SA’s ‘welfare state’ is in trouble
The government has to make tough decisions about social grants in the face of poor economic performance
The social grants and security system is crucial to enhancing the social wellbeing of South Africans. It is important in integrating the vulnerable into the mainstream economy and social spending on education and health has the potential to boost productivity and human capital.
South Africa allocates billions of rands each financial year to roll out its social welfare programme. Spending on social protection will increase from R193.4-billion in 2018-2019 to R223.9-billion by 20202021, growing by an average of 7.9% annually.
The social expenditure of 4% of its gross domestic product (GDP) is on a par with Ukraine, below Malawi and Ethiopia (about 4.5%) and higher than Jamaica (below 1%), Poland (just over 1%) and Argentina (1.5%).
South Africa’s social grant system was expanded during a period of rapid economic growth but there is concern about whether it is still sustainable because, since 2008, the country has suffered a period of low economic growth and there are no signs that the situation is likely to improve substantially soon.
The key question is whether implementation of the government social grant system is sustainable given the current economic climate.
First, South Africa’s muted economic growth has a direct effect on government revenue. Since the 2008-2009 global and financial crisis, the country has failed to achieve pre-crisis economic growth rates of 4% to 5%. For example, over the period of about 10 years from 2008 to the second quarter of 2018 economic growth has declined, save for pockets of insignificant growth not exceeding 3%.
A slight recovery was witnessed in 2010 and 2011, when economic growth reached 3%. This could be attributed to investment in the 2010 Fifa World Cup-related infrastructure spending. Post-2011, economic growth never reached 3%. For the first two quarters of 2018, South Africa has experienced negative growth, implying a technical recession with -2.6% and -0.7% for the first and second quarter respectively.
The South African Reserve Bank has consequently downgraded its forecast to a growth rate of 0.7% for 2018 compared with 1.7% previously. This downgrade was made before the technical recession, implying that a further downgrade is imminent.
The sluggish growth has resulted in the country experiencing a decline in tax buoyancy — the relationship between tax revenue growth and economic growth. A buoyancy of one means the pace of revenue growth is matching that of GDP growth. South Africa’s tax buoyancy has declined from 1.37 in 2014-2015 to 1.01 in 2016-2017.
Consequently, the 2017 mediumterm budget policy statement estimated that government revenue would experience a revenue shortfall of R50.8-billion for 2017-2018. Premised on improvement in economic performance, the overall revenue shortfall was subsequently revised to R48.2-billion. Given the underperformance of economic growth recently, this revenue shortfall is likely to be revised upwards, thus further shrinking the fiscal space.
In 2018, because of slow economic growth and the inability to raise sufficient revenue to deliver on its programmes, the government decided, among other things, to increase the value added tax (VAT) for the first time in many years. Although the government would be able to raise some revenue through VAT, this increase could have a detrimental effect on economic activity and economic growth. But the government appears to have realised this risk; recently it decided to mitigate fuel price increases by reducing the fuel levy/tax, albeit once off.
The estimated cost to the government of this decision is more than R575-million. The government will have to find ways of closing or reducing the revenue gap that will occur as a result of this decision or to reduce spending in its programmes.
Taxation (mainly company and personal income tax) is the main source of any government revenue. In South Africa, these taxes contribute about 56% of the revenue, personal income tax accounting for about 38% and company tax accounts for about 18%. Therefore if the government wants to increase its revenue, increasing taxes is one of its major instruments. But the extent to which the government can do so is limited because higher tax rates inhibit economic activity and negatively affect economic growth.
Second, unemployment remains high. It has increased from 26.7% in the first quarter of 2018 to 27.2% in the second quarter. The government’s fiscal interventions such as programmes aimed at the creation of employment remain ineffective in making significant improvements. The situation is unlikely to improve because, for various reasons, both the public and private sectors have plans to reduce their workforces.
For example, the government, in line with the ongoing fiscal consolidation, has recently announced its intention to trim thousands of jobs in the public service. In the private sector, Impala Platinum is planning to cut 13 000 jobs over the next two years, AngloGold Ashanti will shed 2000 jobs and Goldfield willnnounced its plan for thousands of job cuts.
Job cuts lead to higher unemployment, resulting in higher numbers of individuals qualifying for government social grant programmes and increasing the burden on the shrinking fiscus.
Third, there is an increase in the number of households eligible or qualifying for social grants. Since 1994, the number of individuals benefiting from social grants has increased from about four million to more than 17-million in 2017. The number of social grant beneficiaries is expected to reach 18.1-million by the end of 2020-2021.
The percentage of households that benefit from social grant programmes has also increased; in 2003 the estimated percentage of households receiving social grants was 12.7% and this has increased to more than 30%.
The number of social grant beneficiaries — 17-million — is higher than the number of taxpayers, which is estimated at about 15.5-million people. This implies that these few taxpayers are carrying an extraordinary burden. This burden is likely to increase because the government has to maintain its investment in infrastructure, eliminate infrastructure backlogs in various sectors and also fund new initiatives such as free higher education and the National Health Insurance.
In light of these pressures, the fiscal consolidation exercise being implemented by the government has focused on reducing funding for some of its infrastructure programmes such as housing and others and has maintained or increased social grants. Doing so has contributed to slow economic growth because social grant spending is less growth-enabling compared with infrastructure investment.
The slower economic growth and a constrained fiscal environment means the government has to make hard choices, particularly in favour of those options that are likely to contribute to economic growth and to create employment. Increasing taxes is likely to inhibit economic growth further.
Maintaining the rapidly growing social grants spending at the expense of reducing infrastructure investment will only reduce poverty levels without contributing much in terms of economic growth and employment. But increasing infrastructure investment will contribute to economic growth and create employment.
The government has to balance the growth of social grants spending with the upscaling infrastructure investment to enhance growth.