VAT and other tax hikes could fund new basic income grant for South Africa
The major domestic event this week will be president Cyril Ramaphosa’s State of the Nation Address on Thursday (10 February), during which he is expected to provide an update on a Basic Income Grant (BIG) for South Africa.
With South Africa’s R350 social relief of distress grant set to expire in March, calls for the introduction of a permanent basic income grant (BIG) have intensified, says Virag Forizs, emerging markets economist at Capital Economics.
“However, senior policymakers don’t seem to be seeing eye to eye on the ‘BIG question’,” she said. “Some government officials – including the president – have appeared to be increasingly receptive to the idea, while others, like finance minister Enoch Gondongwana, have expressed a preference for other programmes instead.”
Despite these and other intra-party divisions, the president is widely expected to make an announcement on the question of social support measures in his state of the nation speech, Forizs said.
“While enormous fiscal costs associated with a fully-fledged BIG-scheme – up to 10% of GDP per year – and South Africa’s poor public finances will probably push Ramaphosa to avoid a total commitment to introducing a BIG, the special Covid-19 unemployment grant is likely to be extended beyond March.
“Policymakers will probably use the fiscal space afforded by better-than-expected budget outturns in recent years to do so. But it wouldn’t take much to steer the austerity plans off course – something we have warned about before,” she said.
Market analyst at Intellidex, Peter Attard Montalto, also expressed similar views, saying that the SRD grant is likely to be extended for another year at least, in lieu of an announcement on the basic income grant in the 2022 budget speech.
Tax increases
While it is not clear how the government will fund an expanded R350 SRD grant, or a permanent basic income grant, experts and economists have indicated that it will almost certainly require tax increases.
A report published by an expert panel on basic income support in December 2021 mooted possible VAT or income tax hikes to pay for the additional costs.
A separate report by the National Economic Development and Labour Council (Nedlac) in January found that a solidarity or wealth tax could be introduced as a long-term generator, but that income tax, corporate tax, and VAT hikes would likely be needed in the short-term for the BIG to be feasible if it plans to raise additional revenue more immediately.
“Given the significance of the cost of a universal BIG, alternative sources of taxation such as those mentioned above, should be assessed for viability in financing partially or wholly the implementation of a BIG,” Nedlac said.
“However, such alternative sources of taxation may only be practically implemented over the medium term, therefore PIT, CIT and VAT remain the alternatives over the short-term if the implementation of a BIG takes place within the short-term.”
A source close to the presidency told BusinessDay that no formal decision had yet been taken on financing because a BIG is likely to require an increase in VAT.
Based on various scenarios and target groups, the cost of a BIG grant could be anywhere from R95 billion (targeting the unemployed at R350 a month) to R550 billion (universal grant at R1,270) a year, even in the most optimistic circumstances.
Extending the Covid grant alone for a year would cost R35 billion, said BNP Paribas, while the full costs of a basic income grant could range between R157 billion to R519 billion a year, according to a study by Intellidex.
Nedlac’s researchers found that, if funded through personal income tax, a universal BIG at the level of the special Covid-19 Social Relief of Distress Grant (R350) would result in an approximate average increase in effective tax rates at 8.2%. Alternatively, the cost of implementing the grant can be funded through the reallocation of public expenditure, it said.
Read: Here are the taxes you probably didn’t know you were paying in South Africa
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