SA’s ‘wel­fare state’ is in trou­ble

The govern­ment has to make tough de­ci­sions about so­cial grants in the face of poor eco­nomic per­for­mance

Mail & Guardian - - Business - Thando Ngozo & Sa­belo Mtan­tato

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.

Ma­jor prob­lem: Main­tain­ing so­cial grants spend­ing at the ex­pense of re­duc­ing in­fra­struc­ture in­vest­ment will re­duce poverty but not con­tribute much in terms of eco­nomic growth and em­ploy­ment. Photo: Made­lene Cronjé

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