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How Far Will You Get If You Are Sitting In Your Corner

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The 2012 Budget Speech by Pravin Gordhan delivered few surprises. Aside from his request for members of parliament to stop whistling at the high proposed capital gains taxes, or his attempts at reading Zulu proverbs (Uzothola kanjani uhleli ekhoneni, or How far will you get if you are sitting in your corner), the budget did what it was supposed to do: begin the slow process of roping in anti-cyclical fiscal policy (i.e. a lower budget surplus and debt) now that the economy is growing again. Minister Gordhan, as per usual, increased sin taxes (R36 on tax for a bottle of brandy!) and announced tax reductions (which are mostly the result of bracket creep). Surprisingly, the increases in the social grants are all below inflation rates, marking what I believe is a significant step in rewarding productive activity rather than hand-outs. All in all, I think, he did pretty well.

What made his task difficult, of course, was the emphasis on infrastructure investment, as outlined in Zuma’s State of the Nation address. Minister Gordhan took some time to explain the various sources of infrastructure finance: while government (through the budget) will continue to finance social infrastructure like schools, clinics and courts, investment in economic infrastructure is (mostly) outsourced to the parastatals. Eskom and Transnet will receive little government transfers to finance their massive investment programmes, while telecommunications infrastructure will also be financed by the private operators.

The devil is in the detail, though. Sentech will receive R800 million “for the dual illumination of analogue and digital television, and for digital broadcasting infrastructure”. While there was no mention of South African Airways’ request for R5.6 billion, there was also no mention that SAA will privatise, except to say “our airlines industry has several private sector players”. R5.8 billion will be spent on the Gauteng Freeway Improvement Programme, which effectively mean that the rest of South Africa (which is responsible for 60% of our GDP, and thus tax revenue) will pay for congestion in one province. As Roelof Botha argues convincingly, toll roads are the best way to ensure that the users of the service pays. (He also notes that the top quintile of income earners will carry the heaviest burden, meaning that toll roads are fairer than relying on the general budget.)

But perhaps the main infrastructure-related item was not all the hype about expenditure, but the mention of an increase in 20c on the fuel levy (plus an additional 8c for the Road Accident Fund). Fuel remains an important input into South African production, especially in the two sectors which the Minister singled out as key sectors of the future: agriculture and manufacturing. Of course, increasing the fuel price will create the incentive to shift away from its use, but there really are no viable short-run solutions yet. If the plan is to move from road transportation to rail, then we should not be expanding highways and building new roads where cars require fuel (at least for the next five years) to operate. I suspect the increase in the fuel levy is an easy way to earn revenue – a cash cow – but it creates all sorts of price distortions (inflation!) which eliminate most of the benefits of the greater revenue. Moreover, because the poor spend more on transport as a share of their budget, they will bear more of the burden, exacerbating inequality.

Trade makes society prosperous. But trade is only viable when transport is cheap. A large fuel levy will discourage transport and trade, except if there are alternatives available. At the moment, there are few. Mr Gordhan would do well to consider his own Zulu proverb: How far will you get if you are sitting in your corner (without cheap transportation to get you to work or make your business grow)?

Written by Johan Fourie

February 22, 2012 at 16:25

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