Basic income grant could have unintended consequences – Busa

Business Unity South Africa (Busa) warned on Monday night that implementing a basic income grant could have “huge unintended consequences” and “should not risk or crowd out” key government spending priorities such as education, healthcare, transport, infrastructure and “existing generous grants”.

In a statement issued by Busa CEO Cas Coovadia, the country’s main business body said such a grant could be a costly affair, costing anywhere from R68 billion to over R300 billion.

“It is not a decision to allocate a few billion rand for a few years, but a “forever” decision. It therefore must be considered very carefully as it realistically – in political and in social terms – cannot be reversed once implemented and will act like a ratchet within the budget,” said Coovadia.

“It will also compete for other revenue resources and, even proposals to raise various taxes to pay for it would nullify that option to pay for other policy measures that are critically needed – such as wider quality access to health care or a broader social security safety net that is contributory from employment,” he added.

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While Busa pointed out that it has backed a time-limited, post-Covid and post-unrest extension of the SRD (Covid-19 Social Relief of Distress) Grant, paid for from one-off windfall revenues from the commodities price boom, it however stressed that this was “not a sustainable model to fund a basic income grant”.

“Business encourages more evidence-based and detailed debate on the impacts of a basic income grant on the economy, on its implications on debt markets, on fiscal sustainability and interest rates, [and] on the complex outcomes from large tax hikes that are being proposed,” said Coovadia.

“It [the basic income grant] will have huge unintended consequences which can destabilise already weak tax revenue growth and, critically, lead to costly and disruptive shocks to the macroeconomy from which SA may struggle to emerge for a generation…

“Business backs a broad balance of spending priorities on education, health care, transport, infrastructure, and existing generous grants [including employment incentives] which should not be put at risk or crowded out by a basic income grant in a world where funding constraints are real and binding and cannot be wished away. The only way to afford all these priorities is to grow the tax base through faster long-term growth, driven by reforms and investment,” he added.

Economists such as Mike Schüssler have also raised concerns about the affordability of a universal basic income grant, considering SA’s constrained tax base and the country’s already large social security spending programme.

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The government seems to now be seriously considering the broader grant in the wake of recent unrest and the ongoing, albeit eased, impact of Covid-19 on the economy, which has pushed the country’s unemployment rate to record levels.

Labour federation Cosatu, the ANC’s alliance partner, is a major backer of establishing a basic income grant, while the idea has also received support from some civil society organisations and opposition parties.

Coovadia, however, stressed that a basic income grant “deals only with one element of the broad array of issues” in SA that need to be resolved.

“The fact that transferring a very large amount of money to households improves outcomes for them along some axes is not in doubt from the evidence, although the consequences of a commitment to an unaffordable basic income grant will quickly undermine this. We need to take a view of the entire system and the entire economy,” he said.

“We must make tough choices and honest trade-offs within these constraints,” noted Coovadia.

Busa said that in the medium-to-long-term, business “can back a proposal for expanded social support through an unemployment insurance type product [that might be popularised as a basic income grant].”

However, this needs to be done under the following conditions:

• It is phased in only as deep structural and regulatory reforms such as (but not limited to) those outlined by Operation Vulindlela, labour market reforms that support labour absorption and reducing the barriers to entry for small and medium business, are successfully implemented and bear the fruits of faster GDP growth and faster tax revenue growth from an expanded tax base.
• Fiscal sustainability is not compromised, and a grant does not cause a widening of the long-term trajectory of the deficit which should remain on a path toward debt reducing levels that can help reduce funding costs for government itself and business.
• It is not universal but is targeted at those in need.

By Suren Naidoo

This article was republished with permission from Moneyweb. Read the original article here.