How will grant be funded?
STRONG CASE: REPORT SUGGESTS SUBSIDY WILL REDUCE POVERTY, BOOST EMPLOYMENT
Minister outlines three possible options.
President Cyril Ramaphosa has hinted at instituting a basic income grant after calls in the latest ANC January 8th Statement, and the social relief of distress grant of R350 makes “a strong case for a permanent form of targeted income support grant for the unemployed within our fiscal constraints”.
At the ANC’s NEC meeting last month, he said millions of working-age adults remain unemployed, without any form of support and little prospect of gaining employment until economic growth picks up.
He did not answer the question of where the money would come from, but Minister of Social Development Lindiwe Zulu answered a question in parliament in November, after ANC MP Dikgang Mathews Stock asked about the funding models explored to fund the basic income grant.
Zulu said proposed key funding options were to fund it through an increase in tax, reallocation of current budget allocations or borrowing.
“The borrowing option has the advantage that it would provide additional funding without a need for budget reprioritisation or tax increases,” she said in a written reply.
“However, this would be expensive for the country as it would increase the country’s debt burden and also increase the already very high interest payments which are one of the biggest spending items in our government expenditure, which could crowd out other important spending priorities.
“A second alternative would be a reprioritisation of current budget allocations.
“This would have the advantage of shifting funds from some government expenditure which are less effective and/or efficient, and redirecting [them] to the urgent needs of the poor.”
Such a reprioritisation would be complex and difficult to implement quickly, since some projects would require significant time and careful planning to wind down without negative, unintended consequences.
Zulu said the tax options considered would include wealth tax, removal of tax expenditure subsidies and increases in VAT, or personal income tax.
“The advantage of increasing VAT is that it would be a broad-based tax which enables government to collect sufficient revenue to fully fund the grant, which would be fairly easy to introduce and collect.”
The disadvantage, she said, is that this would be regressive, as poor people would pay the same as the rich.
“Such an approach would negate the motivation for the grant, as the poor would, in effect, pay proportionally more than the rich because VAT is a flat rate for everyone.”
Zulu seemed to be more in favour of a wealth tax, saying it has the advantage of being quite progressive – it would target only rich people, although it could result in significant tax avoidance and therefore inconsistent revenue on a year-to-year basis.
She said tax expenditure subsidies on retirement savings would, in addition to providing new tax revenue, create greater equity in the tax system by reducing support which is currently benefitting high-income earners.
“However, it is difficult to quantify, would be unreliable as the only source of revenue and may result in disincentivising retirement savings.”
Using personal income tax seemed to be her preference. This approach is a more progressive tax which would take a greater contribution from the high-income earners than the lower-income earners, ensuring a more sustainable revenue source.
“It is also more reliable than the other tax approaches, ensuring sustainable funding in the long term,” she said.
“The additional advantage of using personal income tax to finance the grant would also improve the income inequality in our country, as the poor would receive an increase in their income, while the rich would have a reduction based on the increase in the tax rate that they have to pay.”
A report by the Applied Development Research Solutions and the Institute for Economic Justice indicates that implementing a basic income grant can reduce poverty and inequality and boost economic growth and employment.
The study models three new basic income scenarios and shows there is no trade-off between a basic income grant and economic growth and fiscal sustainability.
Instead, it produces win-win outcomes, significantly reducing poverty and inequality while fostering positive macroeconomic outcomes, counter to mainstream economic models which often predict it will negatively affect the economy.
The basic income grant pathways outlined in the study show the potential to reduce the national poverty rate by up to twothirds by 2030, presenting a promising avenue for poverty alleviation that is often overlooked.
The study proposes a funding strategy involving a small wealth tax and demonstrates that the grant can be implemented without changes to income tax
Using income tax would improve income inequality