If a basic income grant means tax hikes, the economy will suffer

The debate over a basic income grant (BIG) is becoming as intense as it is misguided. One of the blunders is to blame “capitalism” for our unemployment and poverty crisis. The reality is that SA has never had a free-market economy in which the market can solve these problems. More importantly, the primary reasons for our dire economic plight are being presented to us in stark detail in acting chief justice Raymond Zondo’s reports.

Economic mismanagement went hand in hand with the institutionalised looting enabled by the Jacob Zuma presidency. The extent of the economic damage is clearly reflected in SA’s credit ratings, which had climbed in the Nelson Mandela and Thabo

Mbeki presidencies to investment grade, driven by GDP growth in excess of 3% a year from 2001 to 2008.

The economy was functioning pretty well before the Zuma presidency.

The first downgrades of the Zuma era came in 2012, and repeated downgrades since (including immediately after Malusi Gigaba was appointed finance minister in 2017) landed our credit ratings deep in junk status territory.

A glance at the main economic indicators before and after Zuma reflect the extent of economic destruction, but the one to note is unemployment.

It remained below 30% from 1994 until 2002, when it hit 33.3%, before plunging to 22.4% in 2008 at the end of Mbeki’s presidency.

At the beginning of his presidency, Zuma promised to create 500,000 jobs a year.

But the only area in which he increased employment was the public service. The wage bill grew well ahead of inflation at 10.3% since 2009, according to Stats SA, and now accounts for 37% of national revenue, among the highest in the world, despite

We can’t go BIG [basic income grant] until we’ve properly determined all its effects and the consequences of the various ways of funding it

dwindling economic growth and high public debt.

SA’s economy was never strong enough to withstand the Zuma onslaught, and to now blame capitalism for our situation is absurd.

We have what is essentially a social democratic system, with 12.4-million people — more than 20% of the population — receiving some form of financial assistance from the state in one of the most extensive social welfare systems among developing countries. It accounts for 3.3% of GDP and 15.4% of total government spending, far above international averages.

The devastation of the Zuma era, the Covid crisis and ineffective implementation of reforms needed to stimulate economic activity have brought pressure to extend that level of social assistance. Business Leadership SA fully supports this. But the primary goal of our economic policy needs to be driven by job-creating economic growth while keeping intact financial support measures where needed.

What we don’t support is going blindly into a BIG. It’s an onerous undertaking and one we’re likely to be tied to forever. Important decisions have to be made to determine the initial level of financial support and increases in future years factored in, along with meticulous scenario planning to gauge the inevitable consequences of tax hikes imposed to finance the grant.

Such a critical issue has to be based on rigorous research-based evidence, and this is an area Business Leadership SA is focusing on: we have commissioned one research report into the effects of a BIG and another is in the pipeline, looking at the consequences of funding it through debt issuance and tax hikes.

We aim to quantify the impact of reduced earnings flowing from the required tax hikes on the wider economy. Only then can we map out a strategy to secure the required amount of social support. The research will also assess tax changes required for wider social security changes such as the issue of pensions, which the National Economic Development and Labour Council is working on.

Initial research has found that if the grant is funded through a proportional increase in personal income tax, corporate income tax and VAT, the effective rate of taxation on personal income would rise from about 30% to between 34% and 46%, depending on the amount of the grant.

At the higher end, those earning above R1.5m a year will see their average effective tax rate rise from 43% to 49%, even if the grant is set at the lower end, at R350 a month. So just about half their income would be taxed.

Such a large tax shock will have significant ripple effects on the economy, some of which are entirely predictable because people with lower disposable incomes would naturally spend less and save less, with the losses suffered unlikely to be recovered by VAT gained from the redistributed income to the poor. The wider consequences of doing this in a low-growth economy with high debt and a steep yield curve that relies on markets buying government bonds need further exploration.

We need proper modelling that incorporates the behavioural reality of how the economy works, and unfortunately this has not yet been tabled.

But it is critical to the overall goal of alleviating the suffering of the poor, not increasing their ranks.