Permanent basic income grant plan for South Africa – with a tax warning

 ·28 May 2024

The ruling African National Congress (ANC) said it will finalise its plan to offer South Africans a permanent basic income grant within two years.

ANC spokeswoman Mahlengi Bhengu-Motsiri said the transition to a permanent basic income payment will be based on the existing Social Relief of Distress Grant.

She added that they would increase the value of the grant and extend it to reach more beneficiaries.

“The ANC recognises that the basic income support should complement, not replace, existing social security mechanisms,” she said.

Bhengu-Motsiri’s comments followed President Cyril Ramaphosa saying there is a “strong case” for universal credit despite South Africa’s financial problems.

“The challenge remains that millions of working-age adults in our country remain unemployed without any form of support,” he said.

Ramaphosa added that the unemployed have little prospect of gaining employment until economic growth picks up.

“There is, therefore, a strong case for a permanent form of a targeted income-support grant for the unemployed within our fiscal constraints,” he said.

The President added that the temporary stipend introduced during the Covid-19 pandemic had staved off poverty for more than 2 million people.

Godongwana announced the extension of the R350 monthly payout to March 2025 during his mid-term budget in November 2023.

The big question, which politicians like Ramaphosa and Bhengu-Motsiri did not address, is where the money for a basic income grant would come from.

Finance Minister Enoch Godongwana said the question is not whether South Africa should have a basic income grant (BIG) but how it will be funded.

Godongwana said South Africa can afford to roll out a basic income grant if it is properly managed.

The 2024 Budget revealed that South Africa will spend R266.21 billion on social grants in the 2024/25 financial year – 3.6% of GDP.

This is a significant increase from the 2023/24 financial year when the government spent R250.97 billion.

Notably, the National Treasury estimates that its spending on social grants will decrease in the next three years.

For 2025/26, it forecasts spending R248.41 billion, and for 2026/27, it estimates R259.79 billion. Both of these expenditures will constitute 3.1% of GDP.

This is likely because the Social Relief of Distress (SRD) grant—also known as the ‘COVID grant’—will end in 2025.

Concerns about the financial impact of a basic income grant

Business Leadership South Africa CEO Busi Mavuso

Many experts have raised concerns about the impact on state finances if a permanent basic income grant is implemented.

The country is already struggling with a shrinking tax base. The country has around 28 million grant recipients and only 7 million income taxpayers.

Business Leadership South Africa CEO Busi Mavuso said the SRD grant was only extended because the ANC knows ending it would be “suicidal” ahead of an election year.

“It’s going to cost the government another R34 billion, and the government knows that they can’t afford the extension,” she said.

“However, they also know that it’s going to be suicidal to try and remove the R350 grant, especially with the elections that are coming around the corner.”

Efficient Group chief economist Dawie Roodt said a permanent income grant is a good idea to address poverty in South Africa.

However, it is quite simply unaffordable when considering the government’s precarious fiscal position.

The 2024 Budget revealed a deficit of R347 billion in 2023/24, and the government’s debt continues to grow.

The National Treasury said any extension of the SRD grant or its replacement needs to be funded by a new revenue source or reprioritisation of other spending items.

“Government is still discussing options for a replacement grant and the balance between policy options to support higher employment,” it said.

An Intellidex study found that, while the grant will improve inequality, “any attempts to expand the budget with the status quo environment will damage debt dynamics further”.

It will increase the unsustainability of the budget and shorten the runway to a fiscal or economic crisis.

If the government were to use tax increases to fund a basic income grant, South Africa could see significant tax increases,

  • Personal income tax would have to be raised by between 9% and 19%.
  • Value-added tax (VAT) would have to be raised by between 14% and 29%.
  • Corporate tax would need to be increased by between 24% and 47%.

Such significant tax increases, the study said, would have a moderate to severe impact on economic growth.

However, Godongwana said that if the government properly manages how spending is allocated, it is possible to afford a basic income grant.

“As the economy grows and more resources become available, we’ll be able to roll out this grant,” he said.

Read: Half of South African households are now on social grants – and government wants more

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