BIG HELP, OR BIG MISTAKE?
A big new welfare grant could greatly reduce poverty — but only if implemented sustainably. Given SA’s fiscal fragility, it could also make things worse. The trade-offs need to be weighed up with care
The report by an expert panel on the feasibility of introducing a basic income grant (BIG) in SA recommends that, as a first step, retaining the social relief of distress (SRD) grant at R350 a month is both fiscally sustainable and “critically necessary” from a poverty-alleviation perspective.
And yet, the same report warns that SA’s fiscal position is precarious, and in the absence of faster growth a new basic income support (BIS) grant for unemployed adults, funded mainly through higher taxes, could make things worse.
The 276-page report, compiled by seven academic experts under Prof Alex van den Heever, chair of social security systems administration and management studies at Wits University, battles to reconcile these two competing narratives.
In essence, it seems to be saying that the very thing that would be really good for poverty reduction could have really negative fiscal consequences unless handled with kid gloves. But, in its enthusiasm to alleviate poverty, this message gets watered down.
Consequently, the fiscal sections of the report don’t sit well with its final recommendation that once the extended SRD grant has been bedded down, SA should institute, as a “viable entry-level” option, a R181bn BIS grant paying R595 a month to 27.5-million people. This would halve income poverty at the food poverty line of R595 a month. However, it would also almost double SA’s social grant bill of R222bn a year — an outlay that will remain out of reach unless there is a game-changer in SA’s approach to growing the economy.
(The National Treasury’s growth document showed that even if every key growth reform were implemented, it would take 10 years to get SA’s potential growth rate up to 3% — and this was before Covid.)
Moreover, this is merely the entry-level version. The panel wants the BIS grant to be raised every year “in sustainable increments, determined by affordability” until it reaches the upper-bound poverty line (UBPL) of R1,300 a month.
This, it says, should be SA’s aspirational goal: eliminating food poverty altogether. The Rolls-Royce version would require a monthly benefit of R1,300 to 27.5-million people at a cost of R429bn annually — more than the entire budget of the department of social development (DSD), which commissioned the report.
Though the report stresses that this process must be phased in to minimise any fiscal fallout, and it imposes no timetable on the government, the panel urges the government to implement a policy framework that places the value of the BIS at the UBPL “as soon as sustainably possible”.
It also wants the government to “immediately” institute a process to enable a BIS grant to take over from the SRD grant, which
What it means: Panel punts a R595 a month welfare grant as a ‘viable entrylevel’ option for unemployed adults
is due to expire at the end of March.
It also calls for an “immediate investment” to raise the SA Social Security Agency’s ability to administer income means tests, noting that it can only manage to add 1-million new beneficiaries a year.
However, back in the real world, the finance minister is budgeting to reduce the DSD’s
R413bn budget by 21% over the medium term and has not budgeted to extend the SRD grant.
The contradiction between the fiscal consolidation path being pursued by the Treasury and the welfare push being spearheaded by the DSD is no closer to being resolved by the panel’s report. If anything, it shows just how wide the gulf between aspiration and reality has become.
President Cyril Ramaphosa appears to back the extension of the SRD grant, noting in the ANC’s 110th birthday message that “there is a clear need for some form of income support for unemployed and poor South Africans based on clear principles of affordability and sustainability”.
Ramaphosa is not wrong. As the report notes, more than half of SA households live in poverty and 70%-80% of South Africans “live in precarious conditions with little prospect of any relief in the foreseeable future”.
Wits University adjunct Prof Michael Sachs, who wrote the fiscal parts of the report, believes the SRD grant is politically impossible to roll back and so its extension beyond March is inevitable.
His main contribution to the panel is to emphasise that a BIS grant will have to be financed by taxes (as the only mechanism compatible with sustained growth); that it will have to be achieved by raising VAT or personal income tax as the only broad-based, dependable sources of revenue; and that BIS will not solve
SA’s low-growth problem.
For Sachs, the question is not so much whether retaining the SRD grant is fiscally affordable, but whether the state is willing to raise taxes to fund it. “If it raises taxes, then the grant is affordable,” he says.
