The MTBPS tabled by the finance minister in the National Assembly on 26 October confirms that the treasury’s fiscal framework only works if municipalities deliberately entrench poverty.
(Paul Botes/M&G)
The medium-term budget policy statement (MTBPS) tabled by the finance minister in the National Assembly on 26 October confirms that the treasury’s fiscal framework only works if municipalities deliberately entrench poverty.
It is a serious issue, so we should all pay attention to it and begin having thoughtful conversations, developing strategies and joining forces with the broader left to fight the treasury, which is dependent on municipalities entrenching poverty to implement fiscal consolidation, which is nothing but fiscal austerity.
Sometimes referred to as a “mini-budget” the MTBPS is tabled in the middle of the financial year and allows the government to propose to the National Assembly adjustments to the Appropriation Act, the Tax Administration Act and the Division of Revenue Act. These are financial bills that parliament approves for adjustments to spending, rollovers, tax rates and adjusted transfers to provinces and municipalities.
The MTBPS is important because the finance minister uses the opportunity to spell out government intentions, as the treasury would have received expenditure estimates from government departments and the minister’s committee on the budget would have approved a preliminary division of revenue and budget priorities for the upcoming financial year.
Also, the medium-term expenditure committee would by now have presented its initial recommendations for funding allocations for key government priorities. What is left between now and when the finance minister presents his Budget in February 2023 is the finalisation of the fiscal framework, which includes the appropriation bill and the division of revenue bill.
Finance Minister Enoch Godongwana made his second MTBPS presentation since taking office in August 2021. While this may be the first MTBPS in which he was involved from the start and may be nothing more than a box-ticking exercise, it is now clear that regardless of who is president or finance minister, the national treasury fiscal framework only works if municipalities deliberately entrench poverty. This is happening in two ways.
For starters, the entire fiscal framework is dependent on limited economic development support. Instead of using the fiscal framework to redistribute wealth in a highly unequal society and drive industrialisation through the procurement of locally produced goods, there is a misguided self-imposed austerity.
This does not work, and there is ample evidence that it has not worked anywhere. Following the 2008 financial crisis, several European countries implemented austerity measures in an attempt to address budget concerns. Instead, we learned from that experience that the damage done by austerity measures to the poor and working class is far more severe and takes much longer to fix.
The treasury is unworried about whether the poor have access to water, electricity, or sanitation as long as the picture painted is one of a fiscal framework that is restoring fiscal strength, whatever that means in the context of high unemployment and poverty, as well as persistent inequality.
The potential for social and economic unrest will only increase, but that is irrelevant. There is compelling evidence that social and economic unrest are real possibilities. In July 2021, civil unrest erupted in large parts of Kwazulu-Natal and Gauteng causing serious damage to livelihood and the economy.
While the national treasury is hell-bent on draining revenue from the economy through austerity in the absence of a credible economic recovery plan, South Africa’s economy is likely to take longer to recover, if it ever recovers at all. A decade of austerity, the collapse of state institutions and the Covid-19 pandemic have all harmed South Africa’s economy.
Maintaining austerity is not only reckless, but it has the potential to plunge the entire country into a social and economic crisis that will make the July 2021 unrest look like a picnic.
Secondly, the current fiscal framework produces a division of revenue raised nationally between national, provincial and local governments that only works if municipalities take from the poor to balance the budget while delivering services to the affluent, mainly minority whites. To fully understand this, let’s go back a bit.
When South Africa transitioned from apartheid to democracy, a decision was made in the early 1990s that only the national government, through the South African Revenue Service (Sars) would collect income taxes from individuals and companies, VAT and later royalties from mining companies, which constitute the majority of revenue that the government collects.
Provincial governments’ revenue is limited to fees for motor vehicle licences, gambling licences and hospital fees. There was no expectation for the national and provincial governments to raise revenue to fund their own activities, as this is funded by revenue collected by Sars.
Local government — which has the primary responsibility to deliver essential basic services such as water, electricity and sanitation — is expected to raise its own revenue, at least the majority of it. The 1998 White Paper on Local Government assumed that income from property rates, sales of electricity, water and sewerage and refuse removal charges would be sufficient to finance 73% of all local government aggregate operating expenditure requirements.
What this means is that there was a misguided assumption that the majority of the citizens would actively participate in the economy, either through employment or business income. However, nearly 25 years later, we now know that the assumption was misguided and uninformed and has proven to be disastrous.
If anything, the decision, like most economic policy decisions during the transitional period, was meant to perpetuate apartheid spatial planning that benefited minority whites in cities with economic activities where municipal councils would be able to collect revenue from the sale of services mainly from companies.
These happened to be metropolitan municipalities such as Johannesburg, Tshwane, eThekwini, Cape Town and Gqeberha. And even with these cities, it is white-dominated affluent areas that get reliable electricity and clean water, with well-maintained roads and relatively functional municipal offices.
Municipalities are required to deliver services on a cost-recovery model to ensure that there is sufficient income while charging households an affordable price. There is neither sense nor practicality to this model because there is no convergence between households’ affordability and tariff pricing that will ensure sufficient municipal income.
Consequently, regardless of any measures to ensure efficiency and rid municipalities of corruption, the simple and correct observation is that the current municipal funding given their responsibilities is not viable.
Here is the calamity of the incoherent assumptions of the 1998 White Paper on Local Government that has been the basis of the national treasury fiscal framework. Each municipality has a responsibility to provide free basic services — electricity, water and sanitation — each month to qualifying households as poor households.
The number of poor households has increased from 8.7-million in 2014-15 to more than 10.3-million in 2020-21, a conservative figure that is likely to be far much higher given a decade of sluggish economic growth crippled by austerity and the absence of economic policy. But the number of registered indigent households in all municipalities was just over 2.8-million. This means that there are 7.5-million poor households not accounted for.
Every year, parliament passes a division of revenue bill that gives local governments an equitable share allocation. Municipalities can use the equitable share allocation for operational functions, including the provision of free basic services, the payment of salaries for municipal staff and other operational expenses.
Part of the equitable share allocation is a grant for the delivery of free basic services to poor households and the caveat is that the grant is discretionary. By “discretionary”, it means that municipalities can decide whether to use the funds to deliver free basic services to poor households or spend them somewhere else.
In the 2019-20 budget, a total of 10-million poor households were funded in the budget, but only 2.8-million poor households received free basic services.
This means the funds budgeted to deliver free basic services to 7.5-million poor households were spent somewhere else. Municipalities are using funding for free basic services to poor households to balance their budgets because they are not allowed to pass budgets that have unfunded items.
Instead of ensuring that all poor households that qualify for free basic services are funded, municipalities are using funds meant for the poor to pass budgets with tariffs that allow the rich to receive clean water, electricity and other services.
There is no consistency in terms of the policy governing access to free basic services for poor households. In some instances, municipalities do not have a policy or functional database.
Then one can ask, “How is this a national treasury problem?” It is a national treasury problem because should any of the municipalities prepare a decent and practical budget that considers the total number of poor households and remain with a budget that has unfunded items, it is the responsibility of the national treasury to step in and ensure that the budget is well funded.
So, when municipalities take money meant for poor households to balance their budgets, the national treasury is happy to sit back, fold its arms and pretend municipalities are not stealing from the poor. It is a toxic relationship between dysfunctional municipalities based on a model that is not viable and a fiscal framework that only works when the poor remain in poverty and hungry for electricity and water.
Dr Gumani Tshimomola is the Economic Freedom Fighter’s senior researcher in parliament.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.