Fuel levy would need to increase by R1 to fund roads

As Gauteng drivers protest against e-tolling, a debate on the merits of tolls versus increased fuel levies has been unleashed across the media, twitter and dinner tables.

Finance Minister Pravin Gordhan may have put paid to the fuel levy debate when he told parliament that the fuel levy would have to increase by R1 per litre to fund the roads during his speech on the Rates and Threshold Bill to approve the tax measures announced in the budget.

“Those asking for the earmarking of the general fuel levy should be careful what they wish for,” he argued by making the point that the total funds spent on roads and public transport is more than what is collected from the general fuel levy. Government has nearly doubled the amount budgeted for roads and transport to over R70 billion. Against this figure the gross expected revenue from the general fuel levy is around R42.8 billion.

“In sum, earmarking will mean that fuel levies will have to increase by another R16.5 billion to cover the perceived shortfall equivalent an increase of almost one rand in the fuel levy – a sum motorists can barely afford. We have, instead, funded this from general tax revenue,” said Gordhan.

The point he has not made is that due to under investment in roads for many years, the amount previously raised by the fuel levy may have been less than was actually spent on roads. However government’s position has always been that earmarked taxes tend “to fragment and complicate the tax system and allow departments and agencies to escape the discipline of the budget process. In addition, dedicated funding bypasses the important process of prioritisation that must occur through the general budget process”.

In other words if more money is needed in healthcare one year, funds will go to that, but in years where roads need fixing, government will allocate more money from the fiscus – it is all a balancing act of needs.

While Gordhan addresses the funding aspect, FNB property economist John Loos says one needs to assess the market distortion that is introduced as a result of tolls. His argument is that tolls create a market distortion by pushing more traffic onto roads that are not tolled.

“To make some roads very expensive and others totally “free” shifts all sorts of traffic and loads onto roads ill-equipped to deal with it. You are going to find some interesting abnormal freight loads moving on smaller roads, and a lot of congestion on roads near to freeways, while freeways were designed precisely to alleviate congestion on other roads”. Loos argues that the only way to avoid this through the toll system is to toll every road in Gauteng along the same lines as the London-style zone system. Failing this the fuel levy is the only fair way to allocate spending across all of South Africa’s roads.

Loos says the level of opposition towards the toll road system suggests that the “paying public” has limits to how much it is going to tolerate as consumers have already had to absorb excessive price increases across various public utilities such as electricity, water and municipal rates and the concern is that increases in taxes and tariffs may not end any time soon. “Now it is the transport sector, and although it is only a few national roads in Gauteng being tolled at this stage, the public will be aware that other major cities will probably be next, and if successfully implemented why can’t other government entities toll their roads too?”

Due to the pressure on the consumer Loos argues that one needs a far more gradually phased in approach to taxes and tariffs. “Government learned of the looming electricity shortage in the 1990s, and around that time it was becoming clear that urban congestion was placing pressure on transport infrastructure. That was the time to begin to phase in the “user pays” principle in order to fund infrastructure. It didn’t happen, but it doesn’t mean that we can make up for lost time by ratcheting up the tariffs at lightning speed,” says Loos.

As adamant as government is about tolls, the challenge will be the enforcement of a very unpopular tax at a time when government credibility around the efficient use of taxpayers’ money is not exactly at an all-time high. This toll debate is simply a reflection of how citizens are currently feeling about the cost and delivery of services.