Govt must tackle inflation better

INFLATION is caused when the costs of the bare necessities in life go up, then the wages need to go up so the people can maintain the purchasing power of their meagre wages. But this was not the case from 2001 to 2007 – the banks worldwide maximised the amounts they could lend to people for home loans.

This left people debt ensnared and the cost of living doubled or even tripled because instead of it costing someone say, R250000 to buy a small cluster house, the price ended around R800000 for that same unit. Now instead of only having to make repayments for R2000 a month, the people had to make repayments of R8000, so most of their income went to home repayments.

The effect was the same for business properties. The running costs for business also went up at the same rate.

But post this horror boom, the middle class has been left debt ensnared and the cost of living has tripled! Normally property escalates at about five to 10% per annum, but during this boom over the seven year period it was escalating at about 30% pa. So it wasn't petroleum or food that drove the inflation rate, it was the cost of housing/property.

Fast forward to this year, the cost of housing is still very high, but what has been causing inflation now is the cost of petroleum rising sharply over the last couple of years. This is because India and China and the East have a growing middle class and thus need more oil.

So in South Africa, our nation is struggling, and the economic growth and job creation are not very strong at the moment, because costs are rising. So inflation in South Africa is being driven by external forces affecting the cost of petroleum and food.

So the Reserve Bank governor can decrease inflation by increasing interest rates, which will see the working class pay more on their home loans and car repayments, and thus see their disposable income shrink even further. This will see them spending less.

So increasing interest rates at the moment is the wrong way to do it. When the Reserve Bank pushes interest rates up to curtail inflation, in reality it will do nothing other than suck the life blood out of a very anaemic economy and do nothing for inflation.

So what is the solution? The Reserve Bank must bring down the interest rate by what it has increased it by, and then reduce the amount the banks charge to the people.

The Reserve Bank lends at, say, 5% and the banks lend to the people at 5% plus 3% (8%). This is daylight robbery – in America and the West, the banks are only allowed to add 1% onto the reserve bank rate.

The other thing the government must do is make the people's cost of living as cheap as possible. When the government collects R1-trillion a year, and of that R40-billion-plus is spent on roads, that money spent must be written off and not tried to be recovered via e-tolls or increasing the fuel levy.

All this does is increase the people's living costs and stifles the economy even further. Businesses have higher costs, less profits and less taxes to be paid to SARS, so the government is actually shooting itself in the foot.

It basically amounts to you paying SARS your taxes of R2000 for the year to build you a road, then the government brings e-tolls or fuel levy to raise a further R2000 to make you pay the money back twice to use the road.

What the government must do to create jobs is provide the platform we need to thrive and use our taxes to build roads, schools, etc, but then write off those costs. We need more roads built, but what the government must do to reduce the cost of living further is to provide a public transport system that is very cheap, efficient and effective, such as metro rail and tramways for each city, and bullet trains linking the cities.

When the people and the small businessman/woman can get around cheaply, this stimulates the economy big time, because one of the major costs today of the working class and the business people is transport. This saving will see disposable income increase, and the people will spend and save more, and stimulate the economy.

The next thing we need to do is promote subsistence farming and the farming sector to ensure we can meet our food needs locally and even start growing enough to export and make profits. We must cash in on the growing demand for food as the floods and droughts are pushing the price of food right up.

Something else the government must do is work out how much is been underspent each year by each department, pool this money and use it for more roads and infrastructure projects. The government doesn't keep track and doesn't seem to know that it is, but it's roughly R80-billion.

Adrian de Villiers, Port Elizabeth