Last week President Cyril Ramaphosa announced that the government would reintroduce the social relief of distress grant, which entitles unemployed adults not receiving an income or social grant to get R350 a month from the state. This is a far cry from the R585 a month national food poverty line, the minimum proposed by advocates for a basic income grant (BIG).
Finance minister Tito Mboweni said in a subsequent media conference that a BIG is something that needs to be debated. And Business Day’s Carol Paton reported that an expert panel has been convened to consider the various proposed BIG levels and their funding options. From her reporting, it sounds as if the panel is not debating if we should do this, but how.
The number of social grant recipients in SA increased to 18.3-million (31% of the population) in 2020 from 3-million (7%) in 1997. This huge jump happened mainly from 2002-2010 when the economy was growing rapidly, in part because of the global commodity supercycle. At the time, fiscal sustainability was improving and the expansion of social support was perceived as a positive insofar as it enhanced sociopolitical stability.
The current proposed expansion of social support would be another step up in grants. However, this time debt levels are sky high and government expenditure is under pressure across multiple dimensions, including wages and transfers to state-owned enterprises. This time we do not have the fiscal space.
For those proposing its introduction, a BIG is the most reasonable approach to the amelioration of the negative effects of the ruinous levels of unemployment, poverty and inequality that bedevil SA. For unemployed youths with no jobs and no prospect of landing one, R800 a month would address abject poverty. However, they would still not have jobs and would not feel any more equal to, say, a teacher earning R12,000 a month.
South Africans in general are no more employed nor any more equal now than they were prior to the current social grant programme being put in place. Social grants help address poverty, but the real solution to unemployment and inequality lies in job creation. If a BIG threatens this, it could very well offset poverty but entrench unemployment and inequality.
There is an optimum level of state consumption expenditure (including social grants) beyond which expenditure is unsustainable and the growth thereof is negative for the economy. This level is not zero, is not static and is not predetermined. Countries can sustain high levels of expenditure if the economy is so productive that it generates sufficient sustainable returns, after the necessary taxation, to keep mobile individuals and capital engaged. Alternatively, an export earner can generate such a high surplus that it can sustain expenditure, as happens in commodity-exporting countries.
However, when an economy has exceeded a sustainable level of expenditure, signs emerge. These include rising debt levels, wide current account deficits, rising borrowing costs and falling investments. Before the Covid-19 crisis, SA was looking sick. High commodity prices and low consumption led to the current account swinging into surplus in 2020, indicating that policy space has opened up. We can and should support consumption in the near term. In this context, the temporary expansion of the social grant programme is appropriate. However, permanent entitlements will further reduce the much-diminished fiscal policy flexibility and will be a problem when the commodity cycle turns, whenever that happens.
I struggle to see how the expert panel can recommend a permanent material expansion in social grants without a need for damaging cuts to expenditure and/or confidence-sapping tax increases beyond the short term. The National Treasury has consistently failed to get this right because it is an impossible objective. Nobody wants to see South Africans go to bed hungry, but if a BIG was an easy proposition it would have been done by now.
We have made policy decisions with long-term consequences on the basis of expectations of continuing commodity price support before, and then spent the past 10 years drowning in the consequences. We now appear poised to repeat that mistake.
• Lijane works in fixed income sales and strategy at Absa Corporate & Investment Banking.
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