Most studies on a basic income grant lack proper macro-economic analysis

The Social Policy Initiative, a feminist research think- and do- tank, says the possibility of the current R350 social relief of distress grant forming the basis for a permanent Basic Income Grant (BIG) should be “celebrated with enthusiasm”.

Finance Minister Enoch Godongwana extended the grant, introduced in May 2020, for another year until March 2024. Currently more than seven million South Africans are receiving the grant.

According to the Social Policy Initiative (SPI) additional public spending through social grants will have a “highly positive impact” by stimulating economic growth and jobs in a period of turgid growth and growing hunger and hopelessness.

Negatives outweigh the positives

Their statement is in direct contrast to the findings of an Economic Research Southern Africa working paper published earlier this year. The research by authors and associate researchers at the Stellenbosch University Hylton Hollander, Roy Havemann and Daan Steenkamp found that the negative economic effects of an expansion in social grants would outweigh the positive effects.

At the very least, their research found that by converting the current R350 grant into a permanent BIG will require an estimated increase in public debt of about three percentage points of GDP after five years.

It will also require a marginal increase in effective indirect taxes (mainly the value added tax rate, VAT), an increase in the effective personal income tax rate of about two percentage points, and an increase in the effective corporate income tax rate of about 0.25 percentage points.

The researchers argue that existing analysis of the implications of extending income support measures in South Africa, including a BIG, have focused on cost estimations, static revenue raising calculations, or distributional effects.

“While each of these provide important contributions, there has not yet been any public modelling of the dynamic and long-term macroeconomic implications of different basic income support options,” they say in their working paper.

Their paper quantifies the effect of fiscal transfers on the trade-off between social relief and debt accumulation. By incorporating macroeconomic feedback effects in the analysis, the paper shows that the introduction of a BIG requires significant long term tax increases and would likely lead to employment losses.

Long-term sustainability

“Although the consumption of poor households would rise, the model predicts there would be some job losses owing to the contractionary impact on investment and growth from higher debt and higher taxes.”

Steenkamp says most of the discussions relating to the extensions of social support lacks solid macroeconomic analysis of the long-term sustainability of higher expenditure, debt and taxes.

“The studies used to advocate for grant extensions do not incorporate the inevitable effects of the required fiscal settings on interest rates, inflation or investment in their analysis.”

He adds that South Africa has a small tax base with limited fiscal space for expansionary policies. Their modelling suggests the tax increases required to finance increased spending would imply fewer jobs and slower economic growth. Sustaining extensions of public spending of the size proposed over the long-term would require either a clear, credible commitment to cutting other spending or structurally higher economic growth.

Robbing Peter to pay Paul

The SPI believes the statement by Godongwana  that financing the R350 grant will have to come from cutting other social programmes for the poor is “robbing Peter to pay Paul”.

“The R350 grant recognises the lack of income support for the millions of unemployed people and goes some way to meeting basic needs and stimulating local economic activity. Income support can be a life changing intervention, and especially for the youth.”

At the same time the think-tank argues that the R350 falls far short from a decent income, and the eligibility criteria for the grant have been challenged legally for their unreasonable demands.

The analysis by Hollander, Havemann and Steenkamp suggests that without sustained higher economic growth, much higher social transfers could threaten fiscal sustainability.

Poverty, inequality, and unemployment are three interdependent socio-economic challenges policymakers seek to address, they acknowledged in their paper.

“Addressing this triple challenge in South Africa is critical for the future of the country, but an unfunded expansion of the social transfer system could lead to even worse economic outcomes — the medicine should not be worse than the disease.”

During the medium-term budget policy statement in October Godongwana said discussions were still under way to consider options for a replacement of the temporary grant and no final decision has been made about a replacement or how it will be financed.