Public Sector Core Notes PDF

THE PUBLIC SECTOR Key concepts Term Definition National government The level of government responsible for making laws, interpreting laws and governing the country as a whole. Parastatal Company which is wholly-owned or part...

THE PUBLIC SECTOR Key concepts Term Definition National government The level of government responsible for making laws, interpreting laws and governing the country as a whole. Parastatal Company which is wholly-owned or partially owned and operated by the state. Free riders Individuals who benefit from public goods without contributing to the cost of provision (i.e. do not pay) Negative externalities The costs that society incurs from activities they have not been involved in. Positive externalities The benefits that society incurs from activities they have not been involved in. Accountability An expectation that a person is able to explain one’s decisions, actions and expenditure. Nepotism Favouring one’s family members or relatives in awarding jobs and contracts irrespective of the qualifications of these relatives. Cronyism Appointing or favouring one’s friends in awarding jobs and contracts irrespective of the qualifications of these friends. Efficiency Resources have been allocated and used in the best possible way with the least waste. Pareto efficiency Resources are allocated in the most economically efficient manner where nobody can be made better off without making someone else worse off. Corruption When someone exploits their position for personal gain Bailout Financial support provided by government to prevent parastatals from becoming bankrupt Privatisation Occurs when the government transfers the functions, activities and ownership from the government to the private sector. Nationalisation Occurs when the private sector transfers functions, activities and ownership to the government. Macroeconomic objectives Government’s aims regarding the national economy Economic growth An increase in the productive capacity of goods and services in a country Full employment When all individuals who are willing and able to work and can find employment Exchange rate stability When the exchange rate remains stable to reduce trade uncertainty in foreign trade Page 1 of 21  Term Definition Price stability The general prices of goods and services remaining relatively constant over time Economic equity The redistribution of income within the economy Fiscal policy The use of government spending and taxation to influence the economy. Tax avoidance Finding legal ways to pay less through an understanding of tax laws Tax evasion Illegal, non-payment or deliberate underpayment of tax National Budget A document that outlines anticipated government income and projected government expenditure for the next financial year Medium-term Expenditure Plan of estimated revenue and expenditure for national and Framework (MTEF) provincial government over a rolling 3-year period Medium-term Budget A statement presented in October each year that provides Policy Statement Parliament with an update on the National Budget and sets out an assessment of the economy, a fiscal framework and government’s priorities for the medium-term. Lobbying (also called rent- A process where people or businesses send representatives seeking) to influence high-level decision-makers (e.g. in government or regulators) to ensure that decisions favour them. Section 1 What is the Public Sector? 1. Organisation of the public sector The term public sector is used to refer to the government, its functionaries and all organisations that take on the role of government. The public sector in South Africa is divided according to three levels and further by the role played in governing the country. The three levels of government are the national, provincial and municipal/local governments. At all levels, government is further divided into the executive, legislative and judicial branches. 1.1 National government At the national level, the government consists of: Legislative branch: The country’s national parliament is based in Cape Town. It is made up of the National Assembly and the National Council of Provinces. The head of the legislative branch is the Speaker of Parliament. Parliament is responsible for: i. Making legislation that can affect all levels of government ii. Holding the executive arm of government accountable for its actions Judicial branch The judiciary consists of all courts from the magistrates’ courts to the Constitutional Court. The Chief Justice heads up the judiciary. The judiciary Page 2 of 21  has the responsibility is responsible for interpreting laws and adjudicating legal disputes for citizens. The Constitutional Court is further responsible for maintaining adherence to the provisions in the Constitution of the Republic of South Africa 1996. Executive branch The executive branch executes the policies of the national government. It consists of departments responsible for developing policies and co-ordinating implementation across the nine provinces. Examples of national departments include: National Treasury, Department of Trade, Industry and Competition. National government also administers non-profit organs of state. These bodies are financed by the state and serve a national interest. i. These include commissions and bureaus such as the Council for Scientific and Industrial Research (CSIR), South African Bureau of Standards (SABS) ii. There are also Chapter 9 institutions such as the Human Rights Commission (HRC) and Public Protector (PP). 