The effects of lump sum unconditional grants on expenditure and revenue decisions and performance of South African municipalities

M.Com. (Development Economics)The Local Government Equitable Share (LES) is a lump sum unconditional grant that is legally entitled to municipalities in South Africa. The grant aims to supplement municipal own revenues in the delivery of services. However, increases in the LES allocations to municipalities have coincided with increased service delivery protests and poor revenue management on the part of local government. Given these trends and the ultimate goal of the LES, it is important to assess the actual impact this grant is having on local government fiscal decision. This minor dissertation evaluates the impact of the LES on the expenditure and revenue decisions and performance of local government in South Africa. Specifically, the research seeks to ascertain the nature of such impacts in terms of how expenditure and revenue decisions are adjusted with this grant funding and whether such funds may be creating adverse incentives on the part of local governments to spend inefficiently and/or not maximising their effort in collecting own revenues. The analysis uses a cross sectional dataset for a sample of 129 municipalities for the 2009/10 municipal financial year, with the Stochastic Frontier Analysis as the primary methodology. The analysis finds that the LES has no statistically significant impact on municipal operating expenditure. This suggests that the funds from this grant might not have contributed to municipal service outputs in the 2009/10 financial year. Furthermore, the results found that the LES is positively correlated with expenditure inefficiencies and poor tax/revenue effort. This suggests that the LES funds create perverse incentives for local government to waste LES funds and not collect revenues from local taxes. The latter is due to municipalities substituting tax revenues with funds from the LES, hence resulting in the LES not having an impact on overall expenditure