Basic income grant almost certain to mean higher personal tax and VAT

A basic income grant in any form will have to be linked to higher personal tax and VAT, and it would appear that government has no choice but to implement a form of universal income.

Experts say South Africans have to accept that it will be near impossible to move away from the existing Social Relief of Distress grant, put in place to ease Covid-related struggle, without replacing it with something.

Prof. Michael Sachs, adjunct professor at Wits and deputy chair of the Finance and Fiscal Commission, said in a PSG webinar today that the Social Relief of Distress (SRD) grant has been in force for two years and has been extended for another year.

“It will be difficult to withdraw the grant as people have already changed their behaviour and have become dependent on it. What we have to do now is how it will evolve and how it will be financed.”

The country is in a chronic, unsustainable fiscal position and have been for some time and we have to fix it because it is a headwind that is preventing further growth of the economy, Sachs says.

“The grant will not be the straw that breaks the camel’s back, because the camel can already barely walk and therefore another straw will not really matter. The reason for our fiscal position is that government spending has expanded instead of moving in the opposite direction.”

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How to fund the basic income grant through personal tax

Sachs says instead of debating if we should have a grant, we should rather discuss how to fund it.

He does not think the president is staking his future on the grant, but points out that when it was withdrawn, the violence happened in July last year, showing that the political cost of withdrawing the grant will be huge.

He says a grant can be funded by borrowing, as the country is already borrowing huge amounts daily, but it can only be done in the short term. He believes that this will offset the expenses in the medium term, but in the long term it will still have to be funded by taxes.

“The economy has been stagnating since 2012 and a grant will not solve unemployment, but it will have a direct and important impact on hunger. It is inequality and the division of society into different worlds that curtail growth. A growing society must be a common society and we have to ask if a grant will change the underlying conditions.”

About the argument that grants breed dependency, Sachs says it is not a strong one in the case of South Africa.

“We had a problem with unemployment for the past 30 years or more and it will be hard even with growth and development to envisage an economy where everybody is employed.”

He also does not think a strong argument against the grant is that it will make people lazy to work.

“If you look at the old age and children’s grants, there is enough evidence to show that it enables people to participate in the labour market, because it gives them taxi money to go into town and find a job.”

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How much should the grant be?

Sachs says the amount of the grant will be determined by the amount of taxes that can be raised.

Although tax in South Afri8ca is already high, it is important to link the provision of a grant with taxation to avoid politicians using it as a tool to make people vote for them by promising to increase the grant if he wins.

He says basic income support can be funded by VAT and personal income tax (PIT), the tried and tested way.

Corporate Income Tax (CIT) on the other hand does not render a consistent flow of income and therefore Sachs prefers funding a grant from VAT and PIT.

“There is no direct relationship between growth and tax, but high taxes deter growth. Our biggest growth problem is not tax, but electricity supply that deters investment.””

South Africa also has a political problem as it is a democracy, but with high levels of inequality that cannot be overcome in a short time that means that everybody’s views are not heard. Sachs says therefore we must do what we can do and not expect to change into Singapore suddenly.