New report raises significant doubts on the sustainability of a basic income grant for South Africa

The proposal for a basic income grant in South Africa has gained both social and political backing, with National Treasury formally putting feelers out on how to feasibly introduce a system that would close the poverty gap in the country.

Treasury has commissioned a study to determine what long-term plan can be devised to replace the government’s current R350 social relief of distress grant.

Briefing parliament’s Select Committee on Appropriations this week, Treasury said that the study is being conducted through a unit of the University of Cape Town, with the poverty gap being those who fall below the current food poverty line – currently under R624 per person per month.

The country’s finance department has effectively been forced into the position, after the Department of Social Development published a controversial green paper on social security in August, which proposed some form of basic income grant at a cost of R200 billion to the economy.

This, the paper said, would likely need to be funded by raising taxes by 10 percentage points – something that put analysts, economists and taxpayers at large on the back foot.

While the green paper has since been withdrawn – with promises it will be reviewed and republished – the gazetting of the document forced National Treasury to comment on it, saying that it was not official government policy, and none of its proposals had been tested against the budget or the economic reality of South Africa.

According to capital markets and financial services research firm, Intellidex, this theme feeds through in most discussions around the basic income grant, with all the focus being placed on the amount that needs to be raised, and how, with little in the way of what impact any changes would have on the economy long-term.

In an independent report, commissioned by Business Unity South Africa and Business Leadership South Africa, the group flagged two key documents that have been published around the basic income grant.

The papers – a report prepared for Nedlac by Deloitte and a discussion document released by the Institute for Economic Justice (IEJ) – investigate what it would take to raise the money necessary to fund it at various levels, and who should foot the bill.

However, neither provides any insight into what will happen therafter.

Who will pay?

The Deloitte report presents a dataset showing that a basic income grant would cost anywhere between R17 billion and R554 billion, depending on eligibility rules and the value of the grant (R350 – R1,268 per month). The IEJ paper presents a different range – from R157 billion to R519 billion, based on a grant of R585 to R1,268 per month.

Both papers posit that grants would have to be funded through raising taxes, cutting government spending, and raising capital from the markets.

However, Intellidex said that the calculations used in the papers suffer from a key flaw: they’re based on the assumption that public consumption, tax morality, business operations and socioeconomic conditions stay the same should these changes take place.

The reality, it said, is very different. A key criticism is that the papers ignore the interactions between tax categories. These are some of the more obvious consequences of the proposed funding mechanisms:

• Hiking income tax – Implementing any significant tax increase on a shrinking tax base – especially one where the average effective tax rate would increase from about 30% to between 34% and 45% – would have a massive ripple effect on the economy. People have less disposable income, so they spend less, and save less. The losses suffered are unlikely to be recovered by VAT gained by redistributed income to the poor.

• Wealth tax – Focusing taxes on a highly mobile wealthy demographic is effectively a tax on savings and investment and would have its own consequences for the economy – such as emigration, or lower tax morality.

• Corporate tax – Putting the funding burden on corporates would likely result in job losses and disinvestment by businesses. A reduction in spending from consumers would also result in less profit for businesses, which means lower corporate taxes.

• Cutting government spending – Raising funding by having the government cut spending elsewhere carries its own set of problems, as portfolios are already constrained, and things like National Health Insurance and infrastructure projects are looking for their own piece of the budget. Government has a track record proving it is not effective at cutting spending.

• Reducing irregular expenditure – Targeting ‘irregular expenditure’ is a misunderstanding of what irregular expenditure is. This is not ‘unnecessary expenditure’, just money spent when not following the complex set of rules and procedures set out by the government. Any reduction in irregular expenditure would be better spent in the areas where it is being reduced, for the goals intended.

• Borrowing from the market – Capital borrowing is a potential source of funding for the grant. However, Intellidex said that markets would likely not be responsive to such an unsustainable path, and the cost of borrowing would increase significantly long before the government even turns to markets to raise the money. The country’s debt burden is already significant.

Not sustainable

Given South Africa’s high rates of poverty – a consequence of its low rates of employment – Intellidex said a basic income grant that seeks to raise a large fraction of the poor out of poverty would have to be very expensive.

“An expensive grant will have to be funded by very substantial increases in taxes,” it said.

“None of the reports makes any serious attempt to estimate the economic consequences of the very large tax shock that the implementation of a basic income grant will entail… (and they) presume that the introduction of the grant and associated taxes have no impact on any macroeconomic variable or price.

“They convey the impression that the balance of the evidence is that a grant will raise economic growth. This conclusion is, in our view, entirely incorrect.”

Intellidex said that it believes a basic income grant – as it has been proposed – would pose a significant risk to South Africa’s public finances and would be perceived by capital markets as doing so.

“As a result, it would immediately raise sovereign risk spreads and interest rates. In addition, a range of behavioural changes are entirely predictable, all of which would have the effect of reducing investment and growth. There should be a strong presumption that a large grant – however it is financed – would weigh very heavily on growth in the medium and long terms,” it said.

The research group said that the conversation should rather shift focus to the ‘necessary’ value of the grant – such as looking at plugging the poverty gap, rather than looking at values based on the poverty line – and the mechanism through which it might be paid – including who should receive it, and what happens when their circumstances change.

“In the absence of a plausible mechanism for achieving this, a basic income grant will tend to cover more people than it ought,” it said.

Read: New ‘Brazilian grant’ and basic income being considered for South Africa: Treasury