1.2 Provincial government Each of the nine provinces has its own government which is headed by a Premier. Provinces manage provincial services such as healthcare, education and provision of housing. 1.3 Local government Local government consists of metropolitan municipalities, local municipalities and district municipalities which administer the rural councils. Metropolitan municipalities are in the urban areas (e.g. Cape Town and Johannesburg). The metropoles are in cities and have large populations in a small area. District municipalities cover rural areas. These are spread over a large area and are further sub-divided into local municipalities. All municipalities are headed by a mayor. Municipalities provides services such as water, libraries, municipal roads and refuse removal. 1.4 Parastatals Parastatals are referred to as public corporations, state-owned enterprises (SOEs) and state-owned companies (SOCs). Parastatals usually provide strategic services in South Africa. These strategic services are required for the optimal functioning of the country. Examples include Eskom, which provides electricity, and Transnet, which provides freight rail transport. Page 3 of 21 Section 2 The necessity of government Governments play three key roles in any country: Provision of public goods and services Conservation of resources Managing the economy 2.1 Provision of public goods and services There are three kinds of public goods: Community goods Collective goods Merit goods Community goods are characterised by the principles that they are non-excludable and non-rivalrous. Non-excludability means that everyone can use the goods, irrespective of whether they are prepared to pay for them or not. Non-rivalry means that the use by one individual does not exclude use by another Examples of community goods include street lights, traffic lights and police services. Collective goods are provided for society as a whole. These can be exploited by free riders. Free riders are individuals who benefit from public goods without paying for them or contributing to the cost of provision. User fees can discourage use by free riders. Examples of collective goods include beaches and parks. Merit goods are goods that benefit society and promote economic development. These are provided by the state because these are not profitable for the private sector to provide. The state encourages the consumption of merit goods because these provide positive externalities for society. Examples include libraries, parks and vaccines. 2.2 Conservation of resources The environment consists of renewable (e.g. marine life) and non-renewable resources (e.g. gold). Government must balance competing needs of current and future generations when managing resources. This requires the protection of the environment for future generations to enjoy while allowing the economic benefit for the current generation. Conservation is achieved by implementing legislation to ensure environmental sustainability. 2.3 Managing the economy Government is responsible for managing the collective interests of citizens. This includes a macroeconomic environment for businesses to operate in. Government develops laws and policies to promote optimum economic growth and economic development for the benefit of all citizens. These laws aim to restrict negative externalities while promoting positive externalities. Negative externalities are costs which society incurs although not directly involved in a transaction. Government intervenes to protect society from these externalities by implementing policies to restrict consumption of these goods and services. For example, government acknowledges that a business that pollutes the environment should be Page 4 of 21  taxed more to deter it from further polluting the environment and causing excessive harm. Government also aims to encourage positive externalities. Positive externalities are the benefits that society incurs from activities they have not been directly involved in. For example, government promotes activities which community health e.g. vaccination. Society benefits from this because the normal functioning of the society can be achieved. Section 3 Problems in public sector provisioning Various problems are encountered when the public sector provides goods and services. It is important to note that these problems are linked to the causes of public sector failure (discussed in section 7). 