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It is possible for South Africa to implement a basic income support (BIS) grant without sacrificing economic growth, according to Alex van den Heever, the chair of panel investigating the feasibility of BIS.
“The modelling results show that, depending on how it is financed, the social relief of distress (SRD) grant can be introduced in a manner which is fiscally and economically sustainable,” Van den Heever, who is also the chair of social security systems administration and management studies at the University of Witwatersrand, said at the launch of a new report on Tuesday.
This report was commissioned by the Department of Social Development and the International Labour Organisation, and looked at the SRD grant that was rolled out in 2020. It made use of two models to understand what the economic, fiscal, and social outcomes of making the grant permanent would be. These models showed that the SRD grant presented “limited economic and fiscal risks” and that such an arrangement could, in fact, have a positive economic impact, said Van den Heever.
This new report built on the work done in the panel’s 2021 report on the viability of BIS.
READ | Trevor Manuel: Loans for permanent SRD grant, upping public wages will be SA’s ‘complete undoing’
These findings seem to counter the warnings of former finance minister Trevor Manual in November this year that the nation’s shrinking tax base cannot bear the costs of introducing permanent stipends for the poor. Manuel’s warnings are in line with findings from an Intellidex study earlier this year, which showed that implementing a basic income grant would slow economic growth and encourage taxpayers to emigrate.
Van den Heever acknowledged that the introduction of new taxes could give way to behavioural impacts on the tax system that are not easy to model.
READ | Basic income grant could drive South Africans to emigrate, study says
To minimise these impacts, the report proposed that “a phased approach be adopted for the progressive enhancement of the SRD benefit over time”, said Van den Heever. Here, again, the SRD grant was used as an example, having not been raised from the initial R350 since its adoption in 2020.
The report suggested that the government should prioritise stabilising the SRD grant, while focusing on adjustments to keep up with inflation. In doing so, the government can progressively improve the grant, said Van den Heever.
“It doesn’t pay to assume that you can just magically redistribute overnight,” he said.
He said that the predominant argument against social grants since the 2000s has been that these grants are an inefficient intervention to address poverty and unemployment, and that it would be “more productive for government to focus on directly creating employment”.
However, “such approaches keep redistributive strategies, such as social grants, to a minimum until such time as growth has provided fiscal space for greater social generosity”, he said.
READ | Government must figure out how to best implement a basic income grant, ANC NEC says
Van den Heever highlighted a counterargument that social grants and wealth redistribution can encourage financial growth, pointing to finding that suggest that “social grants, up to an optimal threshold, yield positive economic and social outcomes” and that “suboptimal transfers below such a threshold systematically distort growth capabilities downward, resulting in structural unemployment, permanent strata of extreme poverty and structural income inequality”.
The findings of the models showed that the SRD grant “offers significant redistributive opportunities, diminished only by the choice of financing options”, said Van den Heever.
In its SRD-focused model, the report worked from the assumption that the grant was entirely unfunded. However, “that is not the practical reality that we face”, said Van den Heever.
“The grant is being paid for today out of general taxes,” he said. “It has been possible to fit this grant into the existing fiscal framework without having to raise the entire amount with a new tax.”
EXPLAINER | Basic Income Grant: What is the debate about?
The report looked at personal income tax (PIT) and value added tax (VAT) as financing options for the grant and found that, when PIT is used, “economic output deviates positively from the baseline, while also achieving material positive distributive outcomes”, he said.
The Intellidex study estimated that PIT would have to be raised by between 9% and 19% to fund the grant, and that VAT would need to be raised by between 14% and 29%.
“Negative outcomes result from the use of VAT, which suggests one should be incredibly careful about using VAT increases until there is more information on the dynamics around VAT adjustments,” said Van den Heever.
Dr Kelle Howsen from the Institute for Economic Justice (IEJ) said at the launch that the institute welcomes “this important research to show the bigger picture about the economic and social impacts of the SRD grant and of a BIS grant in the future”. She added that “a lot of what has been highlighted in this report is very consistent and in line with what the IEJ has been arguing and proposing over the past couple of years”.
While the poverty-reducing impacts of these grants are “clear and very well-evidenced”, Howsen said that there are also other positive social impacts that are important to consider, including effects on gender inequality, health, mental health, access to education, and social cohesion.
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Carol Paton
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