Budget 2025: Reforms to local governments' revenue generating services underway

FINANCE Minister Enoch Godongwana on Wednesday announced that R2,95 trillion will be allocated towards provinces and municipalities over the medium-term expenditure framework (MTEF) period.

The MTEF period is the three-year spending plans of national and provincial governments for the period of 2025/26, 2026/27 and 2027/28.

For the 2025 MTEF period, provinces and municipalities are allocated R2,95 trillion or 49,8% of total non-interest spending. Of this amount, R2,4 trillion goes to provinces and local government receives R552,7 billion.

Godongwana said that municipalities are grappling with weak revenue generation as property tax and service charge collections decline in real terms. He explained that there is a growing reliance on intergovernmental transfers, which currently account for over 70% of municipal budgets in many cases.

"Urban municipalities are more resilient due to diversified revenue streams, but rural municipalities remain heavily dependent on transfers, exacerbating inequities in development and service delivery.

"Provinces face similar fiscal pressures, with personnel costs – particularly in education and health – consuming over 70% of budgets in some cases. Underspending on capital projects due to weak capacity and procurement further hampers service delivery," he said.

Godongwana said that government is implementing a range of reforms to support resilience and disaster management, increase the financing and delivery of infrastructure, and improve the delivery of services.

"A new performance-based grant has also been established that will reward improvements in the institutional capability, financial sustainability and operational performance of metro trading services such as water and sanitation.

"Subnational governments need to implement structural reforms to improve spending efficiency, enhance revenue management and enforce accountability. Strategic planning and robust financial management are essential to ensure sustainable service delivery and reduce disparities between urban and rural areas," he said.

After providing for debt service costs, the contingency reserve and provisional allocations, 48,4% of nationally raised funds are allocated to national government, 41,9% to provincial government and 9,7% to local government.

Provinces are responsible for providing social services according to nationally determined norms and standards, including basic education for 13,5 million learners and healthcare for 53,2 million people who do not have private medical insurance.

The minister in his address said that reforms to the revenue generating services of local government - namely water and sanitation, electricity, and refuse removal - are underway.

"In 2023/24, transfers through the division of revenue accounted for about 97% of provincial revenue. The rest is composed of legislatively limited own-revenue collections, which are estimated to amount to R84,1 billion over the MTEF period, mainly from motor vehicle licence fees.

"Direct national transfers to provinces are projected to grow from R730,7 billion in 2024/25 at an average annual rate of 4,5% to reach R833,8 billion in 2027/28. The transfers include R633,2 billion for the provincial equitable share and R134,6 billion for conditional grants in 2025/26.

"Within conditional grants, R94 million is reprioritised over the MTEF period from the provincial roads maintenance grant to fund other transport priorities. To help implement the 2025 public-service wage agreement, provinces are allocated an additional R4,8 billion in 2025/26, R5,2 billion in 2026/27 and R5,4 billion in 2027/28," he said.

The budget includes provisional allocations that will be made available to provinces during 2025/26 and over the medium term, subject to the fulfilment of specific conditions or the completion of outstanding planning and administrative processes.

A total of R29 billion is provisionally allocated to provincial education departments for compensation costs and the expansion of early childhood development services.

Of this amount, R9,9 billion is earmarked for the early childhood development grant, and the remaining funds will flow through the provincial equitable share.

In addition, R28,9 billion has been provisionally allocated to the health sector. Of this, R16,3 billion is set aside for compensation costs in provincial health departments and will be distributed through the provincial equitable share.

He also explained that in the provincial sphere, the expanded public works programme integrated grant will be merged with the social sector expanded public works programme incentive grant from 2025/26, combining their allocations.

"Furthermore, the municipal systems improvement grant will be discontinued, with funds redirected to the Department of Cooperative Governance for municipal support."

In addition, R494 million in 2025/26 will be shifted from the direct to the indirect component of the municipal infrastructure grant to address wastewater infrastructure issues in 21 municipalities.

"Allocations of R76 million in 2025/26, R83 million in 2026/27 and R86 million in 2027/28 are shifted from the municipal infrastructure grant to the integrated urban development grant as Alfred Duma Local Municipality has become eligible to participate in the integrated urban development grant.

"Government will merge the comprehensive agricultural support programme grant and the Ilima/Letsema projects grant into a single grant with the existing consolidated baseline of R7,3 billion over the MTEF period. This merger aims to streamline grant administration, improve resource allocation, and support commercial and subsistence farming.

"To minimise outbreaks of pests and diseases that affect agricultural production, the department will accelerate regulatory compliance and monitoring interventions costing R30,3 million over the medium term," he said.

Godongwana also explained that while there are indications that provinces are tightening financial controls, further improvements are needed.

He said that in contrast accruals and payables, where an invoice has not yet been received or paid, increased sharply from R28,4 billion in 2022/23 to R37,1 billion in 2023/24.

"This increase in unpaid obligations is particularly pronounced in the health and education sectors, driven by rising service delivery demands due to population growth and the impact of higher sectoral inflation. These pressures highlight the need for improved cash flow management and prioritisation of spending," he said.

Godongwana added that the National Treasury is leading reforms to enhance the disaster risk financing framework in the context of increasingly frequent and severe disasters. Reforms are aimed at ensuring that disaster response is timely, efficient and equitable, while proactively reducing risks.

"A multi-layered risk financing strategy has been developed that will address overreliance on budget reallocations, which often delays disaster response and recovery."

He added that greater commitment is needed from municipalities to ensure residents and businesses pay their bills, improve internal governance and ensure effective use of resources to meet the needs of their communities.

"As part of a five-year programme of action to improve local governance, the National Treasury is leading a comprehensive review of the local government fiscal framework. This review, which was endorsed by the Budget Forum in October 2024, aims to refine the funding model to ensure it is equitable, efficient and responsive to the diverse needs of municipalities."

Key reforms include revising the local government equitable share formula to better target poor households and account for cost differences across municipalities. In addition, the National Treasury is consulting stakeholders as part of developing norms and standards for municipal electricity surcharges to help reform municipal revenue collection.