Withdrawing the social relief of distress grant (SRD) without implementing a permanent replacement carries a huge political risk for President Cyril Ramaphosa as the country claws back from the economic devastation of the pandemic, says Michael Sachs, a former head of the budget office at the National Treasury.
Civil society organisation Black Sash and the Studies in Poverty and Inequality Institute (SPII) called on the government to implement a basic income grant after the July 2021 unrest and ongoing pandemic. However, Business Unity SA and Business Leadership SA oppose the implementation of a permanent grant, considering the country’s wobbly fiscal position.
Finance minister Enoch Godongwana has also indicated that an extension of the grant or replacing it with a permanent grant would be unsustainable without permanent spending reductions and tax revenue increases.
Sachs, who is now a professor at Wits University, has previously indicated that introducing a permanent grant may be necessary to secure Ramaphosa’s re-election at the 2022 ANC elective conference, and victory for the ANC in the 2024 general election.
On Tuesday, Sachs told a webinar hosted by PSG Konsult that withdrawing the distress grant, which has been extended by 12 months, could spark civil unrest as seen during the July 2021 riots or could be used by Ramaphosa’s opponents to mobilise against him.
“If you withdraw the grant you are going to give him [Ramaphosa] a big political headache which is going to hand a political gift to his opponents in society but more particularly in the ANC because it will cause social distress that could be mobilised against him,” Sachs said.
“The real danger ... is that every election we go into, populist politicians will demand an increase in the grant and [that] over time [it] be increased rapidly from this very small level to something that is not reasonable to sustain out of tax increases.”
The grant was introduced in March 2020 as part of the government response to the pandemic to support unemployed adults and those whose income had been affected by Covid-19 and the associated lockdowns.
About 46% of the population receives some form of social grant, including old age and child support grants.
The R44bn allocation to the extension of the grant announced in February’s budget is made possible by a tax overrun brought on by a commodity boom.
Sachs said that increasing taxes to fund the extension of the grant should be done cautiously and incrementally to avoid a “tax shock”. SA already has a high level of taxation, and raising taxes has negative implications for growth and job creation, he said.
“There is no technical barrier to increasing the value of the grant. The barrier is simply that whatever increase in the value of the grant will simply [require] an increase in taxation, so the question is not so much how big can the grant be, [but] how much can we raise taxes,” he said.
In a low-growth environment, SA would have to rely on possibly raising VAT and personal income tax so that the government can raise revenue to fund any new permanent grant.
“The other big income source is corporate income tax. The problem with corporate income tax is that [it] is very cyclical, it moves up and down with the rate of profit and doesn’t provide a consistent flow of resources that are needed to sustain this type of grant, which shouldn’t go up or down with the business cycle,” Sachs said.
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