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Equitable Vertical Sharing and Decentralizing Government Finance in South Africa

Literature › Works

Roy Bahl (2001). Equitable Vertical Sharing and Decentralizing Government Finance in South Africa. Andrew Young School of Policy Studies, International Studies Program, Working Paper 01-6. Georgia State University.
Type working paper
Scope Post-1994 South African economy
Method policy analysis
Period studied 1993–2000
Regions South Africa
Themes macro fiscal finance debt, transition post apartheid, comparative theory, inequality poverty unemployment
Citation key bahl2001

Argument

Bahl asks what share of national revenue should go to local government in post-apartheid South Africa, and how that share should be set. He first shows that South Africa is already more fiscally decentralized than comparable countries predict, using a cross-country regression and a priori criteria such as size, development, heterogeneity, regional inequality, political stability and macro stability. He then reviews local revenue instruments (property tax, RSC levy, fuel levy, rural land tax) and the intergovernmental transfer system, which sets vertical shares largely ad hoc. He proposes an expenditure-first approach to an 'equitable' vertical share: define expenditure assignment, set minimum service costs, net out local capacity, and let transfers fill the gap. The final choice depends on whether leaders prioritise local empowerment or macroeconomic stability.

Evidence and method

Cross-country regression on 73 countries (1993/94 data, mainly IMF GFS 1998 and OECD 1998); a comparison table of federal countries; Department of Finance Budget Review 1999; Bahl and Solomon RSC levy estimates; Katz Commission and Financial and Fiscal Commission reports; secondary literature on property tax and fiscal federalism.

Findings

  • South Africa's subnational spending share far exceeds the level predicted by the international regression. (p. 6)

    we estimate an “expected” subnational government expenditure share of 15.7 percent, well below its actual level of about 33 percent.

  • Regional and racial disparities are large, which complicates decentralization. (p. 11)

    the average per capita income in the highest income province is about six times that in the lowest.

  • The macro strategy caps total taxes, and municipal expenditure growth is constrained by central guidelines. (p. 13)

    The macroeconomic strategy calls for holding total taxes to a ceiling of 25 percent of GDP, a limit that has already been met.

  • The property tax is a major, highly autonomous local revenue source with very high tax effort. (p. 15)

    it is the second largest local revenue source (behind the gross revenues of municipal electricity undertakings) and accounts for about 20 percent of total local government revenue

  • The RSC levy is counter-equalizing, because per capita yield rises with local income. (p. 21)

    a ten percent higher level of per capita GGP (gross product) is associated with an 8.9 percent higher level of per capita collections.

  • The RSC turnover tax burden is partly exported from metros to the rest of the country. (p. 22)

    the six metros collect 57 percent of all turnover tax revenues but that their residents are only burdened with 48 percent of this tax.

  • Vertical sharing of transfers is largely ad hoc rather than formula-based. (p. 28)

    One could classify the system of vertical sharing that exists at present as mostly an ad hoc system, in that the vertical share a decision of the government

  • The local government equitable share of national revenue is small and was unchanged over three years. (p. 31)

    In 1999/2000, the local government equitable share of centrally-raised revenue is 1.4 percent, exactly the same percent as in the past two fiscal years

  • Local fiscal information is too weak to cost minimum service levels or support the vertical sharing debate. (p. 34)

    The present fiscal information system for local governments is weak.

  • Provinces carry most spending but little taxing power, while local governments have some taxing powers but little spending responsibility. (p. 36)

    provincial governments have been assigned a great deal of expenditure responsibility, but relatively little taxing powers. The local governments have been assigned little expenditure responsibility but some taxing powers.