Fuel prices are reaching record highs, leading to growing public demands for tax relief. However, economists warn that reinstating previous reductions would entail significant costs for the budget.
South Africa is experiencing a more severe fuel price crisis than in April, as gasoline and diesel reached their peak on October 7th following another sharp increase. Unlike at the beginning of the year when the government provided temporary measures to reduce fuel excise duties, drivers are now forced to bear the burden of rising global oil prices and the weakening rand exchange rate.
The temporary measures included a reduction of the General Fuel Excise by 3 cents per liter for petrol and, at the peak period, by 3.93 cents per liter for diesel. These measures were withdrawn by the end of June. Due to persistently high global oil prices amid the ongoing Middle East conflict, South Africans are now facing the full General Fuel Excise rate of 4.10 cents per liter for petrol and 3.93 cents for diesel. Including other taxes and levies, such as the Road Accident Fund levy, the tax component for petrol rises to 6.58 cents per liter.
Calls for government intervention are intensifying, but economists point to a valid reason for the Ministry of Finance's reluctance to repeat previous support—the majority of the fiscal reserve that allowed it has been nearly depleted.
Calls for Easing
Several political groups and organizations insist on introducing some form of fuel tax relief, as the rise in petrol and diesel prices puts pressure on both households and businesses. Cosatu has called on the government to reinstate the temporary fuel levy reduction introduced earlier this year, while the ANC has appealed to the National Treasury to consider reducing both the General Fuel Excise and the Road Accident Fund levy as a short-term measure.
Fedusa also demanded an immediate reduction in fuel levies, and ActionSA and the African Transformation Movement separately urged the government to review fuel taxes and levies. These calls come against the backdrop of recent price hikes, which further burden drivers, transport operators, and businesses, with diesel prices particularly affecting the cost of transporting goods across the country.
MISA demands an urgent reduction in the fuel levy, as petrol prices have exceeded 30 cents per liter, warning that rising transport costs create additional pressure on already strained households. Investec Chief Economist Annabel Bishop also deems a reduction in the General Fuel Excise necessary, cautioning that recent fuel price increases could push consumer inflation above 5% year-on-year, putting strong pressure on commuters. This follows a year where diesel prices doubled and petrol rose by approximately one third.
No Room for Maneuver at the Treasury?
Patrick Buthelezi, an economist at Sanlam Investments, stated that reintroducing fuel tax breaks would incur substantial costs for the state budget. While many analysts expect the cumulative rise in fuel prices to push inflation towards 5%, potentially slowing economic growth, Buthelezi noted that the Treasury could face a monthly bill exceeding 6 billion cents if it absorbed the consequences again through fuel levy reductions.
Buthelezi emphasized: 'If the National Treasury were to absorb the shock of the October fuel price hike by cutting the fuel levy, it could cost the budget just over 6 billion cents per month.' He added that the uncertainty surrounding the duration of the Middle East conflict and high energy prices makes such intervention particularly difficult. 'Given the uncertainty about the conflict's duration, extending fiscal measures could undermine efforts toward fiscal consolidation and ultimately affect the sovereign credit rating outlook. The Treasury does not have enough fiscal space.'
Previously, fuel tax breaks cost the budget approximately 17.2 billion cents, although Buthelezi considered this step fiscally neutral. Since the conflict is lasting longer than initially expected, countries worldwide are also abandoning fiscal shields, allowing higher energy costs to be passed on to consumers as pressure mounts on public finances. Buthelezi concluded that fiscal intervention would only provide partial protection and would not solve fundamental energy supply problems. Instead, governments should consider less costly demand-side measures that could help reduce energy consumption, especially if implemented simultaneously across multiple countries.
Hannah Marais, Chief Economist for Deloitte Africa in South Africa, similarly believes that reinstating previous breaks would not be financially prudent. She explained that the previous measures were financed by a combination of higher-than-expected tax revenues and departmental underspending—a fiscal buffer that is now largely depleted. 'The consequence of this decision is that households and businesses will bear the full brunt of higher fuel prices,' Marais stated. She added that reinstating breaks would likely require additional borrowing or cuts in public spending in other areas, while South Africa aims to maintain fiscal credibility and support sustainable public finances. Marais noted that the complex trade-off lies between immediate, measurable costs to the government and economic costs that may be greater but manifest later.
Could Aid Still Pay Off?
Sanisha Pakrisami, a group economist at Momentum, finds the economic argument for fuel subsidies compelling. Recent price increases create difficulties for household budgets and business profit margins, and higher diesel costs increase transportation, agricultural, and other operational expenses. There is also a risk that this pressure could contribute to overall inflation, potentially keeping interest rates higher for longer, which would weaken consumer spending and economic growth. Pakrisami suggested that a severe economic downturn could ultimately cost the budget more through reduced personal income tax, corporate tax, and VAT collections than the direct costs of reducing the fuel levy.
However, this does not mean fuel subsidies are without consequences. 'Absorbing high fuel prices through additional government borrowing risks increasing government bond yields and weakening the rand, while cutting public spending in other areas carries its own socio-economic costs,' she said. From a political standpoint, refusing support is hard to defend to consumers who are already under severe financial strain. But continuously extending subsidies also creates an expectation that the government will absorb any external energy shock. 'Support for vulnerable groups may be necessary if the price shock threatens irreversible structural damage,' Pakrisami added. Nevertheless, the Treasury needs to clearly define both the tax costs of intervention and the broader economic risk of foregoing support.
A Difficult Balance
The dilemma arises during a particularly challenging period for the South African economy. The economy contracted in the second quarter, and the South African Reserve Bank recently raised the repo rate to 7.25%. Persistently high fuel prices increase transport costs, raise production costs for businesses, and reduce household purchasing power. The longer prices remain high, the greater the risk that the initial shock will spread throughout the economy.
Marais noted that the key issue is the emergence of so-called secondary effects. 'Indicators to watch include rising wage demands, increased inflation expectations, and a significant weakening of the rand,' she said. If fuel-induced inflation becomes entrenched in the broader economy, the consequences could extend far beyond transport costs, placing additional pressure on household finances, business profit margins, and economic growth. 'This strengthens the argument for temporary and targeted support for the most affected sectors and households.' Currently, however, drivers appear to remain exposed to the full cost of the fuel price shock. Political calls for aid may grow louder, but the economists' message is more nuanced: the government can provide a safety net, but reusing this opportunity entails significant fiscal costs—and the money for this net must come from somewhere.