ISP Working Paper Number 01-6

Equitable Vertical Sharing And Decentralizing Government Finance In South Africa (404 KB)

by Roy Bahl, May 2001

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Abstract:
South Africa is at a crossroads in its decentralization policy. On the one hand, it has declared its intention to strengthen the fiscal powers of local governments. On the other hand, the institutional arrangements to guarantee fiscal decentralization -- revenue powers and expenditure responsibility -- have not yet been fully defined. Nor has a target been set for the vertical division of resources between the central and lower levels of government. The revenue dimension of fiscal decentralization in South Africa, particularly the question of an equitable vertical share for local governments, is the subject of this paper.

In the first section of the paper, we ask how South Africa fits the profile of countries that are “good” candidates for decentralization. We then turn to a description of vertical revenue sharing as it presently exists in South Africa. We also offer a proposal about how an equitable vertical share for South Africa should be determined. A final section summarizes the results. The policy question raised in this paper is straightforward: What percent of all tax and non-tax revenues should be assigned to the central government and what percent should be assigned to the local government? The implementation question is also straightforward: Once the assignment is decided, how do we structure each revenue instrument to guarantee the “desired” assignment of resources?