MPHO MOLOPYANE: Not adding up: the basic income grant dilemma

With 50% of SA’s population unemployed, government has come under increasing pressure to extend its social security programme and implement a basic income grant (BIG). But how much is a BIG likely to cost, what are the funding options and what impact will it have on an increasingly stretched fiscus?

For this analysis let’s assume the Covid-19 Social Relief of Distress (SRD) grant in its current form is extended to form the basis of the BIG and all unemployed individuals are eligible. We assume that the number of people eligible for the BIG will be about 10.1-million — an average of the official and expanded definition of unemployment. The assumption also considers that those older than 60 would not be eligible for the BIG as they can apply for the old age grant, while those under 18 would be eligible for the children’s grant.

Proponents of the BIG have argued that the grant be set either at the food poverty line (FPL), lower-bound poverty line (LBPL) or upper-bound poverty line (UBPL) — this corresponds to an amount of R624, R890 and R1,335 per person per month respectively, based on Stats SA’s 2021 poverty lines.

In the initial year of implementation the BIG would cost R75.4bn to R161.2bn, depending on whether it is offered at the FPL or the UBPL. However, this cost increases to between R104bn and R223bn by year five. This is based on the grant increasing in line with inflation and the number of unemployed recipients increasing by 3.7% per annum — in line with the historical average (2011-2020) growth rate of unemployed people using the expanded definition. This highlights how quickly the cost of a BIG can escalate.

Given our estimated commodities-induced tax revenue windfall and what’s left of it after adjusting for a marginal increase in public sector wages, implementing a BIG at the FPL in a deficit-neutral manner would only require an additional R31.5bn in tax revenue or expenditure cuts over the medium-term expenditure framework (MTEF: FY22/23 to FY24/25). However, the required amount increases to R125bn and R301bn if the BIG is implemented at the LBPL and UBPL respectively.

Previous tax revenue proposals indicate that the National Treasury can raise the R31.5bn by providing partial fiscal drag relief, with no inflation adjustments to the top four income tax brackets and below-inflation adjustments to the bottom three brackets, as well as above-inflation increases in excise duties and fuel levies.

However, to generate additional tax revenue of R125bn and R301bn needed to fund a BIG at the LBPL and UBPL would be significantly more difficult. For instance, the SA Revenue Service puts the estimated increase in VAT revenue resulting from the one percentage point increase in the VAT rate from 14% to 15% in FY18/19 at about R16bn. This suggests that implementing a BIG at the LBPL or UBPL would require substantial increases in various tax rates.

Raising taxes

It is unlikely that the required amount can be raised by just increasing the tax burden. Evidence shows that as the tax burden (tax revenue as a percentage of GDP) increases, the marginal change in tax revenue diminishes and is likely to turn negative at some point.

Raising taxes can also have negative and unintended consequences on the tax base, tax compliance and GDP growth, which could result in lower tax revenue. SA’s personal income tax and corporate income tax rates are relatively high in comparison to international rates. Increasing corporate rates may make SA uncompetitive relative to peer countries and lead to base erosion and profit shifting.

Supporters of a BIG argue it would lift consumption and thereby raise the amount of VAT collected, implying that the BIG expenditure can be recouped by the increase in VAT revenue. They also expect the lift in overall GDP to lift total tax revenue, with the BIG eventually funding itself.

However, while a BIG is likely to raise consumption and thereby GDP growth, this will be countered by the increase in the tax burden. Higher taxes reduce disposable income and corporate profits and thereby reduce consumption and investment spending, resulting in lower GDP growth.

Another unintended impact is that if perceived negatively by investors the implementation of a BIG could raise bond yields, leading to an increase in government’s debt service cost and in turn reduce public sector capital expenditure. Higher bond yields are also likely to raise the country’s borrowing costs — a negative for private sector investment and overall GDP growth.

Overall, a BIG at the FPL seems viable over the MTEF, as it could probably be funded in a deficit-neutral manner. This is assuming the impact on GDP growth will be positive and the implementation is not perceived negatively by investors — this is a key assumption and a source of great uncertainty. However, if government continues to delay the structural reform agenda, a BIG can become unviable even at the FPL.

A BIG at the LBPL or UBPL is highly unlikely to be funded in a deficit-neutral manner and without raising the tax burden enormously — a negative for GDP growth. If done, the debt trajectory would remain on an upward trend — further raising SA’s risk premium. The unintended consequences of this would be higher debt-service costs that detract from government social and investment expenditure.

• Molopyane is an economist at RMB.