Budget 3.0: Fuel levy replaced VAT hike but is it the better option?

When the VAT increase of 0.5% was scrapped, South Africans breathed a little easier, although they likely knew that they would pay for it in other ways. One of those ways is the fuel levy that Minister of Finance Enoch Godongwana announced in Budget 3.0 on Wednesday.

Now South Africans are wondering if the fuel levy will not be worse than the VAT increase of 0.5% as everybody who sells you something will now add to the price, saying it is due to increasing fuel prices. However, two economists The Citizen spoke to said the fuel levy is still the better option.

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Fuel levy increase larger than VAT increase

Frank Blackmore, lead economist at KPMG South Africa, says the proposed fuel tax hike represents an inflationary increase of 4% in the fuel price, which is larger than the proposed VAT increases, but is limited to 16 cents on the current 385c for a litre of petrol and 15c on 370c for diesel, but it is broad based in terms of all transport of people and goods being subject to this increase. 

“In 2024/25 a total of R85.88 billion was collected form fuel taxes and if we assume demand stays approximately the same for this year, the additional fuel taxes should generate an extra R85.88 billion x 0.04, which equals R3.5 billion, which is far less than the estimated R13.5 billion raised by increasing VAT by 0.5%.”

On the other hand, he says, VAT would be imposed on all goods and services and would depend on the value of those goods. “Therefore, it would be expected to have a larger impact on consumers’ purchases given that the actual amount paid can be relatively large in comparison.”

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Fuel levy increase in line with inflation

Sanisha Packirisamy, chief economist at Momentum Investment, agrees that the fuel levy increase is the better option. She points out that Treasury previously estimated that no inflationary adjustment to the fuel levy would amount to R4 billion in foregone revenue in the current financial year.

“Allowing for the fuel levy to increase in line with expected inflation for the first time in three years, means consumers will now pay an additional 15c/l for diesel and 16c/l for petrol (Gauteng 93) which will result in additional revenue of R3.5 billion, less than R4 billion due to lower inflation.”

Taxes as a share of the pump price are expected to increase to 29.9% in the next financial year.

“The South African Reserve Bank (Sarb) calculated that a VAT increase of 0.5% would have increased headline inflation by just under 0.2%. The fuel levy is part of the ‘private transport’ category, weighing a total of 6% of the consumer basket.

“However, a big chunk of this is new and used vehicles, with the remainder being petrol prices. If we base an average petrol car on 45l capacity, the price to fill up was R963 in May. It will now be R970.2 with the 16c/l increase in the fuel levy, all else being equal.”

Packirisamy says in the current environment of low oil prices and a well-behaved rand, the Central Energy Fund’s estimate for the next fuel increase month-to-date is at 21c/l (over-recovery, indicating a cut in the price), which means this implies that some of the pressure could be offset.

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Consumers will pay for scrapping the VAT increase in other ways

While consumers do not have to worry about the VAT hike anymore, the fuel levy and bracket creep and fuel levy adjustments will still be a drag on household income, she says.

Medical aid credits unaligned with inflation will cost consumers R1.2 billion in the current financial year that will increase to R3.8 billion in the Medium-Term Expenditure Framework (MTEF).

“With Treasury lowering its inflation forecasts, it is now expecting to collect R15.5 billion, while it was R18 billion in Budget 2.0. Due to bracket creep in the current financial year, consumers will pay R16.5 billion in personal income tax, where it was R19.1 billion previously and R17.5 billion in the next financial year instead of R20.3 billion

“The minister did not offer any relief across the earnings spectrum.”

While the minister made no adjustment to excise duties, government is expected to collect R200 million more in the current financial year owing to lower anticipated inflation.

Packirisamy also points out that government has removed the cushioning built into the above-inflation increases in social grants for the current and next financial years, in alignment with the scrapping of the VAT increase.

These grants are now expected to increase in line with expected inflation, further reducing the financial buffer for lower-income earners.