Basic income grant modelling shows how to do it as a boost to the economy

Research presented by the Institute for Economic Justice (IEJ) and Applied Development Research Solutions (ADRS) at a recent IEJ and Human Sciences Research Council (HSRC) symposium models the macroeconomic effects of three (low, medium and high ambition) pathways towards realising a comprehensive basic income grant (BIG) in SA by 2030.  

The results are extremely encouraging. The modelling showed the positive effects of BIG in all three scenarios, on key economic indicators including GDP growth, the unemployment rate, poverty, inequality and the debt-to-GDP ratio. However, in March Business Day ran an opinion piece that was highly critical of the continued IEJ-ADRS research (“When BIG is neither bigger nor better”, March 14).

We welcome engagement with our work, but the authors unfortunately misrepresented critical elements of our (as yet unpublished) research. These misrepresentations seem designed for shock value, and to discredit our calls for comprehensive social security. 

The lead modeller of the scenarios, Asghar Adelzadeh, has refuted various aspects of this ill-considered critique (“Fear-mongering critique of BIG research based on misinformation”, March 23). We do not plan to repeat all the misrepresentations he identifies, but will unpack some supplementary issues. 

The critique of our work hinges on the core claim that the cost is simply too high, which the authors present as between R275bn and R500bn per year. While we do not shy away from a BIG being a major policy commitment, this presentation is mischievous.  

The figures they cite are for 2030, not 2023. If we assume annual inflation of 5% between now and then the cost in 2023 rand is about a third less (about R195bn to R365bn). Moreover, we do not propose this as a starting point, that would be a huge shock to the economy.  

Rather, we model a gradually increasing and expanding BIG over a seven-year time frame. Our scenarios start with costs of between R40bn and R100bn — this builds on allocations for the social relief of distress (SRD) grant, which in 2022/23 were R44bn. 

The phased-in nature of our scenarios allows for settings to be adjusted, or the process to be paused or elongated in response to economic conditions. Moreover, it allows for the economic benefits of a BIG to kick in over time, to help offset a sizeable proportion of the cost of the grant. Importantly, and contrary to the authors’ misleading assertions, this phasing-in dampens, and allows for the monitoring of, any “tax shock”. 

The authors also take aim at the manner in which we propose the grant be financed. In the model the grant is largely funded by increased tax revenue (including a wealth tax and a social security tax). This includes progressively targeting more wealthy people in our society. The manner in which the authors misrepresent these proposals — their level and who they apply to, as well as ignoring the role of VAT receipts — is largely dealt with in Adelzadeh’s response. 

However, it is worth noting two additional points. First, there are countries that tax wealth at a higher rate than SA, with sustained benefits. Despite that, increasing taxes to fund a BIG is not a proposal we make lightly, but with full recognition of the scale and entrenched nature of poverty in SA, which flows from our historically unequal distribution of wealth.

Second, while the model is illustrative of the feasibility of financing the three pathways, the choice of tax instruments, and the exact sequencing of such taxes, need further interrogation. Modelling is, by nature, exploratory, and not prescriptive. 

Another central claim made by opponents of BIG, including these authors, is that a BIG cannot promote economic growth in SA, contradicting the IEJ-ADRS model’s results. This sweeping claim chooses to ignore the extensive real-world evidence on the effects of “unconditional cash transfers” or government grants, in low- and middle-income countries.

A wealth of evidence shows that grants boost consumer spending, especially in poor communities, in turn supporting local businesses, employment, and government revenue. Cash transfers have been shown to have significant multiplier effects, whereby each dollar spent boosts incomes above the grant value and creates a return on investment for the economy. For instance, in Zambia, a cash transfer created an increase in household spending of 67% above the value of the grant. In Ghana and Kenya, cash transfers increased local incomes by a multiplier of 2.5 and 2.6 respectively.  

Emerging research is also demonstrating related effects in SA, even as a result of the small SRD grant. For instance, receipt of the SRD increased the probability of employment by three percentage points; and the grant stimulated customer spending, provided capital to purchase stock, and enabled new businesses to be initiated. This lends credence to the modelling results that demonstrate the economic growth effects of basic income transfers.  

The critics suggest SA needs to focus on creating employment and improving infrastructure to deal with our crisis, rather than grants. We wholeheartedly agree with the need to create jobs and fix our infrastructure. But this is not mutually exclusive with expanding social security. Poverty and economic exclusion are significant drags on our economy.

People cannot build sustainable livelihoods or step onto the career ladder — indeed, they cannot become income taxpayers — until their most basic needs are met. A BIG provides a desperately needed catalyst for economic activity. In the most unequal country in the world, “trading off” a social safety net with the narrow interests of certain private sector players is simply unacceptable. 

Our work demonstrates thoroughly and systematically that prioritising redistribution and the interests of poor people is not only a question of justice in an historically unjust and unequal country, but is also critical to SA’s sustainable development and the interests of the country at large.  

This is not a hypothetical debate — SA is already on the path to introducing a BIG. Basic income support has been adopted as the official policy of the governing ANC, and President Cyril Ramaphosa has repeatedly indicated that the government is committed to making it a reality. It is critical that this policy work is informed by robust evidence, and this was the key impetus for us undertaking research into pathways to a BIG in SA, and their effects. 

As we have argued elsewhere, the logic of growing the economy in the hope that it will come to include people is flawed — to grow the economy we must include people from the start. We do not claim that the policy solutions we propose are not bold, or that they do not carry costs. However, the weight of evidence points to their efficacy and impact across a range of social and economic indicators.

Meanwhile, the cost of conservatism, austerity and inaction in the face of worsening hunger, deprivation and anger is simply too high to contemplate. 

• The authors are with the Institute for Economic Justice.