Intergovernmental Finance in South Africa: Some Observations

This paper examines the evolution and functioning of fiscal decentralisation process and intergovernmental finance in the Republic of South Africa (RSA). It analyses the system of dividing revenues among the three spheres of government. The paper highlights the challenges of designing and implementing intergovernmental fiscal policies and institutions in the post-apartheid era. The paper argues that the costed norms approach developed by the Financial and Fiscal Commission (FFC) has tremendous potential in evolving a simple, objective, and fair system of transfers. However, significant additional work in terms of research, its meaningful dissemination to various governmental units, and building the information system undertake the task is necessary to make it operational. The absence of revenue equalisation in the transfer system is an important weakness of the transfer design. However, provinces do not have much revenue powers. Revenue equalisation in the transfer formula is meaningful only when some broad-based tax handles are assigned to provinces. It is also an important moral and a policy question as to whether there should be incentive to raise revenues from sources such as, gambling taxes and hospital services. JEL Classification: H72, H77.