3.1 Accountability Accountability means that it is expected to explain one’s decisions, actions and expenditure. The nature of the “contract” between a government and its citizens is one of trust. The public pays taxes to the government. In return, they expect that the government will deliver public goods and services of the correct quantity and quality. This means that there must be confidence in the government officials and that there is no abuse of power, corruption, nepotism, incompetence or cronyism. Nepotism is prevalent when family members who are unqualified are appointed to positions or awarded contracts while cronyism rewards friends who are unqualified for certain position with positions and/or contracts. Both of these actions erode confidence in government’s ability to deliver public goods and services. South Africa aims to achieve accountability through: Ministerial responsibility Ministers are responsible for their government departments and must ensure that policy is implemented. Directors-General (DGs) are employees (public servants) who must manage government departments and report to ministers. Parliamentary questioning (oversight) Members of the National Assembly pose questions to the Ministers and DGs on the functioning of departments and how state funds are spent. Portfolio committees monitor the performance of individual government departments and make recommendations to Parliament. Members of the public are also included in public hearings for policy issues and legislative issues. Treasury control National Treasury, under leadership of the Minister of Finance, is responsible for expenditure of the public sector. Prescribed rules exist for spending in the public sector. These include the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA). Any request for spending outside of the budget authorised by Parliament must be authorised by the Minister of Finance Auditor-General (AG) The Auditor-General audits each government department annually and submits a report to the accounting officer (this is usually the Director General). The report is Page 5 of 21  also submitted to Parliament. Unauthorised, fraudulent and fruitless expenditure is brought to the attention of Parliament. Parliament must hold the executive accountable to ensure implementation of recommendations. The AG is independent of Parliament and the Executive and is able to issue its reports without fear or favour. 3.2 Efficiency Efficiency means that resources have been allocated and used in the best possible way with the least waste. It is important to note that accountability does not guarantee efficiency. Efficiency is achieved when Pareto efficiency is achieved. This means that resources are allocated in the most economically efficient manner where nobody can be made better off without making someone else worse off. While pure Pareto efficiency exists only in theory governments must still aim to achieve this. There are three main contributors to inefficiency in government: Bureaucracy This occurs when there are too many rules and procedures that need to be followed. Government ends up being desensitized to the needs of society. Incompetence This occurs when someone does not have the necessary skillset or ability to perform a task. Causes of incompetence include demotivation, lack of skills or training, lack of experience, apathy. Incompetence promotes inefficiency and wastage of resources. Corruption This occurs when someone has exploited their position for personal gain. Corruption includes bribery, fraud, nepotism, cronyism, and dishonesty. Corruption erodes trust because civil servants abuse their power for their own benefit. 3.3 Assessing needs The concept of assessing needs requires government to investigate what the required needs of the economic participants are at a specific time and then aim to provide them. The main market signal in determining needs and wants is the action of supply and demand. However, this mechanism is absent from the government sector. It is therefore difficult for the government to determine needs of the economic participants in its country. This can lead to an over or under supply of goods and services. 3.4 Pricing policy In the absence of a market mechanism that determines prices, government must utilise different methods in deciding how public goods and services are priced. There are three methods which can be used: Free of charge Some goods and services are provided at no charge to consumers. All costs are recovered from taxes. Examples include police services, fire services and street lighting. Page 6 of 21  User tariffs Government levies a fee for certain goods and services. This income is used for maintaining the public goods. Examples include toll roads and television licenses Subsidies Subsidies are used to encourage production in areas with high unemployment, encourage businesses to compete internationally and to protect strategic businesses. There are two main ways that government provides subsidies: i. Direct subsidies: government absorbs some of the cost of the goods and services by paying cash to producers or consumers. (e.g. bread) ii. Indirect subsidies: government absorbs accumulated losses of state-owned enterprises e.g. SAA or Eskom 3.5 Parastatals Some enterprises are capital-intensive and take a long time to be profitable. Moreover, losses will accrue over a very long time and it is often uncertain how long it will take before profits emerge. The inability to make large profits means that private individuals will not want to invest in these industries/enterprises. Government therefore provides these essential goods and services through parastatals. Examples include the establishment of the telecommunications network in South Africa and the establishment of a broadcasting network. Parastatals are often monopolies because they enjoy government protection while new competitors cannot afford the capital required to enter the market Government will need to fund the capital required and absorb losses through taxes provided for in the national budget. Parastatals can become a burden on