SOCIAL SPENDING
Experts push Ramaphosa to implement basic income support for the poor
There’s a major brouhaha playing out ahead of the president’s State of the Nation Address and the Budget Speech later this month. It all revolves around the potential continuation of the special Covid-19 Social Relief of Distress Grant and its possible evolution to become a more widespread basic income support to ideally help the country move from historically entrenched social inequalities.
The idea of basic income support (BIS) was first raised in the National Assembly by Social Development Minister Lindiwe Zulu almost a year ago and it seemed to find favour with all political parties at the time.
Her department, with the International Labour Organisation (ILO) and the United Nations Sustainable Development Goals Fund, commissioned a study by a panel of experts. That study, the Report into the appropriateness and feasibility of a system of Basic Income Support for South Africa, was published in mid-December.
South Africa’s unemployment rate from April to June 2021 was a staggering 48.9%, albeit on the back of Covid-19 lockdowns and retrenchments. However, high unemployment has been the bane of the country for decades. According to Statista, the unemployment rate was 30.2% in 1999, lifting to 33.47% in 2002 before falling to 22.43 % in 2008, at which point it started climbing again.
The idea behind the BIS is to provide support to unemployed adults aged 18 to 59. The World Bank last year rated South Africa as having one of the highest, persistent inequality rates in the world, with a consumption expenditure Gini coefficient of 0.63 in 2015.
According to the World Bank, as much as 68% of the country was living below the upper-middle-income country poverty line, falling to 56% between 2005 and 2010. This figure then moved slightly upwards to 57% in 2015 and was projected to have reached 60% in 2020.
Prof Alex van den Heever, a Chair in the Field of Social Security Systems Administration and Management Studies, and one of the authors of the Expert Panel Report, says the proposal on the table is not a grant but unemployment social assistance, with the priority being support for unemployed adults.
“This is aimed at the 18- to 59-year-old demographic,” he says.
Commenting on the Employment Tax Incentive (ETI) introduced in 2014, Van den Heever said the BIS would be complementary to such a programme.
“My own view is that programmes such as the ETI promote growth and employment but do nothing to relieve poverty. Whereas BIS would provide permanent protection against income inequality,” he says.
According to Intellidex, the ETI supports roughly 600,000 jobs and costs around R4.5-billion a year.
Criticism of the idea appeared in a Presidential Economic Advisory Council (PEAC) briefing note that was leaked a week ago. The disclosure of the report is very rare and very embarrassing to members of the forum, which is supposed to be about open debate behind closed doors.
And the BIS idea split the group to such an extent that its final report was, unusually, divided into two sections; one that supported BIS and another that was more critical. In total, 11 members of the group fall into the group critical of the idea, while four support it. Van den Heever is not part of the PEAC group.
The critical group within PEAC raises fiscal concerns and dire warnings of “reduced resources for saving, investment and employment… (and) behavioural changes among taxpayers that will impact negatively on tax revenue collections”.
However, the Expert Panel Report states 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”.
PEAC had a host of other objections, including modelling concerns, questioning whether such a large investment in BIS will crowd out spending on education and health.
Commenting on other countries’ successes with social relief programmes, Van den Heever says it’s a mistake to differentiate between developed and developing countries. “Many of the social protection regimes that were comprehensive and included substantial social assistance to the unemployed were introduced in European countries post-World War 2, when those countries had a lower capita GDP than South Africa has now.
“It’s not a question of fiscal affordability, but the structuring of government programmes and its redistributive elements. Sweden would look like South Africa within 10 years if they withdrew their social assistance framework where they structurally redistribute to the lower income population.
“That has stabilised their society and as long as you maintain the structure, you can keep society stable,” he says.
The Expert Panel Report — the one Van den Heever co-wrote — proposes that the R350 special Covid-19 Social Relief of Distress Grant be made a permanent BIS, which would increase over time to R595, then R860 and ultimately to R1,300.
At that point, it would reduce South Africa’s Gini coefficient from 0.65 to 0.55. To put that in perspective, Brazil’s Gini coefficient in 2021 was 53.4, while in 2017 Iceland had a Gini coefficient of 26.1.
A report released in October last year by Intellidex lead analyst, Peter Montalto, speculated that the phased introduction of a BIS could go along the lines of:
- 2021/22 — SRD (R350/month)
- 2022/23 — narrow BIS at food poverty line (R585 a month)
- 2023/24 — slightly wider BIS at lower poverty line (R1,250 a month)
Montalto says if the cost of a BIS 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 value of the BIS.
“For those earning incomes above R1.5-million (R125,000 a month), the average effective (tax) rate will rise from 43% to 49%, even if the grant is set as low as R350 per month,” he says.
Someone on the other side of the spectrum, earning a minimum wage of R23 an hour, eight hours a day, would take home R3,900 a month. Their annual income would work out to R46,800.
The tax statistics recently released by SARS show that more than 50% of registered “taxpayers” fall in the first zero to R70,000 taxable income group actually earning below the minimum tax threshold (R87,300), while 0.6% were in the bracket earning R1.5-million and more.
Van den Heever fully agrees that there are fiscal risks and that moves should be made incrementally, but is adamant that South Africa is in a position right now to establish the Covid relief grant as a platform to roll out a BIS.
When it comes to redistributive programmes, he says the argument is usually that the country should grow first and redistribute later.
“The reality is that even when we go through periods of growth, such as 2003 to 2006, a lot of tax incentives and tax rebates were introduced. They (the government) used the surplus to reduce taxes instead of using those funds to reduce inequalities,” he says.
