Time for a basic income grant has come

In his most recent address to the nation, President Cyril Ramaphosa failed to announce any new measures to counter the devastating effect of the lockdown on an economy that in 2020 could experience its largest annual decline since the Great Depression of 1929-1933. SA could have a depression in 2020 with a GDP decline larger than the 10.6% in 1931 if there are no new stimulus measures.

A report by PwC has painted three chilling scenarios for 2020. According to the “mild” scenario, a one-month full lockdown and gradual recovery over the rest of the year will result in the economy tanking by 8.4%. The “severe” scenario, a three-month full lockdown and a gradual recovery, will result in a 20.4% drop in GDP. This would be more than the 14.2% GDP decline in 1921.

The mild scenario is almost six times worse than the 1.5% decline in GDP during 2009 in the wake of the global financial crisis, when the economy lost 1million jobs. Trying to estimate the looming jobs bloodbath, makes one thing clear: we are facing a humanitarian disaster. As Labour Research Service director Trent Elsey says: “We cannot starve the people to protect the people.”

Let us pray the PwC report has the same influence on economic policy that the Imperial College report had on health policy in the US and UK, where it triggered shifts in the previously relaxed responses to Covid-19, which would have resulted in millions of deaths. Ramaphosa said: “Additional extraordinary measures will need to be put in place in coming weeks and months to absorb the sudden loss of income to both business and individuals.” The government is developing a package of urgent economic measures, he said.

However, SA does not have months to develop a response. There are two elephants in the room. First, the Treasury’s idea of urgent economic measures is to reallocate expenditure in the current austerity envelope. This is the economic equivalent of a suicide mission. Second, the Treasury has an effective veto over any economic policies that may be decided through democratic processes such as the Alliance Political Council, which met last weekend, or discussions with members of civil society, who have made many viable proposals.

Over the past two months, global fiscal and monetary policy responses to the economic effects of Covid-19 have reached $11-trillion, which is equivalent to about 12% of world GDP. These stimulus packages contain 143 cash transfer programmes in 81 countries, according to economist Ugo Gentilini. SA’s economic measures are less than 1% of GDP. Yet the country needs fiscal stimulus of R600bn (12% of GDP) in 2020.

The stimulus should have two elements that provide a “dignity floor” below which nobody should fall, especially during sudden global crises, which are not black swan events anymore. A basic income grant at the upperbound poverty level (R1,227 a month) for about 33-million South Africans who do not receive grants would cost R200bn over six months. A R500 top-up of the child support grant, which has wide support from civil society, would cost R40bn. Since such grants will be impossible to withdraw in a context of high poverty, they should become a permanent feature.

Speaking about global stimulus packages, IMF chief economist Gita Gopinath said while a substantial fiscal stimulus package will push up the fiscal deficit and debt-toGDP ratio of economies, lack of proactive fiscal policy by governments could put them in a worse place with the collapse of economic activity.