taxpayers because their losses are funded by government bailouts. Government can assist parastatals through: Bailouts – this provides financial support when parastatals are in distress. Improved governance – this is achieved by: o Appointing a stronger board of directors o Monitoring the audit reports and implement findings Improved human capital - implementing stronger people management processes 3.6 Privatisation Privatisation occurs when the government transfers the functions, activities and ownership from the government to the private sector. The aim of privatization is to reduce the role of government in the economy. The private sector is motivated to maximise profits. In order to achieve this, they will produce at the lowest possible prices. Privatisation benefits government by: relieving government of financial burdens including bailouts promoting efficiency and service provisioning generating greater tax income. Increased taxes can be used for economic development and growth. The disadvantages of privatization include: Possible job losses due to increased efficiencies in private enterprises Page 7 of 21  Price increases which could lead to job losses. Price increases occur when prices are adjusted for market conditions without subsidies. It is important to remember that parastatals and government may provide goods and services below market prices as they are not motivated by profit. 3.7 Nationalisation Nationalisation occurs when the private sector transfers functions, activities and ownership to the government. The aim of nationalisation is to: Promote redistribution within the economy Promote government control of assets – this is particularly true for strategic assets The disadvantages of nationalisation include: Nationalisation comes at huge expense to the government where the private sector is compensated for their property. The reduced participation of the private sector can result in wastage. Section 4 Macroeconomic objectives of government The National Government sets macroeconomic objectives to guide it in the management of the economy. We can say that macroeconomic objectives are the national government’s aims for the national economy. South Africa’s macroeconomic objectives are: Economic growth Full employment Exchange rate stability / balance of payment equilibrium Price stability Economic equity 4.1 Economic growth Economic growth is an increase in the productive capacity of goods and services in a country. Economic growth is measured in terms of Real Gross Domestic Product (GDP adjusted for inflation). Economic growth means that the productive capacity of the economy increases. As a result, unemployment will decrease leading to an increase in demand for local factors of production and, in turn, increasing in state revenue through taxes. It is important to note that economic growth can only occur when the economic growth rate is higher than the population growth rate. Economic growth also stimulates economic development because more public goods and services can be provided to all citizens, resulting in an increased standard of living. 4.2 Full employment Full employment occurs when all individuals who are willing and able to work and can find employment. Unemployment is one of the biggest challenges in South Africa. Addressing unemployment is one of government’s most important objectives. There is a direct correlation between unemployment and negative socio-economic indicators (e.g. crime Page 8 of 21  and poverty levels). A reduction in employment results not only in increased disposable income (good for economic growth) but an improvement in the standard of living of the population. Increased employment decreases the need for government grants and subsidies (so-called social welfare). Government addresses unemployment by supporting small, medium and micro enterprises (SMMEs). These employers provide the most employment opportunities in the economy. The official unemployment rate in June 2024 was 33.5%. 4.3 Exchange rate stability / Balance of Payments equilibrium Exchange rate stability occurs when the exchange rate remains stable to reduce trade uncertainty in foreign trade. International trade is a fundamental characteristic of a globalised market. Imports and exports flow freely between countries in the era of globalisation. A stable exchange rate is required to encourage international trade. Foreign exchange (forex) markets are impacted by socio-political instability in a country. In South Africa, the SARB allows the exchange rate of the Rand to be determined by a free-floating exchange rate meaning that it does not directly intervene in the valuation of the Rand. In order to promote a stable exchange rate, the country will use monetary and fiscal policy. Exchange rate stability is important because volatility creates uncertainty for producers, retailers and investors. Volatility results in erratic import and export prices which are detrimental to economic growth. A volatile exchange rate also causes a Balance of Payments disequilibrium. 