National Treasury warned that major municipal infrastructure would have to be delayed as it is looking to meet new spending commitments such as the promise for free higher education.
Municipalities such as Johannesburg and Cape Town will as a result have to do more with less money from the fiscus.
Only 9 per cent of funds raised nationally will be allocated to the local government over the next year.
In his maiden Budget speech delivered on Wednesday, the Minister of Finance Malusi Gigaba announced that transfers to provinces were being reduced by R5.2bn, while local government faced a reduction of R3.2bn.
Reports say Treasury is expecting large municipalities to invest more of their own resources to fund infrastructure projects.
According to Gigaba local governments are still being plagued by governance and financial management challenges.
The Finance Minister added that municipalities are also not charging tariffs that add up to the full cost of the services they provide, especially in the case of water.
However, Gigaba said they would have to decrease their reliance on government to fund their infrastructure projects.
“The planned spending for 2018/19 has been affected by reprioritisation and reductions undertaken since last year’s mini-budget,” Gigaba said.
The ANC also said it would be looking into the sustainability and efficiency of municipalities’ public transport and housing policies.
“Over the period ahead, we will review the effectiveness of these different support measures and introduce a new instrument design to turnaround some of the most troubled municipalities,” Gigaba said.
The government is also set to work with municipalities to secure investment that can help reshape South Africa’s cities and accelerate economic growth.