GILAD ISAACS: Study’s conclusion that a BIG is more pain than gain is not credible

Business Unity SA (Busa), with the support of Business Leadership SA (BLSA), recently launched a research report authored by consulting firm Intellidex, that focused on the funding options for a basic income grant (BIG) in SA (“VAT hike to 17% is ‘the least bad option’ to fund BIG, research shows”, July 25). The report is a more thorough analysis of funding options for a BIG than the hatchet job published by Intellidex in 2021. 

However, like the original report it spends some time critiquing work by the Institute for Economic Justice (IEJ). This is part of what motivates this response. But more importantly, the IEJ is concerned that business is being poorly advised on an issue of critical national importance. For a powerful constituency to be presented a narrow, and carefully curated, slice of the “evidence” is dangerous for constructive social dialogue.

This article offers a brief summary of the key weaknesses in the Intellidex report — the IEJ will be approaching Busa and BLSA for further engagement. Throughout the report Intellidex selects evidence to support predetermined positions. These are: that SA is overtaxed; that a tax-financed BIG would do more harm than good; and that there is no fiscal space for increased borrowing.

This selective approach to research is the case for some of the statistical data presented. For example, whereas academics writing for the World Bank conclude the SA tax system is, overall, only “slightly progressive”, the Intellidex report stresses the “very progressive” nature of personal income tax, fails to view this in combination with indirect taxation, and leaves the reader with an erroneous impression.

Similarly, wanting to present corporates as heavily taxed, it argues that “comparing effective rates is not really possible”. This is not the case. The Organisation for Economic Co-operation & Development (OECD) and World Bank offer credible effective corporate tax rate databases that show SA corporates face favourable tax rates by global standards. These are only some of a the lengthy list of such “small”, but significant, cherry-picking of statistics that undermines the credibility of the report.

While the report makes the dubious sweeping claim that “high taxes tend to result in slower economic growth”, it does, to its credit, acknowledge that the question of whether to raise taxes to fund a BIG must be viewed in light of the potential economic benefits to be gained. Yet it is precisely in purporting to analyse both the evidence for and against a BIG that the report makes its most egregious errors.

It tackles this question on the narrow basis of comparing “tax multipliers” with “spending multipliers”, that is the (purported negative) impact of tax increases versus the (supposed positive) impact of additional spending. It concludes: “The most recent evidence is unequivocal and concludes that tax multipliers in SA are larger than spending multipliers.” This is concluded primarily on the basis of one research paper.

While this paper is the most direct comparison between tax and spending multipliers, its spending multipliers are disputed by other work, including that published (more recently) by the SA Reserve Bank. The Bank work, also admittedly only one study used to make this point, finds spending multipliers in a recessionary environment are higher than the tax multipliers upon which Intellidex relies. The methodologies are different, the two may not be directly comparable, and estimating multipliers is notoriously difficult, but Intellidex’s claim that the “evidence is unequivocal” is pure fantasy.

More importantly for any meaningful consideration of the merits of a BIG is that a generic spending multiplier, which by definition aggregates across different types of government spending, does not really tell us anything useful about this particular policy intervention.

In a comprehensive analysis conducted for Economic Research Southern Africa of the existing evidence on social transfer expenditure, IEJ researchers find compelling evidence that similar schemes meaningfully reduce structural poverty. On the narrow question of multipliers, in trials in Zambia, Namibia,  Ethiopia, and elsewhere in Africa, and modelling in Rwanda, Colombia, Costa Rica, Ghana, India, Serbia and Georgia, the positive multiplier effects were many times larger than the negative tax multipliers referenced by Intellidex. It chose to ignore this evidence.

The evidence also suggests manifold other benefits. These include: a reduction of growth-retarding income poverty; increased labour market participation; improved physical, child and mental health; greater economic empowerment for women; expanded self-employment and productive activities; improvements to education and skills acquisition; and strengthened social cohesion. The Intellidex report unfortunately fails to engage with any of this evidence.

This is not to argue that the implementation of a BIG is not a complicated policy decision, but rather that the consideration of such should be based on a thorough engagement with the available evidence. To be clear, it is legitimate for Intellidex to want to focus on financing in particular. But the conclusion — that a BIG is more pain than gain — is not credible if it purports to consider the “net effect”, that is to also take account of the possible benefits, and then proceeds to do so on a narrow and partial basis.

Potential positives

The report’s treatment of the question of debt financing, while thoughtful, is equally flawed. In line with the above the potential positive implications for government finances through tax multipliers are not interrogated.

In part, the report falls back on crude economic assumptions that increased debt will “crowd out” private investment. This imagines an economy where the government competes with the private sector for access to a predetermined local pot of “savings” rather than the reality of government accessing funds from across the world and much of local business relying on bank credit. Such theoretical fallacies require further space to unpack.

All in all, the report does a poor job in equipping social partners to have a nuanced conversation about the potential risks and gains of a policy proposal that both looks likely to be adopted, and one that could have major benefits for society, including business. In this respect it does Busa and BLSA a disservice.

• Isaacs is director of the Institute for Economic Justice.