents left behind in these dysfunctional municipalities including some of the poorest South Africans will have to wait longer for bulk infrastructure. In the past institutional issues may have been the biggest stumbling block but now funding is an immediate disqualifier.

It can only be hoped that these residents will be protected somewhat from rising taxes by zero-rated food items and social grants as well as by their municipality’s equitable share allocation but it is clear that last week’s budget was not good for the poorest South Africans nor for the municipalities in which they live.