4.4 Price stability Price stability occurs when the general prices of goods and services remaining relatively constant over time. Price stability is the opposite of inflation in the economy. Both endogenous (internal) and exogenous (external) factors will always result in price changes. Price stability ensures that prices remain relatively stable which inspires confidence in the economy. When prices are stable and inflation low, markets can function optimally, and economic growth can take place. This results in job creation which is needed in South Africa The SARB aims to achieve price stability using its target range of 3% of 6% for CPI. The Repo rate is the monetary policy instrument used to achieve price stability. 4.5 Economic equity The policy of economic equity refers to the redistribution of income within the economy. Its aim is to significantly increase the number of previously disadvantaged people to own, manage and control the country's economy. In South Africa, redistribution of income and wealth is essential as the country has the worst Gini Index in the world (63 in 2014). This is primarily due to the legacy of inequality from colonialism and apartheid. Page 9 of 21  South Africa uses a progressive tax system to redistribute wealth. A progressive tax system means that higher income earners pay more tax than lower income earners. This income is then used by government to finance free social services such as education, housing, primary healthcare and to provide social grants such as those for the disabled, for childcare and for the aged. Section 5 Implementation of macroeconomic policy 5.1 Fiscal policy Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable economic growth and improve equity through poverty reduction. 5.1.1 Characteristics of fiscal policy It is goal-bound - The national government determines its economic and social goal during the budget process. Provincial and municipal budgets are then used to achieve these goals It is demand-based - Fiscal policy is the main demand-side instrument used in demand-side policies. However, some fiscal policies can be applied to achieve supply-side policies. It is cyclical - Business cycles have a direct impact on fiscal policy decisions. Government earns more tax during an upswing. This enables government to spend more on public goods and services. During a downswing, economic activity decreases meaning that the state earns less income from direct and indirect taxes. Government will have less money to spend on public goods and services. 5.1.2 Composition of fiscal policy Fiscal policy consists of state income and state expenditure. The budget is balanced when income is equal to expenditure. A budget deficit occurs when expenditure is greater than income. A budget surplus occurs when income is greater than expenditure. 5.1.3 Government expenditure Government spending is classified in either functional or economic terms. In functional terms, expenditure is broken down according to the various activities or services that government is involved in. Health, education and defence are examples. In economic terms, expenditure is classified according to the nature of the transactions involved. For example, goods and services, compensation of employees, and interest. Government spending ensures that citizens have access to public goods and services as well as merit goods. Government can provide goods and services at no cost or subsidise these. In South Africa, there are large differences in standards of living. Redistribution of income is required to ensure that poverty can be addressed, and further marginalisation does not occur. Page 10 of 21  Government also spends on servicing its debts (paying interest). 5.1.4 Taxation Taxes are levied for the following reasons: To raise income to cover government spending To increase the prices of demerit goods thereby discouraging consumption To increase the price of imported goods by making them more expensive, encouraging the consumption of locally produced goods To redistribute income by ensuring that higher income earners pay higher rates of taxes Taxation policy influences the economy. During an upswing when demand-pull inflation can occur, government can increase tax to dampen economic activity (contractionary fiscal policy). During a downswing when the economy is contracting, government can decrease tax to stimulate economic activity (expansionary fiscal policy). State debt A budget must always balance. When there is a budget deficit, governments must borrow to balance their budgets. These borrowings or loans are called state debt or public debt. They must be paid by government with or without interest. Debt is used to balance a budget when taxation is less than expenditure. 5.2 Effects of fiscal policy 5.2.1 Income distribution The method of taxation used affects income distribution in a country. There are three income distribution systems that a country can use: Progressive tax system This system charges higher rates of taxation to higher income earners. South Africa uses this system to redistribute income and promote the macroeconomic objective of economic equity. Proportional taxation Everybody pays the same rate of tax. This is applicable to VAT in South Africa. Redistribution is not achieved by this method. Regressive taxation Higher income groups payer lower taxation rates than lower earners. This promotes an uneven distribution of income. 