Ajoint National Treasury/University of Cape Town (UCT) study into the feasibility of replacing or extending the special Covid social relief of distress (SRD) grant has set the cat among the pigeons.
Civil society organisations are in a froth after presidency officials used the report’s findings to suggest, in a draft antipoverty strategy document, that the SRD grant be replaced with a pilot project to test the feasibility of an entirely new grant formulation — the family poverty grant (FPG).
Two contributors to the report, Joshua Budlender and Ihsaan Bassier, of UCT’s Southern Africa labour & development research unit (Saldru), upped the ante with a piece in the Daily Maverick this month, stressing the implausibility of implementing a family or household-type grant in SA.
Economists fear the controversy may have killed the FPG. The Treasury declined to say, in response to questions from the FM, if it has backed away from the proposed pilot and dropped the idea of a household grant.
If it has, the alternative policy options may not be that palatable either. "Simulation of Options to Replace the SRD Grant and Close the Poverty Gap at the Food Poverty Line" (a working paper under the SA-TIED programme) reveals how costly any fully fledged social grant for all unemployed adults would be (see table).
According to the research, the R40bn-a-year price tag for the existing SRD grant would probably be just the start, since it erroneously excludes up to 30% of eligible applicants. Moreover, at just R350 a month, it is set far too low for someone in deep poverty.
This suggests that if it is retained there will be constant pressure to increase the size of the benefit. Already the department of social development is asking for a budget of R50bn for the grant to be extended in 2022/2023.
If it were extended from the current 9.5-million beneficiaries to all unemployed working-age adults, who are excluded from the current social grant system and earn below the food poverty line (FPL) of R624 a person a month, the cost would hit almost R71bn a year.
It would be so expensive because almost 17-million working-age adults lack formal employment and so earn little, if any, income at all.
However, going this route would inflate SA’s R256bn social welfare bill by almost 30% at a time when the Treasury is budgeting for steep across-the-board spending cuts to stabilise the debt ratio.
To put the cost in perspective, a one percentage point increase in personal income tax rates would deliver only an extra R10bn in revenue a year, while a one percentage point increase in the VAT rate would generate about R20bn.
The 2021 medium-term budget policy statement assumes the SRD grant will expire as planned in March 2022. But, given the intense pressure on the government to retain it, the Treasury has understandably been on the hunt for alternatives.
It was attracted by the effective way Brazil’s Bolsa Familia programme reaches the extremely poor. To understand it better, the researchers caucused with a team of Brazilian experts put together by the World Bank.
The upshot is the tightly focused household grant, the FPG, modelled in the report at the Treasury’s suggestion. It would be a first for SA in that the benefit would go to households not individuals. It would be targeted at families in SA’s two poorest deciles who have a per capita income below R624 a month.
In its simplest form, a benefit of R460 would be paid to each working-age adult in each eligible household, but it could be topped up, depending on the number of children in the family, to ensure that each household member receives an income of R624.
On average, the FPG model would provide SA’s poorest 5-million households with about R1,000 a month for a total cost of R59bn a year.
In the report, grants are scored on their "effectiveness" in reducing the gap or shortfall below the poverty line (taken as an average across the population), and their theoretical "efficiency" in terms of poverty reduction.
The latter depends on the portion of the grant’s budget that goes directly towards increasing incomes of people who earn below the poverty line. The greater the proportion spent on people above the line, the less effective the grant is judged to be.
On these metrics, the FPG is by far the most efficient of the five options studied, as it directs the largest share of its expenditure (56%) towards reducing extreme food poverty. This reflects the fact that the grant uses a means test to directly target the poorest households. It is also highly effective in that it reduces the FPL poverty gap by a hefty 73%.
The expanded R71bn SRD comes second. Only 35% of the grant goes towards reducing extreme food poverty since it is not as well targeted towards the lower-income deciles. It would reduce the FPL poverty gap by 55%.
By contrast, a universal basic income grant (UBIG), paying out about R600 a month to almost 30-million people at a cost of R200bn-plus a year, would be the least targeted. So it would be the least efficient option for reducing extreme food poverty.
Even with a claw-back mechanism, through which the value of the grant is reclaimed from all registered taxpayers earning more than R3,808 a month, only 19% of UBIG spending would go towards reducing extreme food poverty.
It would also be the most expensive. However, due to the sheer numbers of grant recipients and the size of the budget, a UBIG would reduce the FPL gap by more than 85%. It would also be easier to implement, as it would be paid to everyone without recourse to means testing.
Any pilot should absolutely not come as a replacement to the [social relief of distress grant], but on top of it until we know it is working well
— Maya Goldman
The FPG would, by contrast, be a nightmare to administer — a feature that could swiftly erode its efficiency advantage and blow its budget.
The report words it more politely, warning that there would be "acute implementation difficulties" associated with a household grant in that the government would need to know the income of each member of a household and precisely which individuals live in which households. This means a household means-testing process and a household registry would need to be created from scratch.
Only, such a registry would be "exceedingly difficult and contentious in a country characterised by high rates of migrant labour, extended family support networks, high rates of household dissolution and re-formation, and large populations living in informal settlements", says the report.
Given these drawbacks, the report concludes that the modified SRD grant represents "a middle ground between the highly efficient but potentially unfeasible FPG, and the inefficient but likely more feasible BIG".
This is not to say it recommends the SRD grant as SA’s best option.
"We don’t know what would be the best option without more research," says the lead author, Saldru research economist Maya Goldman. "But it’s less risky than starting a completely new grant with implementation challenges, and it is cheaper and more efficient than a UBIG."
Goldman doesn’t think an FPG is a complete nonstarter, noting that the World Bank team involved in implementing the Bolsa Familia describes it as "highly accurate". But she remains sceptical. In Brazil, municipalities identify who gets the grant — in SA many municipalities have struggled just to maintain the indigency registers for the free basic services policy.
She feels a lot more research is needed before embarking on an FPG pilot programme. But, most importantly, she says "any pilot should absolutely not come as a replacement to the SRD, but on top of it until we know that it is working well".
Other options considered in the report include topping up the child support grant to R623 a child at the cost of R28bn a year, and expanding existing public employment programmes to cover 2-million people at the cost of R35m — both of which come with various pros and cons.
There is a strong push from civil society for the SRD grant to be made permanent and, given President Cyril Ramaphosa’s apparent preference for doing so, it seems likely it will be extended into 2022, even if only for a year at a time, subject to affordability.
Though this would be a victory for civil society, given the Treasury’s historic opposition to instituting any permanent grant for unemployed adults, it would fail to significantly reduce extreme poverty if set at R350 a month. And even then, it would need to be funded through steep tax hikes which could be growth-sapping.
A report by an expert panel commissioned by the department of social development into the affordability of various grant options is due in mid-December. It is expected to spell out the tax implications of the various options in detail and is bound to be a sobering read.
The bottom line is that huge budgetary trade-offs will be required if SA pursues the goal of extending the welfare net to unemployed adults. And, if the intervention is poorly designed, the country may achieve little poverty reduction in return.
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