Warning over higher taxes to fund basic income grant in South Africa

 ·13 Jun 2022

The idea of a permanent social assistance grant in South Africa has grown in popularity following the implementation of the Social Relief of Distress Grant to help offset the effects of the Covid pandemic on the country’s poorest citizens.

The Basic Income Grant (BIG) would provide income support for individuals between 18 and 59 years old who are struggling and don’t have any social assistance. But how much would each individual get paid, and how much would it cost?

Bloomberg reports that record unemployment and deepening poverty has fueled calls for the government to move toward a basic income grant.

It said that for president Cyril Ramaphosa, expanding the welfare state is attractive because it could bolster support for the ruling party after its share of the vote sank below 50% for the first time in last year’s municipal elections.

Finance minister Enoch Godongwana has said the money would be better spent on creating jobs and investing in water, power and other infrastructure.

The South African Federation of Trade Unions (Saftu) has previously urged the government to consider a monthly grant amount of at least R1,500 per month. Civil society groups have put the figure at R1,268, while the ANC’s reported figure was for R500 per month.

The Congress of South African Trade Unions (Cosatu), meanwhile, said that R624 would be sufficient, given that the country’s food poverty line in 2022 is currently set at that amount.

A panel of economic advisers appointed by South African President Cyril Ramaphosa warned against implementing a basic income grant in the world’s most unequal nation, saying the cost could deepen debt and hinder economic growth.

Bloomberg reported that the R350 temporary grant created twice as many welfare beneficiaries as registered taxpayers in the country. The measure added about 10.3 million people to the welfare net, and is seen by many as unsustainable.

“If a more permanent expansion of the grant system is decided upon, it is likely that a more permanent revenue stream may have to be considered to limit the drag on the fiscus,” Herman van Papendorp and Sanisha Packirisamy of Momentum Investments said in a note.

And last week, a report from policy research and advocacy group, the Centre for Development and Enterprise (CDE) showed the impact of a permanent social grant on the country’s books. “South Africa cannot afford a basic income grant,” said Ann Bernstein, executive director of the CDE.

Bernstein noted that poverty rates in South Africa are “exceptionally high”, estimating that it is possible the incomes of over 60% of people fall below the poverty line. “In this context, and with growing reports of child hunger, it is not surprising that people want to see much more spending on social grants,” she said.

“The reality, however, is that government’s finances are already unsustainable, and adding a large and permanent new spending programme will only make this worse.”

SA already spends considerable resources on redistribution. As a share of GDP, cash transfers are three times larger than the average for the developing world.

The new CDE report finds that, in contrast to what proponents of a basic income grant (BIG) claim, a BIG would slow economic growth. While cash transfers to poor households would increase their spending, the higher taxes or increased borrowing needed to finance a BIG would slow the economy and worsen economic sustainability.

Slower growth and increased borrowing would increase the debt ratio. Since 2008, the government’s debt has risen from about 26% of GDP to about 70% – a rise that is among the steepest in the world.

There is no consensus about what a BIG would cost. The SRD grant costs about R44 billion a year, but proponents of a BIG want a much larger grant for which more people would be eligible, likely costing between R200 billion and R300 billion a year.

“Some people think that implementing a BIG is just a matter of raising taxes,” said Bernstein. “But there is a big price for higher taxes – slower growth and less employment. The slowdown in growth will make the rest of the government’s spending even less affordable than it is now. And the consequences of that will be terrible for the poor.”

The report argues that faster economic growth is essential for stabilising SA’s public finances, and would also make greater spending on social grants more affordable.

“But you can’t spend money as if growth has already accelerated,” said Bernstein. “If you did that, you could tip the economy into fiscal or financial crisis, which would only make the prospects of the poor even worse.”

The Centre for Development and Enterprise provided a table of the potential cost of the BIG:

In the 2022 Budget Review, National Treasury provided a summary of total spending on the “social wage”, a term that is defined to include all spending by the government on the delivery of services from which poor households benefit directly, and includes everything from social grants to basic education, and from RDP housing to healthcare.

Total annual spending on the ‘social wage’ exceeded R1 trillion for the first time in 2020/21, and accounts for about 52 per cent of all spending or 60 per cent of non-interest spending. It is also the equivalent of about a sixth of GDP.

Spending on the social wage: 2018/19 to 2024/25

The National Economic Development and Labour Council (Nedlac) also published a report looking at the feasibility of introducing a BIG in South Africa.

The report shows that the implementation of a universal BIG at the level of the current special Covid-19 Social Relief of Distress Grant (R350 a month) could reduce the concentration of income of the top 10% of earners from 49.9% in 2019/2020 to just below 47.1% by 2024/2025.

The researchers said that, if funded through personal income tax, a monthly sum of R350 would result in an approximate average increase in effective tax rates at 8.2%.

The tables below outline how tax rates would be impacted across various income bands, in the researchers’ baseline growth scenario.

Tax impact of R350 grant

Tax impact of R840 grant

Tax impact of R1,268 grant

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