THE BIG DEBATE
As discussion hots up over a basic income grant, there is no escaping the hard fiscal constraints that imperil SA’s existing welfare grants, let alone the state’s ability to broaden the net
There is a groundswell of opinion pushing for the introduction of a basic income grant (BIG) in SA. Given the devastation wrought by the pandemic, the case has never been more compelling. Unfortunately, SA’s public finances have also never been weaker.
A proxy battle for the BIG played out at the end of April, when the government failed to extend the special Covid relief grant. It had until then plugged the gap in SA’s welfare net by providing 6.9-million unemployed adults (aged 18-59) with R350 a month.
According to social justice activist
Shaeera Kalla, the #PayTheGrants campaign wrote four times to government to ascertain its long-term plan for the grant, but was informed just days before it expired that it “hadn’t decided yet”.
“We’re very disheartened by the carelessness
the government has displayed in dealing with this crisis,” Kalla told an Institute for Economic Justice (IEJ) webinar last month.
Speaking on the same webinar, Thuli Madonsela, now a professor of law at Stellenbosch University, argued that there is “a legal imperative” to extend social protection in SA. This derives from the fact that the constitution enjoins SA to build a just society — something she believes is incompatible with “one part of society making a killing while another part is finding it increasingly harder to live”.
Madonsela said: “For me, a BIG is about returning to ubuntu. If I invest in you, I invest in myself, because as a society we’re stronger when each of us is strong.”
As a result of the Covid crisis, the social solidarity argument is gaining traction, with many saying SA should view an extension of welfare as a form of insurance to prevent anger and hunger from boiling over and fuelling political extremism. As such, the question is not whether SA can afford a BIG, but whether it can afford not to have one.
Prof Vivienne Taylor, a former head of the department of social development at the University of Cape Town, argues that a BIG would also increase households’ capacity to obtain education and health care and engage in job seeking. In this way, by helping to break the cycle of poverty, she believes a BIG would act as “an economic stabiliser or buffer”, raising the country’s macroeconomic resilience.
The IEJ adds to these voices in a new paper, “Introducing a Universal Basic Income Guarantee for SA: Towards Income Security for All”. It argues for the introduction of a universal BIG at the food poverty line of
R585 a month, at a minimum.
The institute estimates that, if paid to the 22.4-million adults not formally employed, this would cost about R157bn a year. It says it would be “affordable” if financed through cutting corruption and wasteful and irregular spending, and if a slew of tax hikes and new taxes — including, in time, a wealth tax (see table) — were added.
The institute argues that social grants have been SA’s most effective weapon against extreme poverty — something the job market has failed to achieve, given low wage growth and rising unemployment. It also claims SA has a constitutional obligation to provide a universal BIG, and that doing so would have a range of macroeconomic benefits.
Few would argue with empirical studies showing that well-targeted income transfers directly reduce poverty, inequality and hunger. Rather, the debate centres on the potential macroeconomic costs and benefits.
BIG proponents typically argue that when millions more people have a monthly grant
to spend, it adds to domestic demand, boosting GDP growth. The bigger the grant, the bigger the boost to consumption.
IEJ co-director Gilad Isaacs cites recent research showing that an increase in social protection spending of 1% of GDP can deliver positive returns in developing economies by stimulating GDP growth and employment.
He also argues that the negative impact of select tax hikes to finance a BIG, including the introduction of a wealth tax, are exaggerated.
“Fiscal sustainability, economic growth and social welfare provision are mutually reinforcing, not opposing, policy imperatives,” he says.
“You cannot stabilise public debt without economic growth, and you cannot grow on the back of falling demand from a starving population unable to even secure its health and educational needs.”
In the current context, failing to reinstate the Covid grant and kicking the BIG can down the road “would be like cutting off a diabetic’s insulin supply because the medicine is too expensive,” Isaacs concludes. “You’ll save the money, but the patient will die.”
However, Sanlam Investments economist Arthur Kamp says the history of SA government spending over the past decade shows that, rather than a BIG delivering a boost to GDP growth, the opposite is more likely.
“Government spending, which has been consumption-led, has crowded out private sector economic activity, as excessive debt has led to sovereign debt rating downgrades and upward pressure on real borrowing costs,” he explains.