5.2.2 Consumption The rate of tax directly influences consumers’ disposable income and spending patterns. Taxes are divided into 2 categories: Page 11 of 21  Direct taxes: These are charged directly to the individual or business. These cannot be shifted but must be paid by the taxpayer. e.g. income tax and company tax. Indirect taxes: These are charged as a percentage of the price of goods and services sold. This tax is shifted by the retailer to the consumer. e.g. VAT. All South Africans pay tax because everyone pays VAT. When people earn below a certain threshold, they do not pay income tax. These people still pay VAT. It is important for government to mitigate the impact of VAT by zero-rating basic foodstuffs consumed by the poor. Fiscal policy impacts savings which directly impacts the marginal propensity to consume. The income multiplier kicks in when government spending increases, resulting in increased employment and increased consumer spending. 5.2.3 Price levels A reduction in taxes increases disposable income but could result in demand- pull inflation. An increase in taxes could mean greater demand for higher salary increases by workers resulting in cost-push inflation An increase in indirect taxes such as VAT will affect general price levels (e.g. increase in VAT from 14% to 15% in 2018). This has the impact of reducing consumption. 5.2.4 Incentives High and progressive tax rates can disincentivise employees from entering the labour market, accepting promotions and working longer hours. Similarly, companies may not want to expand their operations when corporate taxes are high. High tax rates encourage tax avoidance and could lead to tax evasion. 5.3 Determining tax rates – the Laffer Curve The Laffer curve was developed by economist Arthur Laffer. The curve illustrates employees’ disincentive to work as a result of increased tax rates. It further illustrates the relationship between the tax rate changed by government and tax earned by government. The Laffer Curve is illustrated and explained below: Page 12 of 21  Tax revenue (Rm) The tax rate (%) is on the horizontal axis. The government revenue is on the vertical axis. At 0% no income is earned. As the tax rate is increased a peak will be reached (at point a with tax rate t and tax revenue TR) If the tax rate is increased beyond this point, people are disincentivised from working. Revenues then start to decrease. If the tax rate is increased to thigh, the tax revenue has decreased from TR to TR1 At 100% tax rate, revenue is R0 because nobody will want to work (all their income goes to the government). Economists use the Laffer curve to justify reducing taxation because all countries experience a turning point as depicted. Evidence suggests that in practice, countries levy taxes below t% (e.g. tlow). 5.4 Discretion in fiscal policy The Minister of Finance has discretion when setting the budget. There are a number of rules which the Minister should adhere to: The deficit rule – budget deficit should not exceed 3% of GDP The borrowing rule – borrowing should only be used for capital expenditure. Current income should cover current expenditure The debt rule – the public debt and guarantees should not exceed 60% of nominal GDP Section 6 Budgets 6.1 National Budget The National Budget is South Africa’s main budget. It is presented each year in February by the Minister of Finance (currently Enoch Godongwana) for the fiscal year to come. The fiscal year for the South African government is from 1 April to 31 March of the next year. The tax year, however, operates from 1 March to the end of February in the next year. The budget is prepared by National Treasury in consultation with the rest of Cabinet and the Financial and Fiscal Commission (FFC). The FFC is an independent, objective, Page 13 of 21 impartial and unbiased constitutional advisory institution that advises and makes recommendations to Parliament, provincial legislatures, organised local government and other organs of State on financial and fiscal matters. Parliament must approve the National Budget each year after presentation by the Minister of Finance. Three considerations must be taken into account when the budget is set: Financial considerations – Cabinet must decide which taxes must be increased or decreased Economic considerations – Cabinet must know what is needed in the economy Political considerations – The budget is used to achieve the macroeconomic policies of the state Three components of the national budget: Government expenditure – all spending incurred by the state Government revenue – all income that is earned by the state Surplus/deficit – if expenditure exceeds income there is a budget deficit whereas if income is greater than expenditure there is a budget surplus The South African budget has run at a deficit for many years now. This requires the state to borrow locally and internationally to meet its spending needs. The main budget sets out the expenditure for the country as a whole. Each province must allocate their own budgets according to their own needs after allocation from the National Budget. 6.1.1 Income The 2024/2025 budget reveals that the primary sources of income are: Personal Income Tax (40% of total income) – these are taxes paid by individual citizens (Refer to annexure A for an example of a progressive tax calculation) Value Added Tax (25% of total income) – this tax is paid by all consumers Page 14 of 21  Corporate taxes (16% of total income) – this is tax paid by companies on their profits (the current corporate rate is 27%) Note that wealth taxes are incorporated into the “other” item which contributes less than 6% of total income. 