The effect of fiscal decentralisation on the financial condition of district municipalities

The adoption of decentralised systems of governance in its various forms across the world represents one of the most important reforms of the past generation. In South Africa, through a plethora of legislative reforms post 1994, the framework of developmentalism and decentralisation underpin the structure and functioning of the local government system. The new onerous legislative responsibilities bestowed on local government included the significant objectives of promoting social and economic development. Given however the myriad of challenges in this sphere of government, the need to find meaningful, suitable and sustainable solutions are even more pressing. By employing a two-way error component fixed panel data regression technique, this study explores the impact of fiscal decentralisation arrangements in South Africa on the financial wellbeing of the district municipalities across the length and breadth of the country. The data reveals that district municipalities in South Africa are not able to self-generate a meaningful amount of revenue and as a result they are heavily dependent on intergovernmental transfers. The results from the regression models reveal that the fiscal decentralisation arrangement have no meaningful impact on the financial condition of district municipalities in South Africa, given their lack of fiscal autonomy. The current two-tier system of governance between local and district municipalities is not consistent with the tenets and intended outcomes of a decentralised system and there is a need to restructure this system to make it more fiscally autonomous and sustainable for municipalities to be able to fulfil legislative responsibilities