Have municipalities crossed the peak of the Laffer curve?

Despite implementing annual tariff increases – often surpassing the prevailing inflation rate – the City of Tshwane’s revenue from consumer services has remained largely stagnant.

This trend suggests that residents may have reached their financial limits, rendering further increases ineffective.

Lex Middelberg, a councillor from the Republican Congress of Tshwane, has analysed the city’s financial statements over recent years and concludes that the council’s income from trading services has declined over the last few years in real terms.​

In the last financial year, revenue from consumer payments was lower than in 2020/21, even in nominal terms, he shows.

Middelberg believes the municipality has surpassed the peak of the Laffer curve – a concept in economics that illustrates how excessive taxation can lead to a decrease in total revenue.

This occurs because high taxes may discourage economic activity or prompt taxpayers to seek ways to avoid taxes.​

Dawie Roodt, chief economist at the Efficient Group, agrees with Middelberg’s assessment. He says the same applies to almost all government institutions in South Africa. Citizens are heavily burdened by the costs imposed by the government, even as service delivery continues to deteriorate.​

Service delivery issues are evident in various parts of Tshwane. On 30 April, Alderman Dana Wannenburg reported that residents in Wards 4 and 98 had been without water for eight days, and some areas were without electricity for three days.

Such prolonged disruptions are becoming increasingly common in the city.​

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Correlation between tariffs and the use of services

Morné Mostert, head of local government affairs at AfriForum, has expressed concern over municipalities’ approaches to revenue generation. He emphasises that, according to the Constitution and the Municipal Systems Act, there must be a clear correlation between the tariffs charged for municipal services and the extent to which the consumer uses those services. This principle has been upheld in legal precedents.

AfriForum has criticised a new cleaning levy of R194 per month that Tshwane plans to impose from 1 July.

This levy targets vacant plots larger than 150 000m², and business and residential properties valued over R250 000 that do not use the city’s waste removal services.

AfriForum argues that this constitutes double taxation and unfairly burdens already overtaxed residents.​

Johan Hopley from Impact Metering highlights the city’s fixed monthly charge for the first nine kilolitres of water. Regardless of whether a household uses two or three kilolitres, it is billed for nine.​

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Basing tariffs on property values

The City of Cape Town’s proposed tariff increases – and its plans to link fixed monthly charges for water and sanitation, as well as a new cleaning levy, to property values – have also sparked public outcry.

The Collective Ratepayers’ Association (CRA) has launched a petition against the draft budget, stating that while it understands the need to invest in infrastructure – especially in under-resourced areas – the proposed 11.4% budget increase is too high.

“It’s more than three times the inflation rate and follows previous increases of 11.9% (2024) and 11.2% (2023),” it says.

 The CRA warns that such increases could lead to financial strain for single-income households and retirees, potentially resulting in the loss of their homes.​ It argues that tying fixed tariffs to property values does not comply with legal requirements, as it does not reflect actual usage.

AfriForum shares this view.​

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Increases above projected inflation must be justified

In December, National Treasury issued a circular advising municipalities to ensure that their tariffs remain affordable. Municipalities are encouraged to assess the costs of delivering specific services efficiently annually and to base their tariffs accordingly.

“The Consumer Price Index (CPI) inflation is forecasted to be 4.4 per cent; therefore, municipalities are required to justify all increases more than the projected inflation target for 2025/26 in their budget narratives and pay careful attention to the differential incidence of tariff increases across all consumer groups,” according to National Treasury.

Mostert says if a municipality provides a well-substantiated document demonstrating the necessity of a particular tariff to deliver a specific service efficiently – and uses the funds exclusively for that service – there would be little grounds for objection.

However, he notes that figures are often arbitrarily determined, or municipalities simply apply a percentage increase to existing tariffs without thoroughly evaluating cost-efficiency.​

This article was republished from Moneyweb. Read the original here.