Experts push Ramaphosa to implement basic income support for the poor

by | Feb 3, 2022 | General | 0 comments

(Photo: Gallo Images / Foto24 / Brendan Croft) By Neesa Moodley Follow 02 Feb 2022 4

There’s a major brouhaha playing out ahead of the president’s State of the Nation Address and the Budget Speech later this month. It all revolves around the potential continuation of the special Covid-19 Social Relief of Distress Grant and its possible evolution to become a more widespread basic income support to ideally help the country move from historically entrenched social inequalities.

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The idea of basic income support (BIS) was first raised in the National Assembly by Social Development Minister Lindiwe Zulu almost a year ago and it seemed to find favour with all political parties at the time.

Her department, with the International Labour Organisation (ILO) and the United Nations Sustainable Development Goals Fund, commissioned a study by a panel of experts. That study, the Report into the appropriateness and feasibility of a system of Basic Income Support for South Africa, was published in mid-December.

South Africa’s unemployment rate from April to June 2021 was a staggering 48.9%, albeit on the back of Covid-19 lockdowns and retrenchments. However, high unemployment has been the bane of the country for decades. According to Statista, the unemployment rate was 30.2% in 1999, lifting to 33.47% in 2002 before falling to 22.43 % in 2008, at which point it started climbing again.

The idea behind the BIS is to provide support  to unemployed adults aged 18 to 59. The World Bank last year rated South Africa as having one of the highest, persistent inequality rates in the world, with a consumption expenditure Gini coefficient of 0.63 in 2015.

According to the World Bank, as much as 68% of the country was living below the upper-middle-income country poverty line, falling to 56% between 2005 and 2010. This figure then moved slightly upwards to 57% in 2015 and was projected to have reached 60% in 2020.

Prof Alex van den Heever, a Chair in the Field of Social Security Systems Administration and Management Studies, and one of the authors of the Expert Panel Report, says the proposal on the table is not a grant but unemployment social assistance, with the priority being support for unemployed adults.

“This is aimed at the 18- to 59-year-old demographic,” he says.

Commenting on the Employment Tax Incentive (ETI) introduced in 2014, Van den Heever said the BIS would be complementary to such a programme.

“My own view is that programmes such as the ETI promote growth and employment but do nothing to relieve poverty. Whereas BIS would provide permanent protection against income inequality,” he says.

According to Intellidex, the ETI supports roughly 600,000 jobs and costs around R4.5-billion a year.

Criticism of the idea appeared in a Presidential Economic Advisory Council (PEAC) briefing note that was leaked a week ago. The disclosure of the report is very rare and very embarrassing to members of the forum, which is supposed to be about open debate behind closed doors.

And the BIS idea split the group to such an extent that its final report was, unusually, divided into two sections; one that supported BIS and another that was more critical. In total, 11 members of the group fall into the group critical of the idea, while four support it. Van den Heever is not part of the PEAC group.

The critical group within PEAC raises fiscal concerns and dire warnings of “reduced resources for saving, investment and employment… (and) behavioural changes among taxpayers that will impact negatively on tax revenue collections”.

However, the Expert Panel Report states that an entry-level version of the BIS “can be safely implemented using a mix of financing approaches, including limited debt financing, tax revenue improvements arising from any demand stimulus and carefully calibrated tax increases where required”.

PEAC had a host of other objections, including modelling concerns, questioning whether such a large investment in BIS will crowd out spending on education and health.

Commenting on other countries’ successes with social relief programmes, Van den Heever says it’s a mistake to differentiate between developed and developing countries. “Many of the social protection regimes that were comprehensive and included substantial social assistance to the unemployed were introduced in European countries post-World War 2, when those countries had a lower capita GDP than South Africa has now.

“It’s not a question of fiscal affordability, but the structuring of government programmes and its redistributive elements. Sweden would look like South Africa within 10 years if they withdrew their social assistance framework where they structurally redistribute to the lower income population.

“That has stabilised their society and as long as you maintain the structure, you can keep society stable,” he says.

