Answer to Question #214569 in Microeconomics for Nethonzhe

Question

As a result of imbalance in revenue generation by provincial governments and local municipalities in
South Africa, intergovernmental grants have been a important source of finance for Local
Governments. The allocations of these funds for use in the local authorities have been questionable,
some doubting if the funds are use for what they were earmarked for. Critically discuss, with the aid
of diagrams the conditional no -matching grants with unconditional nonmatching grant

Answer 1

Local governments get conditional or unconditional grants and other monetary transfers. Conditional funds are intended for a specific project and cannot be used for anything else, whereas unconditional grants can be used for anything the recipient local government wants. In South Africa, conditional grants have been utilized to send funds to provinces and municipalities in order to achieve certain national government policy goals. This process is particularly essential in South Africa, where the Constitution guarantees equitable access to fundamental government services such as health, education, water, and welfare.

Local governments and provinces are entitled to "an equal proportion of the money earned nationally" in addition to the conditional grants they receive, according to Section 214(1) of the Constitution. Equitable shares are unconditional, allowing provinces and municipalities to perform the services and duties that have been assigned to them.

The Conditional Grant Frameworks are attached to the Division of Revenue Bill and then gazetted once the bill is passed into law. These frameworks lay out the guidelines for how the money may be spent and help with grant administration and supervision. The Division of Revenue Act establishes conditional grant distributions to provinces and municipalities.

National departments are in charge of conditional grants, and they propose guidelines and allocations to the National Treasury. Other stakeholders are consulted as well, including other national and provincial ministries, the South African Local Government Association, NGOs, the Auditor-office, Generals, and civil society organizations. Feedback from prior grant expenditure is provided by departmental ministers and MECs, which is used to guide changes to grant regulations and allocations in the following years.

Apart from the Constitution, which mandates an equal distribution of all national resources, the yearly Division of Revenue Bill also includes information on conditional grant distributions. Matching or non-matching conditional grants are available. That is, the grant amount may or may not be linked to spending by the receiving government through a formula. They may be subject to a limit and therefore closed-ended, or they may be open-ended if they match. Matching grants have an impact on not just the design of the program, but also the amount of money spent on it.

Conditional grants may have certain disadvantages. They inevitably distract against one of the goals of decentralization, which is to make all sectors of government responsible for their own decisions, because their aim is to influence the budgetary behavior of the receivers. This interference with local or regional authority would be permissible if the conditions could be designed so that they clearly reflected national aims and nothing else.

The figure below shows the comparison between the unconditional non-matching grants and matching open-ended grants.

An explanation for the curve.

The local government will always consume more of the publicly available good if there is a matching open-ended grant than if there is no corresponding closed-ended grant. Unconditional non-matching grants operate as a lump-sum subsidy, whereas open-ended matching grants act as a subsidy for each unit spent. An unconditional grant of l4 must be provided to enable the ingestion of OX. The new equilibrium will be at E2. The income effect of an unconditional non-matching gift is that it moves the budget restriction outward along the ICC.