Tax hikes to fund BIG in South Africa inevitable, report shows

Implementing a basic income grant in South Africa will undoubtedly alleviate poverty among the poorest of the poor – but navigating the intricacies of who qualifies and how much they should get is a minefield that risks blowing up in the government’s face.

This is one of the key takeaways from a new research report published by Intellidex in partnership with business groups, Business Unity South Africa and Business Leadership South Africa.

The report is the second set of research done by Intellidex in as many years, looking at the viability of a basic income grant in South Africa – specifically, how it would work, who should get it, how much it should be, and what effect it will have on the wider economy.

While the baseline view is that a BIG will be implemented in the country whether opponents like it or not, Intellidex warned that the government needs to tread carefully to ensure that the entire project doesn’t end up having the opposite effect to its intended goal.

The overall goal of the BIG would be to alleviate poverty. How to go about this, proponents of such a grant have differed greatly.

According to Intellidex, proposals have ranged from a modest R240 grant given to households that initially qualified for the Covid-19 social relief distress (SRD) grant – approximately 6.5 million people – to a universal living wage grant of R3,500 given to everyone.

The cost of the BIG to the economy then covers a similar range – from R20 billion a year, to R2.5 trillion a year. Most proposals, however, fall into the range of R60 billion (roughly the cost of expanding the SRD to more people) and R250 billion (about R800 per month for all unemployed adults).

Raising tax is the only theoretically viable way to fund a basic income grant (BIG), said Intellidex. Some options that have been mooted include hiking VAT, increasing income taxes, raising corporate taxes or drawing from higher excise duties.

The problem, Intellidex said, is that most proposals ignore the wider implications of hiking taxes, assuming in most cases that the additional income for poorer households will counter the tighter spending from taxpayers who fund the grants.

This is simply not the case, however, as any tax hike would have large secondary effects on the economy, including lower savings, higher interest rates, increased borrowings, reduced spending on other initiatives in government, private investment leaving the country, and behavioural changes in taxpayers (increased tax avoidance, emigration, etc).

Intellidex said that a BIG of any meaningful size will invariably make South Africa’s public finances even more unsustainable than they are now and, in the context of high interest rates and a steep yield curve, is likely to slow growth.

While the group is optimistic that a BIG will alleviate poverty, it stressed that this cannot come at the cost to the wider economy.

“A BIG will reduce poverty only to the extent that it is affordable and that its positive effects are not offset by any negative effect on the stability of South Africa’s public finances or on the pace of economic growth and job creation – especially when considered alongside other social wage spending pressures, and, indeed, other areas in which public spending is needed such as infrastructure,” Intellidex said.

In fact, “it is entirely possible that the implementation of a BIG could induce so severe a set of second-round effects that its full effect will be to deepen poverty by making it harder for South Africa’s economy to grow,” the group said.

When concerns are raised about the affordability of implementing a BIG, its proponents frequently respond by asking whether the country can afford not to implement it.

“This is a neat, if clichéd, rhetorical device. But it is also disingenuous,” Intellidex said.

“If a BIG worsens South Africa’s macroeconomic performance and destabilises our public finances, leading to default on debt or to rising inflation, the consequences for everyone – the poor, very much included – will be very adverse.”

The poor would be particularly strongly impacted by any inflation-induced shock of such a policy, or if other grants had to be cut back, the group said.

“We can (already) see this with true inflation rates for the poorest running some 8pp higher than the headline inflation rate – so eroding grants and SRD by 10% and 14% respectively in real terms spending power for the poorest.

“Confronted by the question of whether SA can afford not to implement a BIG, therefore, an appropriate response would be, can South Africans – especially the poor – afford for the country to default on its debts, face a financial crisis or endure rapidly increasing inflation?”

Read: Tax hikes to fund South Africa basic income grant will likely spur emigration, says Intellidex