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Municipalities face financial crunch after August elections

In the run up to the local government elections many municipalities are going the extra mile to spruce residential areas up.

As was the case in past elections there is clearly greater vigour with which municipalities repairing roads, cut grass in open areas, sweep the streets and so on. Unfortunately regardless of who wins municipal elections in August the current service levels are unlikely to be maintained as it seems that municipalities face imminent financial ‘constraints’.

For the past two decades revenue accruing to local municipalities has risen each and every year. Moreover revenue has risen faster than the inflation rate. By and large the increases were planned and are consistent with Treasury objectives as set out in the Medium Term Expenditure and Revenue Frameworks (MTEF, MTRF).

By projecting cost changes over the next three years the medium term frameworks facilitate inter-governmental planning while ensuring fiscal discipline.

Over the past five years the local government revenue has risen by 15% every year. In the next three years revenue is projected to rise at 5% above the inflation rate. As the bulk of municipal revenue is from service charges and property rates the increase in municipal revenue is borne by ratepayers.

The envisaged increases in municipal revenue are attainable only if the local households and businesses are able to bear the increased service costs and higher property rates.

Unfortunately the economic growth rate has dropped noticeably in recent years. In 2015 the economy grew by only 0.6 percent. In the first quarter of 2016 the economy actually shrank by 1.2%. These low growth rates indicate that household and business consumers will be able to absorb the increased costs only by cutting back on other items or reducing investment.

More alarmingly there is evidence that household incomes have been dropping rapidly. StatsSAs’ General Household Survey (GHS) indicates that total household income dropped by almost 6% between 2014 and 2015. As a result many households will struggle to meet current commitments let deal with inflationary pressure and the additional revenue demanded by local government. Moreover the low rate of economic growth indicates that businesses will be unable to absorb any shortfall in municipal income.

The graphic below tracks, over time, total monthly household income against municipal revenue from rates and service charges. Total annual municipal revenue approximates household income for a full month municipal revenue is presented in Rand per year and household income in Rand per month.

The GHS shows a marked decline in household incomes between 2014 and 2015 resulting in the two trend lines diverging. The greater the gap between the two lines the more municipalities will be battle to raise the revenue from households. To the extent that they do raise this revenue households will have to forego expenditure on other items like food, transport and clothing.

 

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Given that household budgets are tight municipalities are unlikely to meet the revenue targets after 2015 and the current pre-election spruce-up will not be maintained. The current efforts of sprucing areas up will, if anything, aggravate the pending deficit as households fall into arrears on their municipal accounts.

By Michael O’Donovan

 

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