Calls for ‘special tax’ to fund R700 grant in South Africa
The Institute of Economic Justice (IEJ) has argued that increasing South Africa’s Social Relief of Distress (SRD) to R700 per month is possible through the introduction of luxury VAT, among other initiatives, but some economists think this is a bad idea.
The push for a substantial increase in the SRD grant reflects a growing concern about poverty, inequality, and unemployment, which continue to strain the country’s most vulnerable.
Advocates for the increase, like Zimbali Mncube, a budget policy researcher at the Institute of Economic Justice (IEJ), argue that the grant amount should be raised to provide meaningful support.
“At R370 per month, the SRD grant falls well below the food poverty line of R700, which is the minimum income considered necessary to meet basic nutritional needs,” he said.
Mncube emphasises that the current SRD grant, introduced as a temporary support measure, should be expanded and improved.
He notes that putting more funds in the hands of the poor would stimulate local economies, as recipients typically spend this money within their communities.
“I think we all understand that putting money in the hands of those who need it most stimulates local economies, as people generally spend this money in their communities,” he said.
Mncube believes the SRD grant should meet the food poverty threshold, with a long-term view of adjusting it toward the upper-bound poverty line as the economy grows.
To support this increased grant expenditure, Mncube suggests exploring several revenue-generating mechanisms.
One of his primary proposals is to implement a luxury VAT targeting high-end goods consumed predominantly by wealthy South Africans.
Additionally, he advocates for a wealth tax and adjustments to tax rebates for high-income earners, along with increasing duties on dividends and estates.
Mncube argues that these revenue-raising steps if carefully sequenced, could reduce inequality and support social services.
“I believe measures to raise revenue are essential,” he says, “and introducing a luxury VAT, along with a wealth tax, could have a positive impact if done in the right order.”
This would allow the government to expand social assistance programs without cutting into other essential areas of spending.
The risks
Despite the promise of increased social welfare, however, economists caution against imposing more taxes in South Africa’s already narrow tax landscape.
Social development, including grants and welfare, is a significant expenditure, comprising R387 billion of South Africa’s 2024/25 national budget.
This includes old-age pensions, child support grants, and various social security funds. The government has pledged R1.17 trillion for welfare services over the next three years, but as the economy falters, sustaining such spending levels has become increasingly challenging.
Currently, South Africa could soon have roughly 28.7 million people, or about 44% of the population, dependent on social grants.
In contrast, only about 7.4 million taxpayers support this expenditure, with a small fraction bearing the majority of the tax burden.
Economist Dawie Roodt warns that increasing taxes on the wealthy could drive tax evasion and capital flight, particularly as South Africa’s tax base is extremely limited.
According to Roodt, only 1.12% of taxpayers, about 163,700 individuals, are responsible for 30% of personal income tax revenue, while 19% of taxpayers contribute 87% of the total personal income taxes.
The situation is similar for corporate taxes, where a mere 0.09% of companies contribute 62.5% of the country’s corporate income tax, with 4.4% paying 95% of the total.
This concentration of tax liability on a small group of individuals and corporations makes South Africa vulnerable to any reduction in high-income taxpayer compliance or relocation of businesses.
Roodt argues that attempts to further tax these groups could lead to a collapse of the tax base as wealthy South Africans and corporations seek friendlier tax jurisdictions.
“If this increases, the tax base will collapse as many of the 1.12%, as well as businesses, will simply leave the country – which they are already doing,” he warns.
There is already growing evidence of high-net-worth South Africans exploring tax havens like Mauritius, Malta, and the Isle of Man to safeguard their assets and escape South Africa’s increasing tax burden.
The debate over expanding social grants is, therefore, deeply complex.
While there is a clear moral and economic argument for strengthening social assistance, especially given the high levels of poverty and unemployment, the practicalities of funding such an initiative are daunting.
Implementing a luxury VAT and other wealth-focused taxes might generate the necessary revenue to increase the SRD grant but at the risk of eroding the tax base further and potentially accelerating capital flight.
This delicate balance between addressing social needs and maintaining a viable tax base remains a critical challenge for South Africa’s economic policymakers.
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