DUMA GQUBULE: A case for implementing a basic income grant

“It’s the economy, stupid” was the slogan that got US president Bill Clinton elected in 1992 in a race against George Bush Snr. When I started working on the basic income grant (BIG) after the start of the pandemic three years ago, it soon became clear to me that it was primarily about the economy, stupid — not redistribution or reducing inequality, though it would help to achieve these two objectives.

If the BIG is about recovery, then we must let it rip and provide a first stimulus to an economy whose GDP per capita has not grown for 15 years. The BIG is sustainable within the context of a higher GDP growth rate. In my presentation “Vision 2035. A plan to achieve full employment in SA”, I make seven recommendations that will put the economy onto a sustainable path of higher GDP growth. 

But if the BIG is primarily about redistribution and reducing inequality it will be funded with higher taxes that will result in the retention of harmful austerity policies, impede the economic recovery and make it unaffordable. Nothing, let alone the BIG, is affordable within the context of austerity policies. Low GDP growth due to austerity would result in lower tax revenues and set off a vicious downward spiral, with endless cycles of budget cuts, lower revenues and more budget cuts.

My modelling for the Social Policy Initiative made conservative assumptions about the size of the stimulus effect and the fiscal multiplier — the additional GDP generated by each rand of new spend — which is critical to understanding the economics of the BIG. The modelling found that the BIG had a self-financing element and that 50% of the costs would return to the government through higher tax revenues due to the stimulus effect and a clawback from taxpayers. 

But a new game-changing paper by Daniel Cardoso and others at São Paulo University in Brazil suggests that the fiscal multipliers could be far higher than my conservative estimates. The paper, “The multiplier effects of government spending on social protection: a multi-country analysis”, is probably the most extensive study of the macroeconomic effects of social protection spending. 

It measures fiscal multipliers in 42 developed and developing countries using data from 1985 to 2020. The sample is of 30 high-income countries. There were also six upper-middle-income and five lower-middle-income countries and one low-income country. The paper finds that the cumulative multipliers over up to 12 quarters of social protection spending are higher than those of total government spending.

This is because social protection spending tends to be more targeted towards poorer groups — who have a high propensity to consume — than other types of government spending. In Keynesian models, the size of the multiplier depends on the marginal propensity to consume. 

Mexico’s cumulative multiplier was an astonishing 7.4 and in other middle- and low-income developing countries in the sample — Pakistan (5.1), Brazil (4.5), Ecuador (3.3), Cape Verde (2.7), Nepal (2.7) and Malawi (1.6) — social protection spending also had a large effect on GDP. In developed countries, Sweden (5.3), South Korea (4) and Denmark (2.6) had the highest social protection multipliers.   

The paper also finds that multipliers are significantly higher in more unequal countries — those where the income share of the poorest half of the population is smaller. This indicates a large macroeconomic benefit of increasing social protection spending in countries with high poverty levels. SA is the most unequal country in the world. The top 10% owns 86% of wealth and the share of the bottom 50% is negative, meaning this group has more debts than assets.

Since 1990, the average household wealth for the bottom 50% has remained under zero, according to the World Inequality Lab. These findings suggest SA could have a high social protection multiplier. This dramatically changes the economics of the BIG and boosts the case for implementing it.   

• Gqubule is research associate at the Social Policy Initiative.