A Tale of Two Forces: Fiscal vs Monetary Policy tug-of-war

“It was the best of days; it was the worst of days.”

In recent weeks, South Africa has dominated international news concerning its US-South Africa relations, which nearly overshadowed the outcomes of Budget 3.0 delivered by Finance Minister Enoch Godongwana on May 21, 2025.

The VAT increase proposed in Budget 2.0 was revoked and replaced with a fuel levy increase of 16 cents per litre for petrol and 15 cents for diesel. Although considered a necessary evil, the fuel levy increase affects the economy and households similarly to the scrapped VAT increase. This levy follows a 12.74% rise in electricity prices effective from April 1 and precedes a

25 basis-point repo rate cut on the 29th of May 2025, reducing the prime lending rate to 10.75%.

Much appears to be occurring simultaneously or in brief bursts, affecting various economic agents in different ways. 

South Africa is a fuel-importing nation, relying on nearly 80% of its crude oil on imports, which constitutes a substantial part of the country’s import bill. Although fuel prices are regulated in South Africa, they remain influenced by market forces, such as the exchange rate and the dollar oil price. While managing fluctuations in international fuel prices is beyond our fiscal control, levies and fees fall within our remit.

According to the Organisation Undoing Tax Abuse (OUTA), from 2009 to 2014, South Africa’s Basic Fuel Price (BFP) was the largest component of domestic fuel prices, ranging between 51% and 58% before decreasing to 30% in 2020. However, taxes and levies have been increasing, accounting for almost 70% of the fuel price in 2020. 

The fuel levy makes up approximately 6% of the government's total revenue and is the fourth-largest revenue-generating item in the government budget, collecting R730 billion over the past decade. Although it is not the biggest source of government revenue, it generates more revenue than customs duties or alcohol and tobacco excise duties, which should have been the sacrificial lamb protecting the local market.

As reported by the Department of Mineral Resources and Energy (DMRE), in December 2021, the price of inland 95-octane petrol stood at R20.29, comprising a basic fuel price of R9.74 (48%), taxes and levies of R6.67 (33%), retail and wholesale margins of R2.74 (14%), and storage and distribution costs of R1.14 (6%). The Road Accident Fund levy of R2.18 (1%) was not included. South Africa’s fuel prices are heavily influenced by levies and taxes rather than by global market fluctuations. According to the Stats SA 2021 report, there are 13 different charges depending on the type of fuel and one's place of residence. Are we undermining our economy by self-sabotaging?

The South African Petroleum Industry Association (Sapia) reports that fuel prices rose by 21% in 2017/2018, leading to cost-push inflation and economic growth falling below 1%. This latest levy increase is likely to have a similar impact in an already frail economic environment.

Higher electricity and fuel prices raise production and operational costs, leading to a decrease in aggregate supply, as businesses rely on the transportation of goods for production and retail purposes. This ultimately results in lower output, which, in turn, affects employment, wages, and investment as firms implement cost-containment measures to remain productive. As businesses pass the burden onto consumers by charging higher prices for their products and services, this leads to cost-push inflation pressures that alter spending behaviour, as consumers make trade-offs between food, repaying debt, electricity, commutes, and other essential household expenses. Consequently, aggregate demand in the economy will dampen as disposable income is eroded, thereby hindering economic growth.

Although businesses and consumers were cushioned by the R1.27 drop in the basic fuel price shortly after the increase in the fuel levy, in the long term, the higher levy undermines South Africa’s economic growth. 

An additional financial relief for consumers was a 0.25% reduction in the prime rate from 11% to 10.75%. Although this interest rate reprieve was moderately welcomed by South Africans, if higher fuel levies drive inflation, the South African Reserve Bank (SARB) may hesitate to cut rates further, limiting growth stimulus.

Additionally, a fuel levy hike raises costs immediately, while rate cuts have a lag effect, thus taking time to stimulate growth. Rate cuts benefit indebted middle-class borrowers, boost borrowing, encourage business expansion, and stimulate economic activity, but do not offset fuel inflation for the poor. The fuel levy increase risks hurting short-term growth and rising inequality, disproportionately affecting low-income earners and households. These two policy decisions have opposite impacts. The fuel levy hike increases inflation, thereby reducing economic activity, while an interest rate cut spurs growth.

To counter this challenging balancing act, the economy must grow at a higher rate to increase tax revenues and productive government spending. A higher growth rate will create jobs, reducing the number of economically inactive workers who rely on social grants as they shift to personal taxpayers.

Growth also signifies positive business performance. This will broaden the tax base as more individuals gain employment, diverting the government’s spending from social grants to more growth-enhancing initiatives. Moreover, corporate taxes will also increase. Very little can be accomplished with the low growth rate of 0.6% recorded in 2024 and 0.1% during the first quarter of 2025. If growth continues on this downward trajectory, government revenue and public expenditure will remain constrained.

Nokwanda Mathenjwa holds an MPhil Economics in Industrial Policy from the University of Johannesburg and a Development Finance qualification from the UCT Graduate School of Business. She is the President of the Young Global Economists Society, a recipient of the Top 30 Most Influential Young Economists in Sub-Saharan Africa, a Mail and Guardian Top 200 Young South Africans awardee and a Mandela Washington Fellow.

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

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