Fiscal decentralisation in South Africa's North-West Province

Abstract

South Africa faces significant economic development challenges in poverty, inequality and unemployment. The development profile of North West Province is representative of South Africa in general and reflects the typical challenges that policy makers face. It may be argued that the creation of provinces may provide opportunities for addressing the economic development challenges by bringing economic decision making closer to the people and their needs. Fiscal decentralisation in South Africa may be supported if the development challenges facing the provinces are due to market and central government failure to allocate resources efficiently and equitably. The absence of property rights, information costs, indeterminancy of bargaining and social and public choice problems may be mitigated by the efficiency of catering for decentralised differential preferences, based on the spatial characteristics of public goods and services. Fiscal decentralisation may, however, not always lead to the efficient and equitable resource allocation outcomes suggested in theory. Fiscal decentralisation may result in inefficient spillovers and interjurisdictional competition, and may obstruct national redistributive equity objectives. In practice it may thus be necessary to combine decentralised and centralised functions to realise the benefits of fiscal decentralisation, while compensating for possible inefficiencies and inequalities. In South Africa such a balanced system may exist, since expenditure in major functional areas are the responsibility of both national and provincial governments. However, there is only limited decentralisation of taxation, minimum standards for expenditure are attached to conditional revenue allocation, and there is an aim to ensure fiscal fairness in the provision of public goods and services. It is argued in this dissertation that this system's ability to address the development challenges facing North West Province may depend on its ability to realise the benefits of fiscal decentralisation. In this regard the indications are that North West may experience difficulty in catering for decentralised differential preferences. It has limited access to own revenue, limited discretion over allocated revenue, the composition of expenditure limits the ability to reprioritise and the province may lack institutional capacity. It is therefore concluded in this study that a fiscally decentralised system may not in itself contribute to development and to overcoming the economic development challenges facing not only North West Province specifically, but also all provinces in South Africa generally.