BIG expectations for 2023 budget speech
Experts have mixed views on the potential economic impact of a basic income grant (BIG) in South Africa ahead of the 2023 budget speech on Wednesday, 22 February.
In his recent state of the nation address, President Cyril Ramaphosa said that the social relief of distress (SRD) grant would be continued and increased to account for inflation.
The SRD grant is a temporary support grant of R350 that was issued during the Covid-19 pandemic but has been extended until March 2024.
Currently, 7.8 million people receive the SRD grant.
Rampahosa said the Minister of Finance would “set out” the SRD grant increase in his upcoming budget speech.
Absa senior economist Peter Worthington estimated that “if the minister grants a full inflation offset on the R350 per month grant since it was implemented in early 2020, it would have to be increased by 15%”.
Currently, around 60% of the country’s budget is spent on what is known as the “social wage”, and this 15% increase would require an additional R5 billion, he said.
The continuation of the SRD grant has sparked a conversation about implementing a permanent BIG modelled after this grant.
“Work is underway to develop a mechanism for targeted basic income support for the most vulnerable within our fiscal constraints,” said Ramaphosa.
“This will build on the innovation we have introduced through the SRD Grant, including linking the data that we have across government to make sure we reach all those who are in need.”
The ruling party has made its intention to implement this grant clear.
The ANC December 2022 policy conference concluded that the grant should be indexed to the lower-bound poverty line.
It is calculated by adding the mean amount that households whose total expenditure is close to the food poverty line spend on non-food items to the food poverty line.
Currently, the monthly lower-bound poverty line in South Africa is R945 per person, as per Statista.
The ANC conference also concluded that this grant should be financed through a wealth tax, closing tax loopholes, addressing base profit shifting by corporates, and a transactions tax to “foster economic empowerment”.
In December 2022, an expert panel report commissioned by the department of social development concluded that the Covid-19 SRD grant could be adopted permanently without sacrificing economic growth.
The models that this expert panel used showed that the SRD grant presented “limited economic and fiscal risks” and could even have a positive economic impact, said panel chair Alex van den Heever at the report’s launch.
The report also found that implementing a BIG would reduce inequality in the country, improving the Gini coefficient by 4.3%.
This coefficient measures disparities in income and consumption, and in 2022, South Africa had a Gini coefficient of 63, making it the most unequal country in the world.
However, an Intellidex study from July 2022 found that, while the grant will improve inequality, “any attempts to expand the budget with the status quo environment will damage debt dynamics further.
It will increase the unsustainability of the budget and shorten the runway to a fiscal or economic crisis”.
The study estimated that the cost of a BIG could range from R20 billion a year to R2 trillion.
If the government were to use tax increases to fund a BIG, South Africa could see the following tax increases, according to the study:
- Personal income tax would have to be raised by between 9% and 19%
- Value-added tax (VAT) would have to be raised by between 14% and 29%
- Corporate tax would need to be increased by between 24% and 47%
Such significant increases, the study said, would have a moderate to severe impact on economic growth.
One particular concern is the potential withdrawal from South Africa’s tax system through emigration, which poses a serious threat to the stability of the tax system.
The study concluded that the problems the South African economy faces are not due to a shortfall in demand – they are a result of increasingly urgent supply-side failures.
The structural factors and policy failures that are well documented and comprehensively diagnosed result in the absence of jobs which is key to households sustainably escaping poverty.
Momentum economist Sanisha Packirisamy and Momentum head of investment Herman van Papendorp argue against raising revenue for a BIG through higher taxes.
“Instead, addressing non-payment by wealthier individuals, collecting revenue lost through base erosion and profit shifting and recouping tax gains from illicit trade can contribute to plugging the gap,” they said.