6.1.2 Expenditure The 2024/2025 budget reveals that the main sources of expenditure are: Learning and culture (20% of spending) – this includes spending on primary, secondary and tertiary education as well as skills development Social development (17% of spending) – this includes spending on welfare payments made by the state Healthcare (12% of spending) – this is a provision for spending on public healthcare facilities 6.1.3 Budgetary constraints In developing the budget, the Minister must adhere to three principles: The deficit rule states that budget deficits should not be greater than 3% of national GDP. The budget deficit was estimated to be 4.9% of GDP in 2023/24. The budget deficit for 2024/25 is forecast to be 4.5% of GDP. The borrowing rule states that borrowing should be used for capital expenditure only. Current expenditure must be met from current income. The debt rule states that public debt and guarantees must not exceed 60% of nominal GDP. South Africa’s debt-to-GDP ratio averaged 54.1% of GDP in the decade to 2022 but had risen to 72% by 2023. Page 15 of 21 6.2 Provincial budgets Most of the revenue collected by government is allocated to the provinces. An equitable share is allocated to each province based on the equitable share formula and conditional grants. The equitable share formula considers the following 6 components: 1. An education component (48%) - based on the size of the school‐age population (ages five to 17) and the number of learners (Grades R to 12) enrolled in public ordinary schools. 2. A health component (27%) - based on each province’s risk profile and health system caseload. 3. A basic component (16%) - derived from each province’s share of the national population. 4. An institutional component (5%) - divided equally between the provinces. 5. A poverty component (3%) - based on income data. This component reinforces the redistributive bias of the formula. 6. An economic activity component (1%) - based on regional gross domestic product (measured by Statistics South Africa). The 2024/2025 budget allocation to provinces is as follows: 6.3 Municipal budgets Municipalities can gather their own income in the form of rates and taxes. Property rates are imposed and levies are charged for water, waste removal, electricity and water delivery. Municipalities are allocated a portion of the national budget to ensure that municipal services can be delivered. Poorer municipalities rely more on central and or provincial government than do the metropolitan municipalities. Page 16 of 21 Section 7 Public Sector Failure Public sector failure occurs when the following features are present: Ineffectiveness: If a government consistently fails to achieve its objectives e.g. fails to control inflation or decrease unemployment. When state policies fail to achieve their stated aims, then these are ineffective. If a policy fails to achieve its stated outcomes despite research, development and implementation it is ineffective. Inefficiencies: Inefficiencies occur when government has not allocated resources for optimum benefit to economic participants and wastage has occurred. When the public sector is not efficient in the allocation and use of resources, it will result in wastage. This is an inefficient allocation of state resources. 7.1 Reasons for public sector failure There are 7 reasons for public sector failure: Management failure Apathy Lack of motivation Bureaucracy Politicians Structural weaknesses Special interest groups 7.1.1 Management failure Government departments underperform due to: Lack of training and experience This occurs when public servants do not have the skills, training nor experience required for the role in which they have been employed. As a result, they cannot perform their jobs efficiently. This promotes waste of state resources as civil servants are remunerated for roles that they are not qualified for. It also impedes productivity in the workplace by promoting a culture of incompetence. There is a link to the problem in public sector provisioning in efficiency. For example: A person is employed as an accountant but does not have the necessary qualification. Poor leadership This occurs when employees employed in managerial positions are not able to motivate, mentor and lead their staff complement. If superiors cannot lead, this will stunt higher levels of productivity. Page 17 of 21  Employees will become demotivated and complacent when managers are incompetent. Poor leadership promotes inefficiency in the workplace and results in a wastage of resources. There is a link to the problem in public sector provisioning in accountability. For example: A state judge arrives late to court repeatedly for tardiness and causes a backlog of cases. The judge cannot be disciplined. 7.1.2 Apathy This occurs when civil servants are disinterested, lack enthusiasm and are incompetent in their roles. Lack of accountability and apathy are usually closely linked. Apathetic civil servants usually have low productivity levels resulting in poor service delivery. Inefficient civil servants are fully remunerated which promotes wastage of state resources and a culture of incompetency and inefficiency. There is a link to the problem in public sector provisioning in efficiency. For example: A ward councillor has approval for a new public toilet but this never gets built because the paperwork is never submitted. 