Transport subsidy – an idea worth exploring

I’ve been blogging recently on the causes of South Africa’s unemployment. One of the areas I’ve highlighted is the cost of transport for many of our citizens, particularly as a percentage of wages for unskilled workers.

The high cost of transport is one of the reasons the minimum wage for which it makes sense to accept a job is relatively high. It might also have been figured, to some extent, in the calculation of minimum wage.

High transport costs (due to generally poor public transport infrastructure and large) and long distances (due to past government policies like the Group Areas Act, but also more naturally through rapid urbanisation) mean this is a huge fixed cost for poor, unskilled workers.

There is no question in my mind that this is one of the causes of persistent structural unemployment in South Africa.  (The primary cause it still, unquestionably, education and skill levels.)Now, Cosatu General Secretary, Zwelinzima Vavi, has called on government to provide a transport subsidy for low-income workers. Now Mr Vavi is a guy who’s principles and ideals and views I generally agree with, although I frequently disagree with his economic policies and Cosatu’s generally poor ability to consider consequences and interactions of their ideas.

Tolls, taxes and transport subsidies

The call for a transport subsidy has been catalysed by the proposed toll fees for Joburg roads and recent increase in bus and taxi fares.

There is an important force at work here – toll roads better allocate the cost of building and maintaining roads to those who use them. The idea of a subsidy is to reallocate costs away from those creating them to achieve other objectives. So there is more going on here than just cost increases, we are talking about the allocation of costs in the economy from general tax payers to road users, then back to general tax payers (at least for some road users).

The interaction of general income taxes, fuel levies, toll fees, transport subsidies and road use is the key. I’m not even getting into the road vs rail debate, although it does need to be part of the conversation.

A transport subsidy has merit

I would prefer to see wage adjustments to factor in higher costs of transport be incorporated through a separate subsidy (or specifically identified component of wages matched by a specific tax deduction for companies) rather than as a general increase in wage demands. Hopefully this way it will be less likely to entrench higher inflationary expectations and we can more finely allocate and reallocate costs. It does create additional complexity into our tax and wage system – not something we want.

The interaction of this subsidy with minimum wage and the progressive tax system must be considered.

Of course, this would ideally work together with a youth (or “first time employment”) wage subsidy to encourage companies to hire inexperienced staff to provide them with the basic awareness of what formal employment is like, making them more employable in future. This is an idea promoted by the DA, considered publicly by Jacob Zuma and then rubbished by Cosatu. I can only speculate that the benefit of this subsidy goes to citizens who aren’t yet Cosatu members, potentially at the marginal expense of currently employed, older citizens who are Cosatu members. Maybe that’s just my cynicism showing though.

Ultimately, a wage subsidy spreads the cost of transport across the wealthier wage earners and tax payers, but gets more people productively employed in our economy. This is a Good Thing. However, we also need to work to solve the fundamental problem of high transport costs.

Overall though, I hope a transport subsidy is further explored by Cosatu and government, but that the related issues highlighted above are brought into the mix.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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