Basic Income Grant: ANC govt considering funding options, says Lindiwe Zulu

President Cyril Ramaphosa hinted at instituting a Basic Income Grant (BIG) after calls for it in the latest ANC January 8th statement. The social relief of distress grant of R350 makes “a strong case for a permanent form of targeted income support grant for the unemployed within our fiscal constraints”, he said.

At the ANC’s national executive committee meeting at the end of January he said millions of working age adults in South Africa remain unemployed without any form of support and little prospect of gaining employment until economic growth picks up.

However, he did not answer the question of where the money will come from, but his minister of social development, Lindiwe Zulu, gave a clear indication of 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.

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Borrowing to afford basic income grant or reallocating budgets

In her answer Zulu said proposed key options are to fund it through an increase in tax, reallocation of current budget priorities or borrowing.

“The borrowing option has the advantage that it would provide additional funding without a need for budget reprioritisation or tax increases. However, this would be expensive for the country as it would increase the country’s debt burden and also increase the already very high interest payments which are already one of the biggest spending items in our government expenditure, which could crowd out other important spending priorities of government,” she said in a written answer.

“A second alternative would be a reprioritisation of current budget allocations. This would have the advantage of shifting funds from some government expenditure which are less effective and/or efficient and redirecting it to the urgent needs of the poor.”

However, she said, such a reprioritisation would be very complex and difficult to implement quickly, since some projects would require significant time and careful planning to wind down without negative unintended consequences.

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Tax options to fund the basic income grant

Zulu said the tax options considered include wealth tax, removal of tax expenditure subsidies, increases in Value Added Tax (VAT) or personal income tax.

“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.”

The disadvantage, she said, is that this would be regressive as poor people would pay the same as the rich. “Such an approach would negate the motivation for the grant as the poor would in effect pay proportionally more than the rich because VAT is a flat rate for everyone.”

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.

“However, it is difficult to quantify and would be unreliable as the only source of revenue and may result in disincentivising retirement savings among some high-income earners.”

Using personal income tax

Using personal income tax seemed to be Zulu’s 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.

“It is also more reliable than the other tax approaches, ensuring sustainable funding in the long term. The additional advantage of using personal income tax to finance the grant would also improve the income inequality in our country, as the poor would receive an increase in their income while the rich would have a reduction based on the increase in the tax rate that they have to pay.”

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The need for a basic income grant

A report released in December, Macroeconomic and Developmental Impacts of Selected Basic Income Grant Pathways for South Africa complied by the Applied Development Research Solution (ADRS) and the Institute for Economic Justice (IEJ), indicates that implementing a basic income grant can reduce poverty and inequality and boost economic growth and employment.

The study models three new basic income scenarios and shows 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 it will negatively affect the economy.

“These models are built to closely reflect a particular view of a market economy that suffers from a number of inter-related irremediable flaws, such as full employment, perfect competition, perfect information and rational expectations assumptions,” Dr. Asghar Adelzadeh, ADRS Global chief executive and author of the report, says.

“Our Dynamically Integrated Macro-Micro Simulation Model of South Africa (DIMMSIM) reveals that with reasonable funding pathways, BIG can be a catalyst for positive outcomes—reducing poverty and inequality while enhancing economic growth and employment.”   

The basic income grant pathways outlined in the study, show the potential to reduce the national poverty rate by up to two-thirds by 2030, presenting a promising avenue for poverty alleviation that is often overlooked.

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The impact of social welfare on prices

However, Chloe Allison, economist at the South African Reserve Bank and Neryvia Pillay, lecturer at the school of economics at the University of Cape Town, last month wrote in a South African Reserve Bank Working Paper Series that an expansion in the number of social grants could increase prices.

“More topically, it has implications for the nature of the Covid-19 social relief of distress grant. Discussions about making this grant permanent must consider how it will affect prices. Expanding the social welfare system while aiming to alleviate poverty could negatively impact consumers by increasing prices,” They wrote in their paper, Cash transfers and prices: what is the impact of social welfare on prices?

They say price increases are especially problematic for consumers in lower income deciles, as they will experience price increases in their largest expenditure categories. “Price increases caused by the expansion of the social welfare system have significant monetary policy implications, as policy institutions will have to mitigate inflationary effects.”