The ANC’s recent policy conference confirmed there is significant popular support for the introduction of a large, permanent basic income grant (BIG) for unemployed adults funded by a wealth tax on SA’s richest. If only it were that simple.
Given the ANC’s waning support, it seems plausible that whoever is president in 2023 will extend the temporary R350 a month special Covid social relief of distress (SRD) grant for at least another year, and possibly raise it as well, even if this conflicts with the advice of the National Treasury.
BIG proponents want the grant expanded to the food poverty line of R595 a month. If paid to all 27.5-million poor, unemployed adults, it would cost almost R200bn a year, against the R44bn cost of the SRD grant, which has been restricted to just over 10-million very poor individuals.
While a R595 BIG would halve income poverty at the food poverty line, it would also almost double SA’s social grants bill of R222bn. That already reaches 17-million people, having increased from 13% to 31% of the population over the past 15 years.
Business is beginning to resist the idea of a BIG, given the risk to the economy. SA has a narrow tax base and has been battling a crisis of low investment and slow growth for decades.
SA cannot rely on growth accelerating. Until it does, a BIG should be regarded as unaffordable
— What it means:
A new research paper by local consultancy Intellidex, commissioned by Business Unity SA (Busa) and Business Leadership SA (BLSA), says that while SA could, with difficulty, raise taxes to fund a BIG of R50bn-R100bn a year, it would be “unwise” to do so. In fact, it could easily make things worse, given the country’s fiscal fragility.
This is not only because a tax shock of this magnitude could hurt growth, but also because it would contradict the government’s objective of reducing public spending to stabilise the debt ratio, damaging its fiscal credibility.
The paper doesn’t dispute empirical studies showing that well-targeted income transfers directly reduce poverty. But it does stress that “a BIG will reduce poverty only to the extent that it is affordable and that its positive effects are not offset by any negative effect on the stability of SA’s public finances or on the pace of economic growth and job creation”.
“If a BIG worsens SA’s macroeconomic performance and destabilises our public finances, leading to default on debt or to rising inflation, the consequences for everyone — the poor very much included — will be very adverse,” it warns.
It is common cause that there are only three realistic ways to fund a BIG: by cutting other expenditure, issuing more debt, or raising taxes. Intellidex believes cutting expenditure is not viable as there is too little fat left after years of “top trimming” budgets, which have hurt service delivery.
Raising debt may have been easy in recent years when interest rates were low, but this is no longer the case.
This leaves raising taxes. In the absence of faster growth or an ongoing commodity boom, Intellidex argues that the only other option is to hike tax rates or levy new taxes.
But given how “remarkably narrow” SA’s tax base is, and that most tax rates are already high by international standards, any further hikes would need to be broad-based to ensure sustainability.
That rules out company income tax (CIT), which is considered too volatile, as well as a wealth tax, as it would have to be levied at exorbitant levels because the top 1% of taxpayers number only about 350,000 people.
In addition, there are enormous legal and administrative difficulties associated with implementing a wealth tax; it would distort investment decisions as capital was shifted into more lightly taxed asset classes, and it would likely cause significant capital flight.
This leaves personal income tax (PIT) and VAT as the only sustainable vehicles for raising substantial amounts of revenue. Each, however, comes with drawbacks.
Raising VAT is highly problematic politically, as it is the least progressive of SA’s taxes. However, relying solely on PIT would mean that the burden of funding a BIG would have to be shouldered not just by the rich, but even by the lower-middle-income classes.
Intellidex estimates that if only PIT were used to fund a R50bn BIG, each tax bracket would face an increase of at least 2.5 percentage points (pp), or double that to fund a R100bn BIG.
Similarly, a R50bn BIG, if funded solely through VAT, would require that the VAT rate be raised from 15% to 17%, while a R100bn BIG would take VAT to 19%.
If a combination of CIT, PIT and VAT were used to raise R50bn a year, then PIT would have to rise by 1.2pp at each tax bracket, CIT would climb from 27% to 29.5%, and VAT by 0.75pp.
Raising R100bn would necessitate increases of twice these amounts.
“Given the newest propositions for a BIG are closer to R300bn, the sheer impossibility to fund this within the current tax base becomes all too apparent,” concludes the report.
[BIG proponents] greatly underestimate the costs and risks of its implementation, sometimes to the point of complete denial that such costs exist. That position is untenable, and business needs to push back vigorously against it
— Intellidex
The deeper question is whether a BIG, which uses tax hikes to shift spending power from the affluent to the poor, would have net negative effects on growth and employment. For though low-income households that receive a BIG will consume more, higher-income households (and businesses) will consume (and invest) less when faced with significantly higher taxes.
In other words, would the benefits of increased tax revenues and redistribution be outweighed by the costs of forgone growth and jobs? So far, no researcher has been able to answer this question definitively, mainly because the modelling required to do so is extremely complex and the data required imperfect.
The Reserve Bank has taken a stab at it, using a model in which higher household consumption by grant recipients is offset by lower consumption by net taxpayers and a large decline in investment.
It estimates that in the event of a R100bn BIG, by year five SA’s GDP would be almost 1pp lower, and employment 2pp lower, than without it.
“The BIG is not an allocation of funds for a few years but a forever decision that must be carefully considered as, realistically, it cannot be undone once implemented,” says Busa CEO Cas Coovadia.
BLSA CEO Busi Mavuso agrees, saying there is so much at stake that “decisions must be based on meticulous research into how [a BIG] would be funded”.
Despite the empirical evidence warning against the hasty introduction of a BIG in the SA context, the debate remains emotional and polarised.
The pro-BIG Institute for Economic Justice (IEJ) at Wits University believes business is being “poorly advised” by Intellidex. The IEJ accuses the consultancy of presenting a “narrow, carefully curated” slice of the evidence — something that is “dangerous for constructive social dialogue”.
Intellidex is equally unimpressed by BIG proponents, saying they “greatly underestimate the costs and risks of its implementation, sometimes to the point of complete denial that such costs exist. That position is untenable, and business needs to push back vigorously against it.”
BIG proponents do not accept that SA is already overtaxed, that the net effect of a tax-financed BIG would be negative, or that there is no fiscal space for increased borrowing.
A report the department of social development (DSD) commissioned from a panel of academic experts falls partly into this camp. It urges the government to institute, as a “viable entry-level” option, a R181bn BIG paying R595 a month to 27.5-million people.
However, the DSD report’s fiscal chapters, by Wits University adjunct professor Michael Sachs, warn that a BIG funded through higher taxes could worsen SA’s fiscal crisis if it fails to simultaneously accelerate the growth rate — and there is little evidence to suggest that it will.
Sachs’s position chimes with that of business — that SA’s fiscal situation is already unsustainable and that, in the absence of faster growth, a large BIG will likely make the situation worse.
The Intellidex report concludes that “a BIG could induce so severe a set of second-round effects that its full effect will be to deepen poverty by making it harder for SA’s economy to grow”.
“SA’s public finances are already unsustainable and have already begun to grind the economy onto a lower growth path,” it states, adding: “The available evidence shows that the implementation of a BIG risks worsening this, with the only question being the extent of the deterioration.”
Intellidex urges business to resist any social compact in which it accepts the imposition of a BIG in exchange for the government committing to pro-growth structural reforms. This is both because the contemplated reforms are relatively modest and because other policy developments in SA are less growth-friendly.
“The bottom line,” it says, “is that it is far, far too early to ‘bank’ a growth acceleration, so prudence demands that … unless and until growth actually rises, a BIG should be regarded as unaffordable.”
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