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Assessing Fiscal Capacity at the Local Government Level in South Africa

Margaret Mabugu and Nara Monkam

No 201376, Working Papers from University of Pretoria, Department of Economics

Abstract: In recent years, local governments in South Africa have faced daunting challenges, notably significant service delivery backlogs, poor financial management, corruption, and poor capacity due to lack of skills. As a result, numerous municipalities are deemed to be in financial distress, and already questions have been raised concerning their capability to efficiently deliver on expected outcomes on a sustainable basis and to cope with economic shocks. In this context, South Africa has embarked upon a comprehensive review of the local government equitable share (LES) formula which constitutes the main unconditional grant that accrues to municipalities. The objective of this paper is to assess fiscal disparities across municipalities using a comprehensive approach to measuring fiscal capacity. In assessing the overall level of fiscal capacity, the paper uses the Representative Revenue System (RRS) and the Representative Expenditure System (RES) methodologies. To the best of our knowledge, such comprehensive measures of fiscal capacity at the municipal level have yet to be applied in the South African context. Additionally, the contribution of this paper lies mainly in that it provides a more systematic measure of municipal fiscal capacity that should be taken into account in the revision and improvement of the current LES formula to ensure that the LES funds are equitably distributed. Furthermore, an appropriate measure of fiscal capacities across municipalities in South Africa will provide the Municipal Demarcation Board with a tool to re-determine municipal boundaries based on objective and empirical evidence rather than political considerations.

Keywords: Fiscal capacity; Revenue capacity; Expenditure need; Revenue effort; RRS; RES (search for similar items in EconPapers)
JEL-codes: H11 H20 H71 H72 H77 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2013-11
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-ure
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