The Expert Panel Report — the one Van den Heever co-wrote — proposes that the R350 special Covid-19 Social Relief of Distress Grant be made a permanent BIS, which would increase over time to R595, then R860 and ultimately to R1,300.

At that point, it would reduce South Africa’s Gini coefficient from 0.65 to 0.55. To put that in perspective, Brazil’s Gini coefficient in 2021 was 53.4, while in 2017 Iceland had a Gini coefficient of 26.1.

A report released in October last year by Intellidex lead analyst, Peter Montalto, speculated that the phased introduction of a BIS could go along the lines of:

  • 2021/22 — SRD (R350/month)
  • 2022/23 — narrow BIS at food poverty line (R585 a month)
  • 2023/24 — slightly wider BIS at lower poverty line (R1,250 a month)

Montalto says if the cost of a BIS is funded through a proportional increase in personal income tax, corporate income tax and VAT, the effective rate of taxation on personal income would rise from about 30% to between 34% and 46%, depending on the value of the BIS.

“For those earning incomes above R1.5-million (R125,000 a month), the average effective (tax) rate will rise from 43% to 49%, even if the grant is set as low as R350 per month,” he says.

Someone on the other side of the spectrum, earning a minimum wage of R23 an hour, eight hours a day, would take home R3,900 a month. Their annual income would work out to R46,800.

The tax statistics recently released by SARS show that more than 50% of registered “taxpayers” fall in the first zero to R70,000 taxable income group actually earning below the minimum tax threshold (R87,300), while 0.6% were in the bracket earning R1.5-million and more.

Van den Heever fully agrees that there are fiscal risks and that moves should be made incrementally, but is adamant that South Africa is in a position right now to establish the Covid relief grant as a platform to roll out a BIS.

When it comes to redistributive programmes, he says the argument is usually that the country should grow first and redistribute later.

“The reality is that even when we go through periods of growth, such as 2003 to 2006, a lot of tax incentives and tax rebates were introduced. They (the government) used the surplus to reduce taxes instead of using those funds to reduce inequalities,” he says.

Revenue from personal income tax collection in 2020/2021 exceeded budget estimates last year, clocking in a surplus of R137.3-billion (12.3%) against the Medium-Term Budget Policy Statement estimate, as well as R37.7-billion (3.1%) against the revised estimate in February 2021.

Finance Minister Enoch Godongwana attributed this to the resilience of the economy in the aftermath of Covid-19; however, the tax collections still fell short of the previous year when SARS collected R1,358-billion.

Referring to the proposed increase in taxes from the Expert Panel, the PEAC note cautions that the report from the Expert Panel:

  • Does not clearly specify which taxes should be increased or by how much they would increase;
  • Does not take account of likely behavioural responses by taxpayers to rising taxes rates; and
  • In certain scenarios, it overcomes the negative growth impact of tax increases by assuming that there will be productivity gains, but the source of such productivity gains is not adequately explained.

Going into the numbers in more detail, Montalto points out that the lowest total cost of a BIS would be R20-billion a year for a grant of R260 a month, and that this would only be for the 6.5 million people who received the SRD grant at the height of the relief provided in 2020.

Finally, the much-quoted critical Presidential Economic Advisory Council note did not actually throw the baby out with the bathwater, so to speak. It ended with the caution that the report of the Expert Panel “should be subject to peer review as well as an affordability and economic impact assessment to give policy makers deeper insight into the various macroeconomic implications of the Panel’s proposals”.

Given the heated debate and the height of emotion around the topic, with social activists on one side and cautious economists on the other, it is most unlikely that the basic income support motion will gain any traction in the next month. However, all eyes will definitely be on Ramaphosa when he makes his State of the Nation Address later this month.

In the past three years, we have seen the president is a man of caution who makes measured decisions — often to the frustration of those impatient for change.

The timing of the two leaked presidential advisory notes, and the fact that such documents have never been leaked before, points to advisers trying to stir up debate and push the president into action.

Ramaphosa might sidestep the issue completely, but the greater likelihood is that he will touch on the topic briefly — without making  a commitment either way — effectively kicking the can down the road. BM/DM

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