What a basic income grant will actually cost South Africa

The Financial and Fiscal Commission (FFC) says that the Covid-19 pandemic and introduction of the R350 Social Relief of Distress Grant have provided some impetus for discussing a basic income grant in South Africa.

The FFC is an independent constitutional advisory institution. Its role is to advise and make recommendations to Parliament, provincial legislatures, organised local government, and other state organs on financial and fiscal matters.

While the debate around a universal income is still ongoing, the group said that finance minister Enoch Godongwana would need to consider such a grant’s fiscal impact.

In a presentation to parliament this week, the FFC said that the costs associated with a standard basic income grant are large. A true universal income set at R350 per month would cost approximately R243 billion per year, based on the 2020 mid-year population estimates.

This amounts to 5% of GDP. The cost would increase the revised budget deficit from 15.67% of gross domestic product (GDP) to 20.15%.

However, a more streamlined grant of R350 per month to target the unemployed – using the expanded definition – between the ages of 18 and 59 years would cost R44.8 billion per annum or 0.9% of GDP, it said.

“Naturally, the total costs estimated here are high and would be lower if the BIG were to partially or totally displace grants in the existing system.”

Treasury officials cautious 

In August, a green paper published by the Department of Social Development formally proposes introducing a basic income grant for South Africa.

The paper proposes three options for a universal income, ranging from R585 to R1,268 a month, based on the country’s existing poverty lines.

To raise enough funds for even the lowest of these options, the green paper suggests an income tax hike of 10 percentage points to raise the approximately R200 billion needed.

However, deputy finance minister David Masondo cautioned against the aspirational plans proposed by the department – warning that it’s not something the country can afford.

“We have to ask ourselves what are the preconditions for a social security grant proposed in these reforms,” he said. “As a country, we should sequence our current economic priorities, and we should not confuse our aspirations with what is possible economically.

“Many countries that have social security funds have good economic growth. Currently, we have an economy that is faced with many fiscal risks.”

Similar concerns were raised by the Treasury director-general, Dondo Mogajane, who said that South Africa’s debt to gross domestic product (GDP) is one of the largest in the world.

The major driver of this debt is the wage bill and the perennial bail-out of state-owned enterprises (SOEs), and there are requests in the pipeline for additional funding for some SOEs.

Read: These taxes could finance South Africa’s proposed basic income grant