The fiscal section warns that if SA announces the extension of the SRD grant but does not simultaneously announce that taxes such as VAT or personal income tax will be increased to fund it, interest rates charged on government borrowing could spike instantly, offsetting the positive effects of the BIS grant and, ultimately, escalating SA’s debt crisis.
The report also dashes the notion that a BIS grant could be funded mainly through deficit financing.
Though it finds that the fiscal effects of a BIS grant could be partially offset through economic growth when deficit financed, it concludes that “these effects are likely to prove transitory and there are not strong grounds to believe that increased redistribution will on its own necessarily result in improved growth performance over the long term”.
“Therefore, the only sustainable basis on which to plan for the extension of basic income support is by financing the grant out of domestic resources, and the best way to mobilise these is through the tax system.”
Sachs expects this to disappoint BIG lobbyists, including those within the ANC, who have argued that SA can just print money, raise the deficit, or avoid raising taxes to fund it. However, while this finding may dash some expectations, the report may also unwisely raise expectations that a “viable, entry-level” BIS at R181bn is easily doable without negative fiscal or growth consequences.
The report concludes that “an entry-level version of the BIS can be safely implemented using a mix of financing approaches, including limited debt financing, tax revenue improvements arising from any demand stimulus, and carefully calibrated tax increases where required”. This is somewhat at odds with Sachs’s emphatic statement, made during a DSD webinar late last year, that “ultimately, every rand spent on BIS will have to be funded by an extra rand of taxation, either now or in the near future”.
So, just how much
of a tax increase would
be required?
The report says an expanded SRD grant costing about R77bn a year could be fully covered by an across-the-board, two percentage point increase in personal income tax. Though this would raise only about R45bn, the panel believes BIS would stimulate demand among lower-income groups, allowing for up to 40% (R28bn) of the initial outlay to be recovered, mainly though extra VAT.
In short, it concludes that a BIS grant of this size “would unlikely require significant tax increases or increase government debt levels”.
The problem is that a BIS equivalent to the initial SRD grant (paying a R350 benefit and premised on a strict zero-income means test) would only reduce poverty at the food poverty line from 21% to 17%, and barely nudge SA’s Gini coefficient lower.
This is why the panel favours a R181bn BIS grant paying a R595 benefit. It would slash poverty at the food poverty line from 21% to 10.6%, but require far more significant tax increases. Taken too far, these could trigger behavioural responses that erode the tax base, nullifying the revenue gain.
What is still not clear is whether a BIS that uses a combination of VAT and personal income tax hikes to shift spending power from the affluent (the top 10% and middle 40% of income earners) to the poor (the bottom 50%) would have net positive effects on GDP growth and employment.
“The report leaves the question of the macroeconomic desirability of a BIG unresolved,” says Sachs. “In other words, it does not provide a solid basis in macroeconomics for proceeding with a BIG.”
This is highly problematic, as SA has been mired in a deep crisis of low investment and slow growth for decades. The report acknowledges that the only durable solution to the country’s fiscal challenge is sustained acceleration in economic growth; however, it fails to concede that SA lacks a credible growth plan to achieve this.
What it doesn’t say is that the Treasury expects real GDP growth to dwindle from about 5% in 2021 to 1.7% by 2024, or that the International Monetary Fund (IMF) expects SA’s growth to drop as low as 1.3% by 2025. In fact, the IMF lists SA as one of five global outliers — with Iceland, Brazil, Mexico and Oman — that will likely face fiscal distress in the years ahead.
The report does warn that if BIS doesn’t catalyse a new growth path (and there are no strong grounds to assume it will), and SA remains confined to the growth path of recent decades, the additional taxation will become “more burdensome” and, ultimately, “the extension of taxes and transfers may worsen the fiscal crisis”.
In short, BIS has the capacity to greatly reduce poverty and hunger, but only if implemented in a sustainable manner.
Given SA’s fiscal fragility, it could also make things worse. The trade-offs need to be weighed up with care.
The Rolls-Royce version of the grant would require a monthly benefit of R1,300 to 27.5-million people at a cost of R429bn annually