The clock is ticking down towards the expiry of the Covid-19 social relief of distress (SRD) grant, but given the political pressure on President Cyril Ramaphosa to retain it in the face of extreme poverty and joblessness, it is likely to be made permanent in the 2022 national budget in February.
This means higher taxes for, well, just about everybody. Specifically, South Africans should brace for a two percentage point across-the-board increase in personal income tax in the coming budget.
This is my reading of the combined advice contained in two expert reports released late in 2021 into the feasibility of SA extending basic income support to unemployed adults who fall outside the existing social grant system.
In November a joint paper by the University of Cape Town and the Treasury concluded that a R71bn SRD grant (paying R350 a month but extended from the 9.5-million beneficiaries to a potential pool of 17-million working-age adults who lack formal employment) represented the “middle ground” among the options on the table.
Then in December, an expert panel of academics commissioned by the department of social development came down strongly in favour of retaining, as a first step, the R350 SRD grant (but with a less strict means test, taking the cost to about R77bn a year from R40bn at present).
The panel concluded that it would have to be tax-financed as taxation is the only mechanism compatible with sustained growth, and that this would have to be achieved by raising VAT and/or personal income tax as the only broad-based, dependable sources of revenue. (Given the potential blowback from civil society over any further attempt to raise VAT, the burden is most likely to fall entirely on personal tax if the panel’s recommendations are followed.)
The panel concluded that a R77bn SRD grant could be covered by a two percentage point increase in personal tax across the board, making such a hike a distinct possibility in the coming budget. However, there is a huge contradiction between the department of social development’s welfare crusade and the fiscal consolidation path being pursued by the Treasury.
The Treasury is likely to baulk at raising borrowing or taxes but, in their absence, extending the SRD grant could have disastrous implications for other social grants and social spending in general, as expenditure would have to be reprioritised within a fixed fiscal envelope.
And if SA announces the extension of the SRD grant but does not simultaneously announce that taxes will be hiked to fund it, the markets could take fright. Interest rates charged on government borrowing could spike instantly, offsetting the positive effects of the grant and escalating SA’s debt crisis.
The report also dashes the notion that the grant could be funded mainly through deficit financing on a sustainable basis, noting that though the cost initially could be partially offset through stimulated demand, these effects are likely to fade.
These findings will disappoint lobbyists who have argued that SA can just print money, raise the deficit or avoid raising taxes to fund a new basic income grant. On the other hand, the extension of the SRD grant would still be a victory for civil society, given the Treasury’s historic opposition to instituting a permanent grant for unemployed adults.
What is still not clear is whether a new grant that uses personal income tax hikes to shift spending power from the affluent to the poor would have a net positive effect on GDP growth. But there is no escaping that SA has been mired in a deep crisis of slow growth for decades, and should it remain confined to this growth path the extension of taxes and transfers would worsen the fiscal crisis.
The only durable solution to SA’s fiscal challenge is growth. Significantly expanding the welfare net before that growth has even been glimpsed, and while promises of accelerated structural reform continue to ring hollow, is an extremely risky move, one that the Treasury may fiercely resist.
• Bisseker is a Financial Mail assistant editor.
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