Municipal infrastructure spending capacity in South Africa: a panel smooth transition regression (PSTR) approach

This paper assesses the factors that contribute to underspending of the capital budget at the local government level by making use of a nonlinear model based on the panel smooth transition regression (PSTR) model. South Africa is used as a case study. Capital transfer is identified as an important threshold variable in that the degree to which municipalities spend their capital budget depends on a threshold determined by capital transfer. The results of the empirical analysis show that large amounts of capital transfers to local government contribute to underspending by municipalities in South Africa. Moreover, the results indicate that capital budget spending could be improved by ensuring that the trade-off between the current budget and capital budget is reduced, increasing the fiscal capacity of municipalities, which gives them financial autonomy to raise their own revenues.