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Not since the oil crisis of the 1970s has inflation dominated political talk as much as it does today. Workers from the poorest to the richest countries are feeling the pinch. It wasn’t that long ago that the European Central Bank resorted to negative interest rates to deal with the insurmountable problem of how to boost consumer prices. But data published on Tuesday shows the annual inflation rate for the countries that share the euro jumping to more than 8% in May, compared with bank’s 2% target.The story has been the same in the US where prices are running at more than 40-year highs. The cost-of-living crisis has led to protests, from the UK to Chile. In the poorest countries in Africa and elsewhere, rising fuel and food prices risk leading to mass starvation and hunger. SA hasn’t been left out, and the clamour for the government to be seen doing something was too hard to resist; it’s no surprise that the “temporary” reduction in the fuel levy has been extended for a further two months. It could be going the same way as the Covid-19 special relief payments, which are now due to run until 2023. Governments may all be in the same boat but, as with the outbreak of Covid-19 in early 2020, their ability to respond isn’t uniform. For a troubled leader of a wealthy country such as the UK’s Boris Johnson, the call for action might have even come as a godsend. Instead of talking about the prime minister breaking his own Covid-19 rules, the press was last week occupied instead by a £15bn relief package, including rebates on energy bills.In a reminder that even for rich countries there is no such thing as a free lunch, questions soon arose whether the package would be inflationary and force the central bank into a faster pace of interest-rate increases.It was two months ago that SA also offered to help hard-pressed people, announcing a reduction in the fuel levy that would cost R6bn in forsaken revenue. When government announced the relief — which has been extended to early August at a cost of R4.5bn — soaring oil prices had increased the cost of petrol locally to a record of just under R22/l.
Ministers probably counted on a quick end to the conflict that started with Russia’s invasion of Ukraine. Instead, the latter’s resistance has been more impressive than anyone would have expected, while the former has demonstrated that its military prowess is exaggerated. So the war has rumbled on past 100 days.
Russian President Vladimir Putin, whom SA has refused to condemn, may still get his “victory”. But it will be at a great cost to people across the world, SA's poorest among them. Brent crude jumped above $120 a barrel this week and the risk of world hunger has increased as Russia continues to blockade wheat exports from Ukraine. That hasn’t been enough, unfortunately, for President Cyril Ramaphosa to grow a backbone.The immediate crisis for SA motorists and business is a petrol price that was set to exceed R25/l with the expiry of the original relief on top of the general increase. The problem for governments, especially ones with finite resources, is that they are no better than experts in telling what the future holds, hence such “temporary” relief measures hold dangers.The government says the sale of strategic reserves won’t be enough to cover the cost of the relief this time and there will be an impact on the fiscal framework. This highlights that choices have to be made. It’s easy to make noise about the need to cut levies and increase spending, but a reality of economics is that there’s no magic money tree; the revenue lost by reducing the fuel levy has to be clawed back from somewhere.
Will the government take from the poor through cuts in health and education spending, or impose tax increases on SA’s middle class? An unplanned commodities boom came to the rescue and allowed the Covid-19 grant payments to be extended, but this is not something that SA can count on indefinitely.
Having worked hard to restore its fiscal credibility, the government needs to tread carefully.
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.