Published in Le Mauricien, 01 June 2018
The correction of market failures is a sound justification for introducing fuel taxes but here their use is often explained by the need to increase fiscal revenues as it is an effective form of taxation, in the sense, that a) fuel consumption is fairly inelastic to price changes; b) fuel taxes are easy to introduce/increase with minimal risks of evasion and c) the tax base is relatively large.
We currently paying Rs 52.00 per litre at the pump for gasoline – but roughly 55% of that price comes from different forms of taxes/contributions namely, subsidies, road, ecology and excise and value added taxes. Fuel taxes are usually levied to correct market failures and/or to mobilize fiscal resources.
Why should we slash fuel taxes?
1. Politicians are particularly guilty of clinging to bad ideas. One that ideally all the regimes cannot seem to let go of is the belief that we should raise fuel taxes to pay for capital projects. On the surface, this sounds like responsible government. There is also general agreement that we have to invest more in social and physical infrastructure projects.
But we are being duped. First off, a lot of the petroleum tax money actually is not being used for capital spending. It is being funnelled right into social spending, that is, current expenditure of which there are totally unrelated pork barrel nonsense expenditures like so many millions for the celebration of this and that, so many millions for retouching VIP cars and building of bus shelters into artefacts and billions more for meeting electoral promises on pensions, subsidies, etc, which we can barely afford for all.
Second, over the years there have been persistent substantial under-execution of investment spending at all levels of government which reflects an implicit strategy where the public investment budget is used as a fiscal buffer during budget execution. That is, reductions in budget deficits are achieved mainly by sacrificing capital investment. Public investment has been stagnating at around Rs19 billion annually for several years. For e.g In 2017, public investment was forecast by Statistics Mauritius to grow sizeably by 20.2% in real terms, to an amount of Rs 23.7 billion, or 5.1% of GDP. In the estimated outturn for 2017, public investment in fact fell by 4.1%, in real terms, to a lower value of Rs 18.6 billion, and to a smaller ratio of 4.1% of GDP. As for 2018, the prospect of a big push in public investments is not borne out by the current trend in Government capital spending, which accounts for about half of public sector investments. As at March 2018, only Rs 4.2 billion of the Rs 12.7 billion earmarked in budget 2017-18 have been spent, or only about 33%, reflecting a major shortfall in Government capital spending. Thus, year after year, our money is not being properly utilised. Using the fuel taxes money for non-capital spending is irresponsibility. We are indebting our future generation while bequeathing them a laggard economy - failing again and again to meet the targets for graduating to a middle income economy.
2. A practical argument against fuel taxes is that they harm industry competitiveness. This is not only a tax on consumption but also a tax on production as transport cots is an important element of the cost of production. Gasoline prices around the world show that our fuel prices are much more expensive than many of our competitive textile producers, namely, Indonesia, India, Turkey, Bangladesh, Malaysia, South Africa, Sri Lanka, Philippines, Kenya, Thailand, Morocco, China, and Madagascar. It is not a surprise that the exports of the Export Oriented Sector, which is beset by several challenges, including domestic cost pressures, have been growing at dismal rates of -2.3%,-9.4% and -3.6% over the last 3 years.
3. Yet another argument against fuel taxes is that it is really just like another VAT that adversely affects the middle class and the poor. It increases the regressivity of our already unfair tax system impacting far more heavily on both the middle class and the poor. (The poor spend a larger portion of their income on driving than the rich do). It also has a trickle-down effect on inflation, higher fuel prices mean higher freight, and higher freight makes transportable goods more expensive thus driving up the prices of goods and services throughout the economy. And a good chunk of the gains for the lower middle class and the poor via the populist measures of Minimum Wages and NIT would be snatched away at the gas pump.
More importantly, in our specific case, as fuel taxes are an important source of revenue and an easy way to fleece consumers, there are likely to be less efforts to discourage wasteful spending and carry out crucial reforms to curtail recurrent expenditure, including measures to find alternative sources of revenue like improving the progressivity of the tax system, hiking the taxes on the Smart City and Property Development Schemes and the divestiture of public assets in the short-term.
