South Africa’s recent Budget speech delivered by Finance Minister Enoch Godongwana was marked by a mixed reaction as he announced a reversal of the value-added tax (VAT) increase — a move initially welcomed by businesses and trade unions. However, this was swiftly overshadowed by a new burden: a hike in the fuel levy, which is expected to have far-reaching effects on consumers and businesses alike.

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In his long-anticipated address, postponed twice before, Godongwana revealed that petrol prices will rise by 16 cents per litre and diesel by 15 cents. This marks the first increase in fuel taxes in three years and has sparked criticism from a range of stakeholders, despite the VAT relief.

Concerns from Labour and Civil Society

The Congress of South African Trade Unions (Cosatu), through spokesperson Matthew Parks, expressed disappointment with the fuel levy hike, noting that workers and the broader economy will bear the brunt. “We had hoped the freeze on fuel taxes would continue,” Parks said. “This will hurt workers and the economy.”

Parks added that although both the scrapped VAT increase and the fuel levy hike are painful, the latter disproportionately affects the working class, who are already under financial strain. Cosatu also criticized the government’s failure to adjust personal income tax brackets in line with inflation, warning that workers on the cusp of a higher tax bracket may end up paying more despite only modest income increases.

Furthermore, the union called for expanded social support, including additional VAT exemptions on essential foods and an extension of free utilities like electricity and water for impoverished households.

Mixed Views on the Trade-Off

Some economists, such as Peter Baur from the University of Johannesburg, view the fuel levy as a more equitable solution than raising VAT. According to Baur, while the levy will lead to increased transport and production costs, its regressive impact is less severe compared to a VAT hike, which directly raises the cost of goods and services for all consumers, especially the poor.

Nonetheless, Baur acknowledged that the fuel levy could still have inflationary consequences, as it increases the cost of transporting goods and running businesses.

Business Sector: Logistics and Cost Pressures

Business Unity South Africa’s economic policy director, Lunga Maloyi, noted that the higher fuel prices will drive up logistics expenses for companies dependent on road freight. These additional costs will inevitably be passed down to consumers, compounding financial strain and threatening the sustainability of small and medium-sized enterprises.

Similarly, the taxi industry — a major consumer of fuel — warned of rising operational costs. Motlhabane Tsebe, president of the South African National Taxi Council (SANTACO), said the increase places considerable pressure on a sector that plays a crucial role in moving millions of South Africans daily.

While fare increases occur just once annually and are route-specific, Tsebe urged the government to expedite plans for a formal subsidy system to help stabilise the industry and shield commuters from economic shocks.

Fiscal Perspective: Less Revenue, More Burden

Economist Frank Blackmore from KPMG SA calculated that the fuel tax adjustment equates to a 4% increase in the overall fuel price, expected to generate an additional R3.5 billion in revenue. This figure falls significantly short of the R13.5 billion that would have been collected from a 0.5 percentage point VAT increase.

Sanisha Packirisamy, chief economist at Momentum Investments, also regarded the fuel levy as the less harmful alternative. However, she cautioned that it still erodes household disposable income, particularly when coupled with stagnant medical aid credits — a shortfall projected to cost consumers R1.2 billion this financial year, escalating to R3.8 billion in the coming years.

While the government’s decision to reverse the VAT increase offered a momentary reprieve, the subsequent fuel levy hike has shifted the financial burden in a way that disproportionately affects transport-heavy industries, workers, and low-income households. With rising costs now filtering through to goods, services, and public transportation, both consumers and businesses are bracing for a ripple effect that may well offset any benefit gained from the scrapped VAT hike.

As inflationary pressures mount and economic uncertainty continues, many are calling for more targeted and equitable fiscal policies to cushion South Africa’s most vulnerable from further economic strain.