7.1.3 Lack of motivation Civil servants do not have regular performance evaluations or receive acknowledgement for excellent service unlike employees in the private sector. Public sector employees also do not receive performance bonuses or incentives. Civil servants are only evaluated against compliance and standard procedures causing them to become complacent and demotivated. Customer service is not a priority in the civil service creating the perception of less commitment and efficiency. There is a link to the problem in public sector provisioning in efficiency and assessing needs For example: In the private sector, employees are often paid bonuses paid on the ratings of customer in post-service surveys. This does not apply in the public sector. 7.1.4 Bureaucracy This occurs when there are too many rules, regulations and procedures to be followed by civil servants. It is important to have rules and regulations in place and that these are followed, but some civil servants are more interested in following these than in efficient service delivery to the people they serve. This results in poor service delivery and a perception that civil servants are out of touch with the public Furthermore, civil servants may feel overwhelmed by the rules and regulations resulting complacency and demoralisation. There is a link to the problem in public sector provisioning in efficiency and assessing needs. Page 18 of 21  For example: Critical medical equipment cannot enter the country because the customs officials will not work overtime to finalise the paperwork for importing at the harbour. 7.1.5 Politicians In order to build political careers, politicians are tempted to act in their own interests rather than those of the public. They endorse programmes and projects that secure votes and re-election. This can lead to wastage of resources because of a misallocation of resources. Politicians may also serve their own interests through cronyism, nepotism and corruption. They could favour certain service providers over others in tenders in return for kickbacks and favours. Promoting their own interests creates distrust and disillusionment among the public. There is a link to the problem in public sector provisioning in accountability and efficiency. For example: the Minister of Health appoints family members to provide personal protective equipment to state hospitals during the Covid-19 pandemic. 7.1.6 Structural weaknesses When the state is the only provider of a particular good or service and there is an undersupply, it creates an inefficiency in the entire economy. If the good or service is critical to the entire economy (e.g. electricity), all role players will be compromised. This has far-reaching negative consequences for economic growth. This will deter potential investors from investing in the economy as the economy has structural weaknesses There is a link to the problem in public sector provisioning in accountability, efficiency and parastatals For example: Eskom is the only provider of electricity in the country. It fails to efficiently provide electricity resulting in loadshedding. This impacts on the entire country and economy. 7.1.7 Special interest groups Special interest groups such as trade unions and businesses lobby government to act for their advantage. This promotes inefficiencies because special interest groups act to improve their wellbeing at the expense of others. Special interest groups ensure that pareto efficiency cannot be achieved. There is a link to the problem in public sector provisioning in efficiency. For example: Trade unions pressure government to pass legislation to favour their members such as a very high minimum wage. This will detract from investment in businesses. Page 19 of 21 7.2 Effects of public sector failure The effects of public sector failure are summarised into four main categories: Allocation of resources The state is supposed to allocate and use resource optimally. When this does not happen, wastage occurs. When the state does not deliver, role players feel that their tax revenue is being maladministered leading to apathy, unhappiness and disgruntlement. Economic instability Public sector failure erodes economic stability deterring investor confidence. Corruption, nepotism and cronyism do not inspire confidence in investors. Distribution of income The progressive taxation system aims to redistribute income and wealth in South Africa. When the government fails to redistribute wealth effectively, marginalised people are further marginalised and the gap between rich and poor grows. Social instability When government does not deliver public goods and services, it causes frustration and resentment among citizens. This leads to civil unrest and violent protest action. Page 20 of 21 Annexure A Calculation of progressive income taxes in South Africa Assume that someone earns R600 000 a year: Look for the bracket into which this income fits – (R512 801 – R673 000) Fixed tax = R121 475 Variable tax rate = 36% Calculation of taxation Tax payable = Fixed rate + (salary – lower bracket) x tax rate = R121 475 + (R600 000 – R512 800) x 36% = R121 475 + (R87200 x 36%) = R121 475 + R31 392 = R152 867 Minus rebate: R17 235 = R152 867 – R17 235 = R135 632 Page 21 of 21