Social grants affect prices for poor
SA has one of the world’s largest social welfare systems, providing cash to millions of poor and vulnerable citizens. But how do these grants affect the prices of goods and services that the recipients consume? A new study sheds some light on that question.
The study, conducted by researchers from the Reserve Bank, examines the relationship between existing grants and prices in SA using annual price and household survey data from 2009 to 2021.
The study found that cash transfers have significant price effects on the poor, especially on food and housing, which are the two largest expenditure categories for the grant recipients.
The grants include those for child support, old age and disability, which together cover about a third of the population.
The authors — Chloe Allison, an economist at the Reserve Bank, and Neryvia Pillay, a policy associate at Economic Research Southern Africa and a research fellow at the Reserve Bank — found that different grants have opposing effects on inflation, depending on the household composition, grant size and consumption patterns of the beneficiaries.
Child support and disability grants increase food inflation, while grants to the elderly increase housing inflation. That’s because child support and disability grants are mainly received by larger and poorer households that spend more on food, while grants to the elderly are mainly received by households that can pool income to spend more on housing.
On the other hand, child support grants reduce housing inflation and old-age grants reduce food inflation, because they have counteracting effects on aggregate demand and income distribution. The former are more progressive and the latter are more regressive.
The authors also discuss the supply constraints and income elasticity of the affected goods and services, which may explain the magnitude and direction of the price effects.
They suggest these effects have implications for the introduction of a basic income grant (BIG), which is under consideration by the government.
“We find that an expansion in the number of social grants could increase prices. This has implications for the introduction of a basic income grant, a long debated topic in SA,” they state.
“More topically, it has implications for the nature of the Covid-19 social relief of distress grant. Discussions about making this grant permanent need to take into account how it will affect prices.”
The study is one of the first to provide empirical evidence on the price effects of cash transfers. It contributes to the growing literature on the impact of cash transfers on outcomes such as poverty, inequality, education, health and labour supply.
It also comes amid debate
about introducing a BIG, which has been on the table for decades but has gained more attention in recent years, especially after the Covid-19 pandemic tossed millions of South Africans into poverty.
It has polarised economists and policymakers, with some of its opponents saying it is unaffordable and unsustainable in the long run given SA’s fiscal constraints and debt levels.
Its cheerleaders say the BIG could help reduce poverty, inequality and hunger — some of the root causes of social discontent and frustration that some business leaders have warned could boil over into social unrest.
Social development minister Lindiwe Zulu has previously said her department plans to take its proposed basic income support policy to the cabinet before the end of this financial year.
LIMITATIONS
The Treasury, which has launched a punishing cost-cutting programme to save R213bn over the next four years, has also been considering the feasibility of a BIG and has commissioned a study on the various options.
It provisionally allocated social protection of R35bn in 2025/26 in the medium-term budget, which could be used for a possible further extension to the social relief of distress grant.
The authors of the study acknowledged the limitations of their analysis, such as the lack of causal identification, the aggregation of prices and grants at the provincial level, and the omission of other factors that may affect prices, such as monetary and fiscal policies, exchange rates and global shocks.
They called for further research on the causal mechanisms and financing of social protection in SA.