In other words, the past decade has shown that more government consumption spending is not the best way to make the economy grow faster, nor is it feasible to keep borrowing at real interest rates that exceed the economy’s real growth rate to fund consumption spending.
Isaacs concedes that SA’s public finances are not unlimited, but says no-one is arguing that SA should stop investing in roads, rail, ports or electricity infrastructure. “In financing a BIG, increased taxation would need to be combined with reprioritised expenditure and borrowing.”
But, given that SA now spends about R195bn a year on social grants for 17million people, the IEJ’s proposal would almost double the size of the welfare net. Even the R29bn to extend the Covid grant would be a 15% escalation. To put that in context, SA spends less than that annually (R17.4bn) fostering innovation, science and technology.
“The problem with raising taxes is that it
HOW TO PAY FOR IT
Options to finance a universal BIG
Source: Institute for Economic Justice; Sars tax tables (2019/2020)
means the government is still absorbing private sector resources to fund its consumption expenditure,” says Kamp. “Whether that is through taxes or borrowing, the outcome is a constraint on growth.”
The bottom line, he says, is that “the BIG is a good idea, but it must be funded mostly by cutting government consumption elsewhere, not increasing taxes further”.
The obvious place to cut is the public sector wage bill, which, at 14.8% of GDP, far exceeds the Organisation for Economic Co-operation & Development average of 10.2%. If SA reduced the wage bill to this benchmark, it would free about R225bn a year — more than enough to fund a decent BIG.
However, SA is already planning to slash R265bn from expenditure over the next three years (most of this from the wage bill) to prevent the debt ratio from exploding through 100% of GDP. So that avenue is closed.
Claims that SA has a constitutional obligation to provide a universal BIG are untested. The constitution says everyone has the right to social security and that the state must take reasonable steps to achieve the progressive realisation of this right — something it has done by increasing the coverage from 13% to 31% of individuals (44% of all households) over the past 15 years.
However, the constitution qualifies this by saying the state must act “within its available resources” — which is impossible to square with a doubling of the welfare bill.
SA’s public finances are “dangerously overstretched”, according to finance minister Tito Mboweni, who has warned that the country is inviting a sovereign debt crisis if it doesn’t stabilise its debt trajectory.
The danger is that allowing an explosion of welfare spending, predicated on higher taxes, would invite a fiscal crisis that could unravel all the social gains the country has made over the past 26 years.
This is not only because the markets and ratings agencies would probably react badly, the rand would nosedive and borrowing costs would spike, but also because such a move would be fundamentally unsustainable, given how sclerotic the SA economy has become.
The problem is that as long as the tiny pool of taxpayers is shrinking (an estimated 6.3-million people submitted returns in 2019, down from 6.6-million in 2018) while the vast pool of people on welfare (17-million) is set to increase at a rate of 100,000 a year, financing a BIG would require constant tax hikes. This would further dampen savings, investment and growth, hastening SA’s downward spiral.
Davis Tax Committee chair judge Dennis Davis believes there is no room to increase income tax rates in SA. However, he estimates that the country is losing about R100bn each year — around 10% of total tax income — to tax dodgers. Recouping this is where the focus should be.
In choosing to cut the corporate tax rate and to remove R40bn of planned tax hikes in the recent budget, the National Treasury intimated that the best route to faster growth and fiscal sustainability is through cutting government expenditure, not hiking taxes. However, it declined to comment on the possibility of extending the Covid grant or introducing a BIG, saying the matter “is still under consideration by the cabinet”.
In short, while expanding the welfare bill significantly may be the right moral or political choice, it is arguably not a legal imperative, and it would certainly make conditions for the poor worse if it destroyed SA’s fragile macroeconomic stability.
In fact, without faster growth and job creation, SA may soon be unable to afford the social safety net it has. It’s hard not to conclude that BIG proponents grossly overestimate the potential of the economy and the resilience of SA’s public finances. x
You cannot grow on the back of falling demand from a starving population unable to even secure its health and educational needs
Gilad Isaacs
What it means: Economists are divided over whether a BIG would boost consumptionled growth or destroy what little is left of SA’s fiscal credibility