Petrol is an essential good – remove tax on petrol

By Nicholas Woode-Smith, an economic historian, political analyst, and fiction author of the Kat Drummond Series and Warpmancer Saga, has written hundreds of articles on South African politics, economics and history. He writes for the Free Market Foundation. By Nicholas Woode-Smith, an economic historian, political analyst, and fiction author of the Kat Drummond Series and Warpmancer Saga, has written hundreds of articles on South African politics, economics and history. He writes for the Free Market Foundation. 

Everything in a modern economy relies on fuel somewhere along the line. It is an essential good, from the poorest of the poor to the richest among us. We need it for getting to work, having our food reach the shops, to keep warm during cold weather, and to supply generators when Eskom inevitably fails to keep the lights on.

Why then is petrol still taxed? It is more essential than bread, as it is needed to get the bread to our shelves. It is the bedrock of a modern, motorised economy – yet it is taxed as if it is a luxury.

As of February 2022, 33.5% of the price of fuel paid for taxes and levies. The largest of these being the General Fuel Levy, but also notably the Road Accident Fund Levy, which is reportedly needed to pay compensation to victims of vehicle accidents – but is in actuality used as a piggy bank by corrupt politicians.

A third of the price of petrol goes to the government. While food costs rise, people struggle to get to work, and our prosperity dwindles – every drop of fuel we purchase furnishes the extravagant spending of the state.

This becomes even more frustrating when one remembers that in 1993, the African National Congress (ANC) criticised the National Party for raising fuel prices; something of which the ANC now makes an almost monthly tradition.

As of June 2022, levies and taxes make up R10 of the price of fuel per a litre before the fuel price is even added. On top of a global rise in fuel prices, South Africans are suffering whenever they have to inevitably top up their fuel tanks.

This doesn’t just mean that motorists can’t drive to a luxury restaurant or the mall. It means workers are forced to dip even further into their dwindling incomes to get to work, that food prices rise as transport costs rise. And as these prices rise, all prices rise; a knock-on effect that can devastate an economy.

But this can all be remedied.

Remove all levies and taxes on petrol. Consider it an essential good. Because it is. And thus, it should be allowed to be as cheap as possible. While the government cannot control the basic fuel price (and shouldn’t), it can spare South Africans a huge chunk of the existing cost.

Further, the government could go a long way to improving the real price of fuel by removing price controls on petrol. Allow petrol prices to float like any other product. Let petrol stations compete over cheaper fuel – incentivising the market  to drop prices.

Price fixing never works. All it does is remove a good from reality. When petrol is price-fixed too low, then there will be shortages. If it is price-fixed too high, consumers suffer. Rather, let companies compete over selling petrol and see what the real price is.

The biggest possibly negative consequence of removing taxes from petrol would be that the government will lose a huge source of revenue. But the RAF and fuel levy were never meant to fund the public budget. We have so many taxes already: Income tax, VAT, corporate tax, inheritance tax, capital gains tax, tariffs, levies…the list goes on.

South Africa has too many taxes, too many sources of revenue. And none of it is helping to service our massive debt and failing budget.

Perhaps, then, the problem isn’t a lack of tax and revenue, but that the state is overspending and strangling our economy.

Rather than taxing an essential good, the state should rather cut spending to make up the shortfall. Perhaps, by avoiding paying R22m for a giant flagpole – or by eliminating wasteful parastatals that would function better privatised.

Wasteful and corrupt expenditure is a much more pressing problem than a lack of tax income in South Africa. The government must cut the chaff and prove that tax money isn’t being wasted before demanding more tax.

With the pressure lifted by removing tax and levies on petrol, the economy will in all likelihood also have room to grow. If coupled with deregulation of the labour market and making other moves to improve ease of doing business, the government may end up making even more money, as more taxpayers enter higher levels of income, across the board.

There are many ways South Africa can grow and prosper. None of them involve taxing a debilitated and rapidly shrinking tax base even more. They involve eliminating wasteful expenditure, liberalising the economy, and embracing sound economics.

And that starts with removing tax on an essential good that is needed by everyone. So, do the right thing. Abolish all tax and levies on petrol.