‘Large and unpopular’ tax hikes the only way to fund South Africa’s basic income grant

The National Treasury is working with the presidency and the Department of Social Development to tackle the poverty gap, and this will include finding an alternative for the R350 SRD grant, says finance minister Enoch Godongwana.

Answering oral questions in the National Assembly on Wednesday (8 September), Godongwana said all options also need to be considered concerning their availability and their financial and revenue implications before a final decision can be made.

He said that in terms of achieving sustainable relief for vulnerable households, the baseline budget for a social assistance grant is R205 billion from 2022 to 2023.

While the government has formally committed to investigating the introduction of a basic income grant, the debate is likely to come back to affordability, scope, and already questionable long-term debt sustainability, said Jeff Schultz, senior economist at BNP Paribas South Africa.

“Paring back the current relief of distress grant of R350 a month to more than 10 million recipients when it is scheduled to end on 31 March 2022 will be challenging.

“Narrowing the scope of the current grant to only those seeking active employment, not making it eligible for existing grant recipients, could be one such compromise.”

Schultz said that this would still come at a non-negligible R25 billion per annum (0.5% GDP). However, Shultz said that this would fall well short of a broader basic income grant that would apply at a minimum of R585 a month at the cost of R75 billion – R150 billion – between 1.3% and 2.5% of GDP per annum.

“(This) is something which looks unaffordable without large and unpopular tax hikes.”

5% of GDP

The Financial and Fiscal Commission (FFC) has indicated that a ‘true’ basic income grant could cost the fiscus even more, depending on how the government plans to implement it.

The FFC is an independent constitutional advisory institution. Its role is to advise and make recommendations to parliamentt, provincial legislatures, organised local government, and other state organs on financial and fiscal matters.

In a presentation to parliament at the end of August, the FFC said that a true universal income set at R350 per month would cost approximately R243 billion per year, based on the 2020 mid-year population estimates.

This amounts to 5% of GDP. The cost would increase the revised budget deficit from 15.67% of gross domestic product (GDP) to 20.15%.

However, a more streamlined grant of R350 per month to target the unemployed – using the expanded definition – between the ages of 18 and 59 years would cost R44.8 billion per annum or 0.9% of GDP, it said.

“Naturally, the total costs estimated here are high and would be lower if the BIG were to partially or totally displace grants in the existing system.”

In August, a green paper published by the Department of Social Development formally proposes introducing a basic income grant for South Africa.

The paper, which has since been retracted, proposes three options for a universal income, ranging from R585 to R1,268 a month, based on the country’s existing poverty lines.

To raise enough funds for even the lowest of these options, the green paper suggests an income tax hike of 10 percentage points to raise the approximately R200 billion needed.

Read: What financially stressed South Africans are doing to cut monthly costs