A permanent basic income grant (BIG) may weaken the credibility of fiscal policy but it may also have positive spin-offs for the economy — while being impossible for President Cyril Ramaphosa to avoid.
That is according to Michael Sachs, Wits University adjunct professor and a former head of the budget office at the National Treasury, who used a paper published on Tuesday — two days before Ramaphosa delivers his state of the nation address — to highlight the risks that could come with the policy and the sacrifices that are needed if it is to be sustainable.
With the temporary Covid-19 social relief of distress (SRD) grant of R350 a month set to expire in March, the government has been under immense pressure to extend it and to use it as a basis for a universal grant in one of the most unequal countries on earth, with an unemployment rate of close to 35%.
The grant was introduced in the context of the state of disaster regulations after the outbreak of Covid-19. A previous plan to let it lapse was thwarted by the violent looting in Gauteng and KwaZulu-Natal in July 2021.
In an article titled “Basic income support is unavoidable, but making it work requires political courage”, Sachs said a grant, which would involve a new expenditure commitment of between R50bn and R100bn, equivalent to 1% of GDP, “will worsen SA’s fiscal position, which is already so chronic that it has itself become a central cause of slow growth and economic stagnation”.
Echoing the sentiments of some members of Ramaphosa’s divided presidential economic advisory council, he warned of the dangers of accumulating more debt and crowding out investment spending, which is needed for growth-enhancing infrastructure.
“High interest rates on government debt are a hurdle to fixed investment. The incessant rise in debt service costs — now approaching 5% of national income — crowds social spending out of tax revenue and shifts the profile of public spending in favour of affluent households,” he said. With no clear path to closing a budget deficit that has been stuck at about 6%, the risk is that these dangers will persist, which could bring “financial and macroeconomic turbulence”.
Labour federation Cosatu, a key ANC ally that helped to propel Ramaphosa to the party’s leadership in December 2017, has not only called for the SRD grant to be extended beyond March but also for it to be increased to the food poverty line, which is just more than R600 a month, and be used “as the foundation for a BIG”.
Ramaphosa has previously spoken in favour of a BIG, saying it would show people that the government cares, though he also stressed the need for an affordability assessment.
Sachs said the political pressure may be too hard to resist, and the introduction of a grant, which is unlikely to be temporary given SA’s structurally high unemployment and poverty rates, may even be seen as necessary for Ramaphosa to win a second term as ANC president in 2022.
“Continuing with basic income support may well be necessary to secure his re-election at the 2022 ANC conference and victory for the ANC in 2024,” he wrote in the paper published on the Econ3x3 website.
“By then, the grant would have been in place for five years, and it does not make sense to think of it as temporary.”
Potential upsides will depend on design, institutions and the quality of the social compact that can be negotiated around it.
“Until now, the president has been warm and fuzzy about the need for basic income support and public employment programmes. He frequently waxes lyrical about social compacting and the need for government to be generous to its people, especially the poor and unemployed.
“But he has been largely silent on the question of the trade-offs or the real economic concessions needed to make a social compact work,” Sachs said.
Basic income support is not a question of the government “being generous” and its implementation will require sacrifices, not all of which will be popular, such as tax increases. Making a BIG sustainable may also involve “critical compromises on public sector pay, economic growth and the transformation of energy supply that the ANC has so far refused to swallow”, he said.
Sacrificing the fiscal space for other “progressive social policy interventions” such as basic education and health could harm service delivery in the longer term.
“An income support grant that reaches poor and unemployed workers can become an effective and prideful part of our fiscal constitution. It will mean sacrifices from the wealthy, but also from those in secure jobs, including public sector workers and other unionised insiders. And this will take political courage to push through.”
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