National Treasury says municipalities will realise operating deficits on their operating budgets for the 2022/23 financial year as the total operating expenditure increases at a higher rate than the revenue projections, meaning that municipalities are living beyond their means and are increasingly experiencing financial challenges.

However, the situation is projected to improve in later years of the medium term as operating surpluses will be likely be realised.

Treasury on December 6 published the operating and capital budgets of municipalities as adopted by their respective councils. These budgets give an overview of the expected revenue and expenditure trends in local government over the next three years, referred to as the 2022/23 Medium Term Revenue and Expenditure Framework (MTREF).

The aggregated budgeted revenue for local government in 2022/23 is R529-billion, R558-billion in 2023/24 and R593-billion in 2024/25.

Total municipal expenditure, on the other hand, is expected to be R557-billion in 2022/23, R582-billion in 2023/24 and R614-billion in 2024/25.

The total expenditure for 2022/23 is therefore 5.1% higher than the adjusted budget for the 2021/22 financial year.

Treasury expects a net deficit of just under R270-million in the 2022/23 financial year, which improves to a surplus of R3.5-billion in 2023/24 and R7.3-billion in 2024/25.

Treasury notes that external loans and internally generated funds have been excluded from total revenue, but that these funds are considered in determining the net surpluses or deficits for each year. Municipalities intend to fund infrastructure investment through external loans of R37.2-billion and internally generated funding of R45.6-billion over the three-year MTREF period.

Meanwhile, the main cost drivers of local governments are employee-related costs and material and bulk purchases, which represent 28.9% and 32.7% of the operating expenditure, respectively.

Treasury says municipalities are experiencing a two-fold impact of high electricity and water tariff increases, lower sales levels owing to changes in consumption patterns, and increased bad debt as a result of affordability pressures.

Capital expenditure (capex) increased by 1% to R69.7-billion in 2022/23 compared with the original budget for the 2021/22 financial year. Capex, in aggregate, represents 12.5% in 2022/23, 11.7% in 2023/24 and 11.4% in 2024/25 of the overall budget of municipalities.

Trading services, including electricity, water, wastewater management and waste management, represents 49.7% of the total capex of R69.7-billion in 2022/23 and will decrease slightly to 49.1% by 2024/25.

Treasury says the 2022/23 capex budget reflects a R43.8-billion investment in new infrastructure, which is 62.8% of the total aggregated capital budget.

Investment in the renewal and upgrading of existing assets is much lower at R10.9-billion, or 15.6%, and R15.1-billion, or 21.6%, of the total capital budget, respectively.

Lastly, Treasury says municipalities have allocated R27.7-billion to repairs and maintenance of assets in 2022/23. This will increase to R29.2-billion in 2023/24 and to R30.9-billion in 2024/25.