The government is floating the idea of a new revenue stream linked to value-added tax as part of a package of proposals aimed at arresting the financial slide in many municipalities.
The proposals are contained in the Reviewed Draft White Paper on Local Government, which the Minister of Co-operative Governance and Traditional Affairs gazetted for public consultation on 7 May 2026.
The White Paper reassesses how South Africa’s local government system has performed since the original 1998 White Paper and proposes reforms aimed at restoring effective, sustainable, and accountable local governance.
The Paper says the current municipal funding model is increasingly coming under strain because of above-inflation increases in costs – particularly for bulk electricity – and revenues that have not kept pace.
One of the Paper’s nine policy proposals is an “origin-based” VAT-sharing arrangement that would see national government allocating a portion of VAT-derived revenue to local government.
National Treasury’s revised estimate for 2024/25 put VAT at R447.6 billion, the second-biggest source of revenue after personal income tax at R732.3bn.
“Origin-based VAT revenue sharing would not affect the way VAT is levied but would require the development of rules to statistically assign origin,” the White Paper says. Essentially, it would require developing a formula to estimate where economic activity happens and then share back a portion of VAT revenue to municipalities based on that “origin” measure.
The Paper says origin-based VAT sharing would reward municipalities that foster economic growth by allowing them some share in the revenues generated by that growth.
The White Paper sees origin-based VAT sharing as a potential substitute for the origin-based share of the fuel levy allocated to metropolitan municipalities. In 2006, Regional Services Council levies were replaced by an origin-based share of the fuel levy in metros and by a grant in district municipalities.
The Paper states that the origin-based share of the fuel levy paid to metros has stagnated because of reduced fuel consumption resulting from high fuel prices, more fuel-efficient vehicles, and changing work patterns post-Covid. Fuel-levy income is expected to decline further as electric vehicles become more common.
The Paper notes it cannot mandate specific new own-revenue instruments and that, for technical reasons, options for fully fledged local own-revenue instruments are limited – hence the focus on origin-based revenue sharing as a hybrid option.
Administrative weaknesses
The White Paper paints a stark picture of municipal finances, warning that many municipalities are trapped in a cycle of weak revenue collection, deteriorating infrastructure, rising costs, and declining public trust.
“Despite a municipal finance system that is well structured in many important respects, multiple municipalities are facing serious financial distress, while many citizens are struggling to pay for services, or are not paying even if they can,” it says.
It groups the “root causes” of municipal financial distress into two broad categories: institutional and administrative weaknesses within the local government system, and sustained increases in input costs.
Administrative weaknesses are a result of appointing staff with inadequate technical skills, political interference in administrative decisions, and poor financial decision-making. This is compounded by the failure of national and provincial governments to manage the key elements of the local government system for which they are responsible.
“Their role in monitoring and intervention has generally been inadequate, with problem identification, consequence management, and implementation of remedial measures often hamstrung by politicisation of the process,” the White Paper says.
“To ensure sound financial administration, complex administrative requirements have been mandated that have often not met their objectives. Competent municipalities are bogged down in administrative processes that impair effectiveness, while malpractices in incompetent or dishonest environments seem to continue regardless.”
Eskom’s tariffs drive escalating input costs
The second set of causes are above-inflation increases in input costs that have outpaced both municipal revenue growth and household affordability.
Historically, electricity has been the largest single revenue item on municipal budgets and the largest single item on an average household’s municipal account.
Eskom’s tariffs to municipalities increased by 910% (in nominal terms) between 2007/08 and 2024/25, compared with an increase in general inflation (as measured by CPI) of 147%.
There has also been a marked increase in other bulk service costs, the White Paper says. As a result, whereas in 2003/04 bulk service costs represented 47.6% of total service charges (revenues from electricity, water, sanitation, and refuse removal combined), this had risen to 72% by 2023/24, with electricity driving most of the increase.
This cost pressure has been compounded by sustained increases in average real municipal employee costs from R259 714 a year in 2005/06 to R431 284 a year in 2022/23.
Equitable share grants per capita, which is the main source of grant income to municipalities, have retained their real value since 2011. However, they have not matched the cost increases faced by municipalities, the Paper says.
