The fuel price challenge – Moneyweb

Last week saw the country consumed in debate around the April fuel price hikes linked to the Middle East conflict. The question repeatedly asked is what can we do to mitigate this shock?

The seemingly obvious answer, right here and now, is ‘very little’. Government did offer temporary fuel levy relief of R3 per litre to reduce the magnitude of the price increases, cushioning the blow for consumers.

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Finance Minister Enoch Godongwana estimated the temporary relief for April at around R6 billion in foregone tax revenue, small in relation to the total national revenue budget of roughly R2.3 trillion. Nevertheless, every bit helps, and subsequent months will be assessed to see if further relief is required.

But even this modest tax relief quickly leads to the question as to whether the country’s cash-strapped fiscus can afford it?

The fuel price shock highlights many structural problems in SA.

For one, much can seemingly be done to improve the country’s transport energy efficiency.

This is not only to ‘proof’ it against periodic oil price shocks, but also to contain ongoing energy costs in general and help make its economy more globally competitive, not to mention reducing South Africa’s contribution to environmental damage.

The design of the South African city needs much attention, its layout being arguably ‘sub-optimal’.

Many low-income people live in townships far from places of work, meaning their transport costs relative to income are sometimes exorbitant. Changing urban design to bring more of the economy and jobs closer to these areas surely needs to be a priority.

South Africa’s lack of high-quality, reliable public transport also comes into the spotlight during such times. Addressing this requires detailed planning.

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A transport corridor system, whereby the strategy is to promote densification along specific routes, can create the mass demand for public transport along these corridors, which can potentially improve the financial viability of high-frequency, reliable services.

Then there is the potential role of ‘active transport’ – safe cycling and walking.

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These are the cheapest modes of transport, and are potentially ideal for people from all walks of life, both rich and poor.

Not only do these modes lower costs dramatically and reduce dependence on various fuels, but they also offer significant environmental benefits, help to ease congestion, and improve the health of urban residents.

However, all of these potential improvements around improving transport fuel efficiency require major investment in infrastructure.

This investment is mostly in areas that government, along with its state-owned enterprises, assumes responsibility for – be it roads, safe cycling infrastructure, or railways, as well as much of the related infrastructure and equipment that accompany these.

But lack of budget space to move on infrastructure in general is a seemingly never-ending fiscal issue.

This time, the crisis has much to do with road transport costs. In the past, it has centred on electricity, and currently there is an ongoing rail and port logistics issue.

Often in these crises, a major part of the solution lies in infrastructure, with much of SA’s systems ‘cracking’ due to a lack of renewal and expansions. And each time, the severe fiscal constraints limit what can be done.

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There is very little room in public sector budgets for such infrastructure spending at present, suggesting that progress in reshaping urban and transport system design will, at best, be slow.

As a percentage of GDP, general government fixed capital formation recorded another very low percentage of 2.42% in 2025, according to South African Reserve Bank data.

Government fixed capital formation as a percentage of GDP began its slide in the late 1970s, from a high of 12.23% in 1976, and has never significantly recovered.

Public corporations’ fixed capital formation reached a multi decade high of 5.5% of GDP in 1980, and has never returned to such levels since. In 2025, it languished at 1.6% of GDP.

Source: The author

So can government really afford any tax reduction at all?

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Back to the earlier question: does government have the money to afford the fuel levy reduction in order to ease the pain of motorists at the pump as the oil price shock induced by conflict in the Middle East takes hold?

And can it conceivably afford any further relief? Has it, in fact, been able to afford any of the periodic crisis relief measures, or the ailing state-owned enterprise support measures, of prior years?

Simplistically, the very low rate of government saving available to fund much-needed infrastructure investment would suggest that it hasn’t.

Its debt-to-GDP ratio has steadily risen over a decade and a half.

This has led to interest payments on debt increasingly crowding out much-needed non-interest expenditure items, while social spending items – such as education, healthcare and welfare – continue to absorb a large part of the non-interest budget.

Can government afford not to reduce taxation rates? 

Surely any tax relief would just exert more pressure on the fiscal deficit and feed through into an even higher government debt burden?

Not necessarily. Many reports point to the scope for improvement in financial management and efficiencies in government as being huge.

Furthermore, much depends on whether one sees taxation as merely as a mechanism for generating revenue, or whether one sees it as an important lever for influencing economic performance, perhaps in a similar way to how we view interest rates.

Economist Arthur Laffer developed his theoretical Laffer curve to explain what he believed was the relationship between taxation rates and tax revenue.

The theory suggests that, for a time, a government can raise tax rates and indeed generate higher tax revenue. However, at some point, raising tax rates any further would begin to generate less tax revenue, because of the dampening effect that a high tax rate could ultimately have on incentives to produce economic output.

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It is possible that this theory is currently relevant for SA, and that the country’s net tax rate (gross taxation relative to the level of services received from government), may have reached that critically high level (admittedly, this debate is difficult to prove either way).

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If so, then any significant tax reductions may well be a boost for economic growth to such a degree that government may end up with more tax revenue than would have being the case without tax cuts, all other things remaining equal.

Without growth, SA seems destined to lurch from one shock to the next with little fiscal ammunition available to tackle it.

We can view the cause of the problem emanating from this petrol price shock in various ways. Certainly, the global oil price shock has suddenly caused petrol prices to rise, which has a direct financial impact on the consumer.

But one of the reasons why this is such a problem is in part because South Africa has a lack of comprehensive and high quality public transport, along with safe active transport infrastructure.

A major part of the problem, too, is the low income level and lack of financial buffers among a large part of the population. Far better job creation is thus required.

A petrol price shock would be far less troublesome were SA to be a higher income society with far less unemployment and poverty.

Tax reductions alone probably have limitations.

The bottlenecks in certain public sector-dominated industries – such as electricity, transport and logistics, and certain local governments – need to be resolved rapidly, in many instances by opening them up to well-incentivised private sector entities that possess the capability and the means.

If the principle of the state largely being the regulator, and the private sector being the deliverer (of goods, services and the infrastructure) were to be pushed to a far greater extent (implying a smaller state), perhaps SA could afford to cut average tax rates to boost economic growth, job creation and thus ultimately grow its taxpayer base.

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Therefore, while very small in magnitude to date, even the April fuel levy reduction quickly raises the question of whether government can afford any such type of tax relief, so tight is its fiscal situation?

But perhaps a question to start asking more is whether it can afford not to provide such tax relief and far more, as part of a growth strategy aimed at growing the tax base?

John Loos is an independent economist.

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