Over the next couple of days finance minister Enoch Godongwana’s political fix for the national fiscal crisis will come into effect. The increase in the fuel levy was announced in the budget 3.0 proposal, which seeks to deal with two complementary issues. The first reason sounds sensible enough.
In the aftermath of the Russian invasion of Ukraine in 2022, back when the ANC still had the ability to unilaterally pass budgets, Godongwana decided to announce a temporary reduction in the levy in response to the extraordinary spike in fuel prices.
Beyond that moratorium, the previously annual upward adjustment to the levy was not implemented from 2022 until now. The logic behind the focus on freezing the levy was that fuel costs affect every facet of the economy. Freezing the increases had the effect of tempering the effects on citizens. So the proposed adjustment merely performs a catch-up exercise — to the detriment of citizens.
The upside of keeping fuel costs down is that it enables businesses and citizens to redirect those extra cents towards other activities. The complexity with the fuel price is that its major components — the exchange rate and dollar-denominated global oil prices — are out of the government’s control. Hence, if there is a price crisis it is only levies implemented by the government that can be tweaked.
The long-term depreciation of the rand and fluctuations in global oil prices — which often have little to do with the economics of extraction, refinery and transportation — have cumulatively resulted in fuel prices that are far higher than desirable and contribute to pushing up business costs and the cost of living.
If the state was blessed with a stronger fiscal position the decrease in the levy that we saw in 2022 might have been a more common occurrence. Unfortunately, SA’s fragile fiscal position means we are stuck at the other extreme of that pendulum, which essentially explains why the adjustment is being implemented now.
After the rejection of the proposed VAT increase in the first two draft budgets the National Treasury had to figure out an alternative way of raising revenue to fund national commitments and priorities. The rejection of the VAT increase was premised on the realisation that, such as fuel levies, it is a notoriously blunt instrument.
The National Treasury’s preference for VAT as a source of revenue is ironically premised on its ubiquitous nature, which means its upside — increased revenue — is deeper than other taxes that are subject to a concentration problem. Across the three main taxes — VAT, personal income tax and corporate taxes — it is VAT that has the capacity to generate the most substantial revenues if managed properly.
The problem that remains unresolved is whether the increases that were proposed would yield the revenues that were desired. The Revenue Service thinks not, and has taken on the responsibility to rather extract and collect more from the current tax model and rates. If it succeeds it will buy us time to figure out the best way of growing tax revenues in the long term. If it doesn’t collect the excess they believe exists, the headache will return with one instrument — the levies — no longer a possible source of the fix.
For now, the levy increase represents the short-term fix the minister can justify as a catch-up exercise, though the windfall ultimately gets us no closer to funding the hole in the books.
• Sithole (@coruscakhaya) is an accountant, academic and activist.
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