The equitable share is a transfer of money from national government to municipalities. The equitable share is unconditional – municipalities are not told exactly how to spend it. However, it is intended to help municipalities provide basic services and support municipalities that do not have a strong local tax base.
Municipalities have relied to an increasing degree on property rates to meet rising costs. The Paper says property rates have increased in real terms by 134% on average across all classes of municipality since 2003/04. This figure is partly driven by new properties coming onto valuation rolls, but mainly by increased real property rates on existing properties.
These pressures have resulted in an affordability crisis for both households and municipalities, exacerbated by a fall in real household incomes since 2008. Driven by strong migration trends, the fall has been most marked in the metropolitan areas, where average household income, which used to be highest, is now below that of secondary cities, the White Paper says.
The affordability crisis has resulted in poor service delivery and significant increases in debt, particularly over the past decade, of both consumers to municipalities and municipalities to their creditors, most notably Eskom. As of 2024/25, total debt owed to municipalities by its customers for services and taxes exceeded R400bn.
Other proposals to reform municipal finances
Beyond the VAT-sharing concept, the White Paper sets out eight other “core policy shifts” for municipal finance reform. These are:
- A more differentiated municipal finance system
Municipal finance should not be treated as though all municipalities face the same economic and administrative conditions. Financially stronger municipalities, particularly metros and secondary cities, should be able to rely more on devolved revenue sources, while weaker municipalities need a greater share of redistributive support.
- Adjust the grant system
The equitable share remains important, particularly for poorer municipalities, but national government does not have the fiscal space to keep increasing transfers indefinitely. If stronger municipalities gain more from their own economic bases, grants can be reoriented more effectively towards areas with weaker tax bases and higher poverty.
Grant conditions need to be smarter: national departments are often too prescriptive about how grants should be spent, while still lacking effective safeguards against wasteful or illegitimate use.
- Improve own-revenue collection
The Paper calls for better billing, fairer and more progressive tariff design, stronger revenue administration, and a more workable indigent framework. It notes that household-by-household means testing is often unrealistic and calls for area-based and consumption-related mechanisms as part of the solution.
- Address personnel costs
Rising real employee costs have not been matched by equivalent gains in productivity, while municipalities are sometimes understaffed in some functions and overstaffed in others. The Paper calls for deeper research into how municipalities can get “the right people in the right numbers at the right remuneration levels”. The salary bargaining process should be examined because above-inflation settlements have become normalised despite weak output.
- Spend better
Efficiency and effectiveness must improve across municipal operations, particularly in supply-chain management and procurement, which are key drivers of unauthorised, irregular, fruitless and wasteful expenditure.
Procurement should be treated as a strategic instrument for service delivery, not just an administrative function. Municipal finance regulation has become too complex and restrictive in some places, particularly for stronger municipalities, while still failing to prevent maladministration elsewhere.
The Paper also notes that some poorer municipalities incur audit costs disproportionate to the problems being addressed, reinforcing the case for simplification and review of the Municipal Finance Management Act and its regulations.
- Keep borrowing and private investment in play
The public sector does not have enough capital to fund the municipal sector on its own, so borrowing at competitive rates must continue. Public-private partnerships have a role, but the framework should be simplified to make them easier to use. In addition, National Treasury should examine whether grant allocations can be extended beyond three years in some cases to help municipalities pledge those allocations when borrowing.
- Deal properly with unfunded mandates
The principle of “finance follows function” must be applied more consistently, particularly because the White Paper envisages a more differentiated allocation of municipal functions. It is preferable to devolve revenue sources alongside devolved functions rather than leave municipalities carrying responsibilities without the money to perform them.
- Stronger monitoring and earlier intervention
Oversight should be consolidated as far as possible around National Treasury and the Department of Co-operative Governance and Traditional Affairs’ reporting systems, with less duplication and earlier identification of trouble. The Paper argues that interventions need to happen sooner, last longer where necessary, and be more predictable and data-driven. It adds that a constitutional amendment is likely required to fully enable stronger/longer interventions, although significant advances should be possible in the interim.
National Treasury and the Department should develop a comprehensive programme to address municipal financial crises and debt, including measures to contain electricity and other bulk-service costs.
