Basic income grant: just empty promises from government?

We keep hearing promises from the president and minister of finance that a basic income grant is coming although many experts and studies have indicated that the country can simply not afford it.

Although President Cyril Ramaphosa promised a basic income grant at the ANC’s manifesto launch in February after saying in his State of the Nation Address that the ruling party will “progressively implement a basic income support grant by extending and improving the value and coverage of the Social Relief of Distress (SRD) grant for the unemployed”.

Finance Minister Enoch Godongwana also referred to the basic income grant in his budget speech and last week told the SABC that the question is not whether South Africa should have a basic income grant, but rather how it will be funded. He added that if it is properly managed, the country can afford to roll out a basic income grant.

However, the 2024 Budget Review stated that any extension of the Social Relief of Distress (SRD) grant or any replacement must be funded by a new revenue source or reprioritisation of other spending items. It said government is still discussing options for a replacement grant and the balance between policy options to support higher employment.

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South Africa cannot afford a basic income grant

Professor Bonke Dumisa, an independent economic analyst, puts it very bluntly: “South Africa cannot afford a basic income grant. It is even battling to pay the mere R350 SRD grants.”

Before the budget speech, Professor David Warneke, partner at BDO, said that dreams of a basic income grant may remain deferred, given current economic constraints. “In the past, Godongwana rightly emphasised the need for sustainable economic growth to finance such initiatives.

“Implementing a basic income grant requires a stable economic foundation, which we must prioritise building before introducing such a measure into the budget.”

The Black Sash said after the budget speech that although the president referred to a targeted basic income grant in his State of the Nation Address, the minister of finance failed to speak on how and when mechanisms for this kind of support will be implemented. “Does this mean that the president was making empty promises?” the organisation wanted to know.

Neil Roets, CEO of Debt Rescue, also pointed out that leading economists have warned that although the basic income grant will alleviate a bit of the burden for some, it will create an unsustainable economic scenario. 

“With only 7.1 million taxpayers contributing to government and 28 million South Africans currently receiving grants, there are clearly not enough taxpayers to generate enough funds for this. We need to focus on growing the taxpayer base by stimulating economic growth.”

National Treasury recently revealed that South Africa only has 7.1 million individuals with taxable income, a quarter of the number of people who receive grants.

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Basic income grant will push SA deeper into debt

Even Ramaphosa’s economic advisers warned against implementing a basic income grant, saying the cost could deepen debt and hinder economic growth.

Ann Bernstein, executive director of the Centre for Development and Enterprise, warned early on that South Africa cannot afford a basic income grant. “Government’s finances are already unsustainable and adding a large and permanent new spending programme will only make it worse.”

The ANC wants to increase taxes, which may include a wealth tax, to fund a basic income grant, but Bernstein warns there is a high price to pay for higher taxes, which includes slower economic growth and less employment. “The slowdown in growth will make the rest of the government’s spending even less affordable than it is now and the consequences of that will be terrible for the poor.”

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This report says it can be done and boost economic growth

However, a report released in December last year by Applied Development Research Solution (ADRS) and the Institute for Economic Justice (IEJ), said implementing a basic income grant can reduce poverty and inequality and boost economic growth and employment.

The report, Macroeconomic and Developmental Impacts of Selected Basic Income Grant Pathways for South Africa, highlights the transformative impact of a basic income grant for South Africa. 

The study modelled three new basic income scenarios, showing there is no trade-off between a basic income grant and economic growth and fiscal sustainability. Instead, it produces win-win outcomes, significantly reducing poverty and inequality while fostering positive macroeconomic outcomes, counter to mainstream economic models which often predict that it would negatively affect the economy. 

The study proposed a funding strategy involving a small wealth tax and social security tax, demonstrating that a basic income grant can be implemented without changes to income tax or VAT regimes. 

According to the report, the outcomes would be significant and potentially reduce child mortality, hunger, crime and a cyclical poverty trap. 

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

How Department of Social Development wants to fund it

Minister of Social Development Lindiwe Zulu indicated how she thinks a basic income grant can be funded when she answered a question in parliament in November when Dikgang Mathews Stock, an ANC MP, asked her about the funding models explored to fund the basic income grant.

In her answer Zulu said proposed key options are to fund it through an increase in tax, reallocation of current budget priorities or borrowing. She said the tax options considered include wealth tax, removal of tax expenditure subsidies, increases in Value Added Tax (VAT) or personal income tax.

Using personal income tax seemed to be her favourite way of funding the grant as she said this approach is a more progressive tax which would take a greater contribution from the high-income earners than the lower income earners, ensuring a more sustainable revenue source.

“The advantage of increasing VAT is that it would be a broad-based tax which enables government to collect sufficient revenue to fully fund the grant, which would be fairly easy to introduce and collect.”

However, Zulu seemed to be more in favour of a wealth tax, saying it has the advantage of being quite progressive as it would target only rich people, although it could result in significant tax avoidance and therefore inconsistent revenue year-to-year as the wealthy find ways to avoid it.

She said the tax expenditure subsidies on retirement savings were also considered as a possibility as it would, in addition to providing new tax revenue, create greater equity in the tax system by reducing support currently benefitting high income earners.

There has been lots of talk about the basic income grant, but until there is policy and a clear strategy to fund a basic income grant, South Africans who struggle to find an income will not find any relief in government promises in an election year.