A big debate is going on about the BIG and that is encouraging. It goes to the heart of the economic policy debate about the balance between growth and grants in SA. It is time the BIG idea is properly aired, based on proper evidence. The government needs to face up to the tough trade offs involved and to make appropriate policy choices.
Calls for SA to introduce a basic income grant for all adults go back at least two decades. The Covid-19 pandemic’s devastating impact on unemployment and poverty levels has, inevitably, put it back on the radar. Many of its advocates have looked to the temporary R350 Covid-19 social relief of distress grant as a platform from which to build a BIG.
The government commissioned an expert panel to investigate and report back in December — which favoured extending the R350 a month grant into something broader and more permanent, but made it clear that tax hikes were the way to fund the huge cost on a sustainable basis.
President Cyril Ramaphosa has said that he favours some form of income support — one that reaches many more than the 18-million vulnerable children, old age pensioners and disabled people who already receive social grants on a permanent basis.
Ramaphosa’s presidential economic advisory committee is fiercely divided on the issue and has submitted dissenting briefing notes to the president ahead of his state of the nation address on February 10. One group, whose note has been widely circulated, sounded a loud alarm on the severe impact a tax-funded extension of the current grant would have on public services and public finances, and ultimately on the poor themselves.
They also put serious question marks over the methodology and arithmetic of the expert panel report, which they said had not properly costed its proposals to extend the grant.
The other group recommended a raft of cash and non-cash support to deal with extreme levels of poverty, the Sunday Times reported, arguing that SA could not feasibly grow its way out of poverty in any reasonable timeline.
The Covid-19 R350 grant already reaches 9.5-million people, so more than 27-million South Africans are receiving social grants — almost double the 14-million in employment. It’s now widely expected next month’s budget will extend the temporary grant beyond its end-March expiry date, at an annualised cost of more than R50bn. But the government is likely to kick the can down the road on whether it will be expanded into a more permanent BIG, which would cost a lot more and require steep hikes in VAT and personal income tax rates to fund on a sustainable basis.
SA’s social grants system has been one of its most effective ways of combating poverty and it’s tempting simply to argue for more of it. But the government is effectively already cross subsidising the Covid-19 grant by cutting existing child and old age grants in real terms, as well as by cutting other departmental budgets — with negative impacts on service delivery for poor communities.
Hiking taxes, especially if this means a hike in the VAT rate, could mean even more of a cross subsidy from one group of poor people to another. But the bigger issue is the balance within the budget between growth and grants. SA already spends almost 60% of its redistributive budget on the “social wage”. It spends ever less on infrastructure and services that would help to enable growth and investment. And that the public debt is so high itself “crowds out” private sector investment, consuming savings that could otherwise be invested to grow the productive capacity of the economy.
Shifting that balance further towards grants and away from growth can be a self-defeating exercise in the longer term. Worse, it could signal that the government has given up on growing the economy fast and far enough to get it creating jobs and improving lives any time soon. That could be bad for the poor and rich alike.
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