The Wealth Room


Government is enslaving citizens with its hefty price increases


South Africa would be far richer if it wasn’t for government constantly ratcheting up prices on the things we can’t avoid paying for.

In South Africa, from January 2008 to April 2019, consumer price inflation increased by 84.9% as measured by the consumer price index (CPI). That, in an international context, is steep. The euro area, for example, only saw prices increase by 16.8% over this period.

But that is a mature and developed market, many will say. While Brazil saw the total price level increase by 79.5% over that period, the likes of China, Russia and Japan saw price level decreases.

Other developing economies saw more reasonable consumer price increases, including Thailand at 18.7%, Mauritius at 42.1% and Rwanda on 53% while high inflation in Mexico saw a price level increase of 58% in total. South Africa is an outlier in these countries.

Government’s heavy hand

The reason has been clear for many years: government and its agencies have increased administrative prices well above inflation.

I have since 1998 studied administered prices. These are prices that government controls such as those for electricity, water, property rates, and taxes on fuel and other fuel components beyond the actual oil-price-related prices on petrol and diesel in rand terms.

Only a handful of these price increases have made headlines, such as electricity – power prices have increased by 351% over the period and more increases are on the way. But water too has increased (by 205%), while local petrol taxes and margins have increased by 190% compared to 70% for the international oil price component.

Increases in the prices of electricity, fuel and water have an impact on the likes of manufacturing and transport. Add Transnet, Airports Company South Africa, school fees, parking fees, tolls and a host of others, and SA CPI ends up increasing even more than it should.

Let’s take the new petroleum pipeline from Durban to Gauteng as an example. It is funded by a charge added to the price of fuel. This currently amounts to 57 cents per litre. It was 15.5 cents a litre in March 2011 – a 268% increase, while overall inflation to which it added increased by 52% over the same period.

They’re everywhere, affecting everything

These prices are everywhere and have impacted the prices of other goods and services since it is impossible not to pay them in petrol, insurance, licences, water and lights, and even schooling.

My best estimate over the last 20 or so years is that the prices government or its agencies control added at least one percentage point to South Africa’s inflation rate every year.

The compounded annual inflation rate since 1998 is 5.7% – and making it just one percentage point lower would mean the price level since 2008 would have increased by only 42.5% and not the 84.9%.

But that’s not all folks – the quality of government services also has an impact as people fear the bad schooling and health lottery that government hospitals present. Never mind the security services and electric fences that help combat suburban crime shivers at night.

South African citizens pay some of the highest taxes in the world but must still pay extra for a reasonable quality of life.

Let’s for a moment just imagine …

Imagine if water and electricity were half price. Imagine if the rentals paid by retailers weren’t increased by as much due to lower power costs and the bakery could bake bread for less.

Administered price increases should have been controlled but were not, as managers never controlled costs. Not all administered prices are captured in the CPI, and some – like harbour and rail tariffs, landing fees and licence fees for medical hospitals, among others – have an indirect impact on overall prices too.

SA would be richer, bigger and wealthier if it were not for the price increases by the government.

The South African economy should have had interest rates that are about 1% or potentially even lower as inflation would have been lower.

That would have decreased the risk of doing business in South Africa and encouraged more investment (leaving aside Eskom’s electricity generation capacity challenges).

Could’ve, should’ve … didn’t

Yip, inflation could have averaged well below the midpoint of the inflation target for most of the last 10 years, but it did not, and our government is mainly at fault.

Lower inflation would equal more real spending, particularly for poorer households. It would have meant a lower risk-free rate for government, which would then have had more money to spend on the poor or on infrastructure.

This also would have meant lower interest rates from the South African Reserve Bank (and less criticism too). It would have meant more money in consumers’ pockets and that would have helped consumer confidence.

Lower inflation would also have lowered the barrier for investment decisions by private businesses, and that would have meant more jobs and more business confidence. This would have led to higher growth of say at least half a percentage point if not a full percentage point or more as confidence enhances confidence in a positive feedback loop.

By my simple calculations, I would say at least one million extra jobs over these 20 years.

Perhaps we would have seen even bigger investments during the commodity boom and fewer job losses during the commodity price decline, and now have had closer to two million more jobs.

Yes – one out of five jobless people today could have been employed, and there would be less inequality too.

The impact is huge

The impact of higher prices is huge. These charges are then passed on but the efficiency of state-owned monopolies is not addressed.

Why the Competition Commission is not investigating these situations is beyond me. This is treason by the government, as the high prices of everyday items enslaves citizens who should have been at least 10% richer per capita than they are today.

Administrative prices have been studied and blamed by many, even in government, but nothing gets done.

This is a real test for the government now, not just the fight against corruption.

High administrative prices are the result of greed, corruption, waste and the inability of management to do things right. 

SOURCE: https://www.moneyweb.co.za/moneyweb-opinion/government-is-enslaving-citizens-with-its-hefty-price-increases/



June 6, 2019


The Wealth Room

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