Revenue from personal income tax collection in 2020/2021 exceeded budget estimates last year, clocking in a surplus of R137.3-billion (12.3%) against the Medium-Term Budget Policy Statement estimate, as well as R37.7-billion (3.1%) against the revised estimate in February 2021.
Finance Minister Enoch Godongwana attributed this to the resilience of the economy in the aftermath of Covid-19; however, the tax collections still fell short of the previous year when SARS collected R1,358-billion.
Referring to the proposed increase in taxes from the Expert Panel, the PEAC note cautions that the report from the Expert Panel:
- Does not clearly specify which taxes should be increased or by how much they would increase;
- Does not take account of likely behavioural responses by taxpayers to rising taxes rates; and
- In certain scenarios, it overcomes the negative growth impact of tax increases by assuming that there will be productivity gains, but the source of such productivity gains is not adequately explained.
Going into the numbers in more detail, Montalto points out that the lowest total cost of a BIS would be R20-billion a year for a grant of R260 a month, and that this would only be for the 6.5 million people who received the SRD grant at the height of the relief provided in 2020.
Finally, the much-quoted critical Presidential Economic Advisory Council note did not actually throw the baby out with the bathwater, so to speak. It ended with the caution that the report of the Expert Panel “should be subject to peer review as well as an affordability and economic impact assessment to give policy makers deeper insight into the various macroeconomic implications of the Panel’s proposals”.
Given the heated debate and the height of emotion around the topic, with social activists on one side and cautious economists on the other, it is most unlikely that the basic income support motion will gain any traction in the next month. However, all eyes will definitely be on Ramaphosa when he makes his State of the Nation Address later this month.
In the past three years, we have seen the president is a man of caution who makes measured decisions — often to the frustration of those impatient for change.
The timing of the two leaked presidential advisory notes, and the fact that such documents have never been leaked before, points to advisers trying to stir up debate and push the president into action.
Ramaphosa might sidestep the issue completely, but the greater likelihood is that he will touch on the topic briefly — without making a commitment either way — effectively kicking the can down the road. BM/DM
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This concluding paragraph from Paul Bercowitz’s article in 2013 is very relevant:
If we’re going to keep using the Gini coefficients as the only proxy of inequality then we can maybe accept the idea, counterintuitive to some, that the creation of entry-level jobs could lower both unemployment and inequality. To those that value ‘decent work’ above all else this might sound like apostasy. The alternative is to drop the Gini coefficient as the arbiter of inequality and choose a new metric. Either way, some long-held beliefs may have to be modified. DM
It always amazes me how comparisons to European countries get made on this topic, without mentioning how low their unemployment rates, how their service delivery actually works, how low their corruption is, the state of their education, the tiny and shrinking tax base…the list goes on. Again, can we get a proper balanced article on this topic? With all due respect to Prof Alex van den Heever, he is more of an activist that wants to implement BIG no matter the consequences, than an expert in this case.
I am really getting a bit over the term historically entrenched social inequalities. We are approaching 30 years after the end of apartheid. The problems we have at present were created by the people for the people.
You have to credit Van Den Heever with one thing : the man is persistent.
Why do we have reducing Gini as a goal of a BIG?
The facts are sketchy and deliberately avoids those facts that are known sensitive ones, especially being honest about how much what scheme will cost. At 350 the scheme increases a filthy rich taxpayer’s rate from 43% to 49%. AVERAGE! come on, let’s be hinest about what the max rate increases from. At 1300 what happens to the average and maximum tax rates?
The foundations of his research are questionable. Per Van Den Heever, if Sweden were to abandon their social support system, Sweden would within a few short years have our unemployment and poverty. The reason we have our problems therefore has nothing to do with our economic policies, corruption, unskilled labor, labor policies, unproductive labor force, etc. damn, if only we knew this earlier. Pay everybody in the country R10,000 a month and our economy would fly.
bottom line : we cannot afford this
Lets not forget that even without BIG, our social spending is already very high.
From the world bank Oct 2021: “Accounting for 3.3% of GDP and 15.4% of total government spending, the cost of South Africa’s social assistance system is relatively high compared to the average of other upper middle-income countries (UMICs).”
Karl:
One has to look at what else the state provides. If we take free housing, education, health, subsidised water and electricity plus grants we spend R1.2 trillion on social welfare already.
The researchers are blatantly dishonest when they take only income to spend on other expenses into account when defining income. Add the other and very real social support spend and our social welfare is already over R2k per month.
Indeed…
The issue is not the Gini Coefficient. It is whether the extreme inequality and poverty is generating levels of social disintegration that are making society unsustainable. All the signs have been there and increasing for a long time with the recent looting spree being the most ominous. Every market, competition based economy generates inequality – not even in the 100 meters sprint do all competitors cross the line together! The problem is that, in South Africa pre 1994, 85 percent of the population were excluded from the economy and the ANC has done nothing to rectify that situation – as a result we have reached extreme levels in world terms. The BIG has to be accompanied by a strategy aimed at ‘catching up’ by specifically targeting inequality and poverty. In his major work, Piketty points to inequality of opportunity and capacity to accumulate assets as the biggest drivers of inequality and that home ownership and retirement funding made the most important contributions in the west to reducing inequality. With the housing capital subsidy, South Africa started on the right road but has not followed through with home ownership. If South Africa is to introduce BIG, it must be accompanied by a clear strategy to address extreme inequality and poverty. Unless it does so, social disintegration will continue and BIG will not be our saviour.