The Medium Term Budget Policy Statement (MTBPS) presented by the finance minister in the National Assembly on October 26 confirms that the treasury fiscal framework only works if municipalities deliberately entrench poverty.
It’s a serious issue, so we all need to pay attention to it and start having thoughtful conversations, strategizing, and joining forces with the broader left to fight the treasury, which relies on poverty-entrenching municipalities to implement fiscal consolidation, which is nothing more than fiscal austerity.
Sometimes referred to as a “mini-budget,” the MTBPS is presented in the middle of the fiscal year and allows the government to propose to the National Assembly adjustments to the Appropriation Law, the Tax Administration Law, and the Revenue Division Law. They are financial bills that are approved by Parliament for adjustments in spending, reinvestment, tax rates, and adjusted transfers to provinces and municipalities.
The MTBPS is important because the finance minister takes the opportunity to explain the government’s intentions, as the treasury would have received spending estimates from government departments and the minister’s budget committee would have approved a preliminary revenue split and budget priorities for the next financial year. year.
In addition, the medium-term spending committee would have already submitted its initial recommendations for funding allocations for the government’s key priorities. What remains from now until the Minister of Finance presents his Budget in February 2023 is the completion of the fiscal framework, which includes the appropriations bill and the revenue division project.
Finance Minister Enoch Godongwana made his second MTBPS presentation since taking office in August 2021. While this may be the first MTBPS he has been involved with from the start and may be nothing more than a marking exercise Casillas, 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 depends on limited support for economic development. Instead of using the fiscal framework to redistribute wealth in a highly unequal society and boost industrialization through the purchase of locally produced goods, there is misguided self-imposed austerity.
This doesn’t work, and there is ample evidence that it hasn’t 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 caused by austerity measures to the poor and the working class is much more serious and takes much longer to repair.
The treasury is not concerned with whether the poor have access to water, electricity or sanitation, as long as the painted picture is 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 convincing evidence that social and economic unrest are real possibilities. In July 2021, civil unrest broke out across much of Kwazulu-Natal and Gauteng, causing severe damage to livelihoods 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, it is likely that it will take longer, if ever, for the South African economy to recover. A decade of austerity, the collapse of state institutions and the Covid-19 pandemic have damaged South Africa’s economy.
Continuing austerity is not only reckless, but has the potential to plunge the entire country into a social and economic crisis that will make the July 2021 riots look like a picnic.
Second, the current fiscal framework produces a division of nationally collected revenue among national, provincial, and local governments that only works if municipalities take from the poor to balance the budget while serving the wealthy, primarily white minorities. . To fully understand this, let’s back up a bit.
As South Africa transitioned from apartheid to democracy, the decision was made in the early 1990s that only the national government, through the South African Revenue Service (SARS), would collect income tax from individuals and businesses. , VAT and subsequent royalties from mining companies, which make up the bulk of the revenue the government collects.
Provincial government revenue is limited to motor vehicle license fees, gambling licenses, and hospital fees. The national and provincial governments were not expected to raise revenue to finance their own activities, as this is funded by revenue collected by Sars.
Local government, which has primary responsibility for providing essential basic services like water, electricity and sanitation, is expected to raise its own revenue, at least most of it. The 1998 White Paper on Local Government assumed that revenue from property fees, sales of electricity, water and sewage, and garbage collection charges would be sufficient to finance 73% of all aggregate operating expense requirements of the local government.
What this means is that there was a mistaken assumption that most citizens would actively participate in the economy, either through employment or business income. However, almost 25 years later, we now know that the assumption was wrong and uninformed and has proven disastrous.
If anything, the decision, like most economic policy decisions during the transition period, was intended to perpetuate apartheid spatial planning that benefited white minorities in cities with economic activities where city councils could raise revenue from the sale of services mainly of companies.
These turned out to be metropolitan municipalities such as Johannesburg, Tshwane, eThekwini, Cape Town and Gqeberha. And even with these cities, it’s the prosperous white-dominated areas that get reliable electricity and clean water, with well-maintained roads and relatively functional municipal offices.
Municipalities are required to provide services on a cost recovery model to ensure there is sufficient revenue while charging households an affordable price. This model does not make sense or practical because there is no convergence between the affordability of homes and the setting of tariffs that guarantee sufficient municipal revenue.
Consequently, regardless of any measures to ensure efficiency and rid municipalities of corruption, the simple and correct observation is that the current municipal financing given its responsibilities is not viable.
Herein lies the calamity of the inconsistent assumptions in the 1998 White Paper on Local Government that have been the basis of the national treasury’s fiscal framework. Each municipality is responsible for providing free basic services (electricity, water, and sanitation) every month to households that qualify as poor households.
The number of poor households rose from 8.7 million in 2014-15 to more than 10.3 million in 2020-21, a conservative number that is likely to be much higher given a decade of slow economic growth crippled by austerity and lack of of economic policy. But the number of indigent households registered in all municipalities was just over 2.8 million. This means that there are 7.5 million poor households that are not counted.
Each year, parliament passes a revenue division bill that gives local governments an equitable allocation of shares. Municipalities can use the fair 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 fair share allocation is a subsidy for the provision of free basic services to poor households, with the caveat that the subsidy is discretionary. By “discretionary”, it means that municipalities can decide whether to use the funds to provide free basic services to poor households or spend them elsewhere.
In the 2019-20 budget, a total of 10 million poor households were financed in the budget, but only 2.8 million poor households received free basic services.
This means that funds budgeted to provide free basic services to 7.5 million poor households were spent elsewhere. Municipalities are using funds for free basic services for poor households to balance their budgets because they are not allowed to pass budgets that have unfunded elements.
Instead of ensuring that all poor households that qualify for free basic services are funded, municipalities are using funds earmarked for the poor to pass budgets with rates 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 cases, municipalities do not have a functional database or policy.
So one may ask: “How is this a national treasury problem?” It is a problem of the national treasury because if any of the municipalities prepares a dignified and practical budget that considers the total number of poor households and is left with a budget that has unfunded items, it is the responsibility of the national treasury to intervene and ensure that the budget is correct financed.
So when municipalities take money earmarked for poor households to balance their budgets, the national treasury is happy to sit back, fold its arms, and pretend that municipalities aren’t 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 poor and hungry for light and water.
Dr. Gumani Tshimola is the Principal Investigator for Economic Freedom Fighter in Parliament.
