/ 8 February 2022

The BIG debate: Would new social grants compromise economic growth?

Sassa Glitch Delays Grant Funds For Some Beneficiaries And Double Pays Others
A general view of senior citizens queuing for their monthly social grants outside Jabulani Mall on May 04, 2020 in Soweto, South Africa. (Gallo Images/ER Lombard)

With less than two weeks until Enoch Godongwana makes his maiden budget speech, no subject has generated more controversy among commentators than the basic income grant, calls for which the finance minister will eventually have to answer.

About two weeks ago the president’s economic advisory council entered the fray, although perhaps not on its own terms, when two briefing notes reportedly containing conflicting views on the grant were leaked to the media.

The basic income grant debate has been dominated by two sects. One extols the grant as a way of rescuing the legion of South Africa’s poor and jobless from falling through the widening wealth gap. The other says the grant, and the various fiscal and tax-related contortions the budget would have to endure to make it happen, could throw cold water on economic growth.

For the latter group, economic growth is the lodestar. But others point out that GDP gains rarely trickle down and that now — in the fallout from the Covid-19 pandemic — is the time to reimagine South Africa’s economy.

At the heart of the grants conundrum is South Africa’s inequality problem, which the country has been saddled with throughout the 20th and 21st centuries. 

Legacy of inequality

Since the end of apartheid, experts have pointed out, the government has expanded its fiscal toolkit to address inequality through budgetary interventions in taxation and expenditure. But progress has been slow.

According to the 2022 World Inequality Report, since the end of apartheid, “extreme economic inequalities have persisted and been exacerbated”. 

The richest South Africans have wealth levels broadly comparable with those of affluent Western Europeans, but the bottom 50% in South Africa own no wealth, the report notes. The top 10% own close to 86% of total wealth and the share of the bottom 50% is negative.

A recent special report by the Southern Africa-Towards Inclusive Economic Development  programme considers how to “turn the tide on inequality”. The report brings together research that has been done over the years to inform economic policy.

The report notes that some of the most influential social science of the past decade shows that inequality works to embed social exclusion and chronic poverty. Economic growth, the report points out, “can sometimes lift all boats and eradicate poverty, but in other contexts leave the poor increasingly marginalised”.

Maya Goldman, an economist at the Southern African Labour and Development Research Unit, said it may very well be possible to turn the tide of inequality in countries with huge wealth gaps, such as South Africa, with policy interventions — “but it almost never happens”.

“And the reason for that is, in a very unequal society, the rich have a disproportionate influence on policy. And they believe that it is not in their interest to change that … Stanford professor Walter Scheidel argues that usually what ends up changing the tides of inequality is war, revolution, state collapse and plague. This has to happen because the rich are resistant to resolving these things,” she said.

Economic consensus globally, and in South Africa in particular, is that economic growth comes before anything else, Goldman added.

“So we put forward a proposal to tax sugar. And the business community argue ‘No, we can’t tax sugar at such a high rate’ — even though we know what sugar is doing for the health and wellbeing of our people — because it will reduce economic growth. We prioritise giving inner-city spaces to developers over creating social housing for people, because it’s better for economic growth,” Goldman said.

“We allow unsafe levels of pollution in Mpumalanga and Gauteng, because we choose economic growth over a healthy, unpolluted air system. We choose GDP over providing

incentives to people to take care of their families, their children, the elderly … And those trade-offs are always going to impact the poor the most.”

The rich, Goldman noted, can move away from polluted spaces. “They can pay for bottled water, they can pay to send their kids to private schools, or put their parents into an old age home. So all of these things that are good for GDP, make the rich wealthier, and make the poor worse off in every way. But they’re not good for any of us really, as a society.”

What will Finance Minister Enoch Godongwana response be to calls for a basic income grant? (Dwayne Senior/Bloomberg via Getty Images)

She referred to economic anthropologist Jason Hickel, who found that, of all the income generated by global GDP growth between 1999 and 2008, the poorest 60% of humanity received only 5% of it. 

Economic growth, Goldman said, is not trickling down. “And yet we continue to act as if it will.”

South Africa, she argued, needs to find a new indicator to determine the health of the economy. “It is not that GDP necessarily needs to be discarded, but it shouldn’t be the primary indicator.”

But Martyn Davies, Deloitte‘s managing director of emerging markets and Africa, is on the side that believes the old adage “rising tide lifts all boats”. 

“Name one successful country, which is wealthy and defined by an embedded, crisis-resistant middle class, that has achieved that status without a strong GDP,” he said.

An International Monetary Fund working paper, published in March last year, came to a similar conclusion. The paper found that when the average GDP per capita rises, income in the lowest decile also increases and poverty falls.

Davies used Singapore as an example. The Southeast Asian city state rapidly developed after it won independence in 1965. With GDP growth at an average of 7.7%, Singapore went from being a low-income country to a high-income one.

Singapore, however, is now experiencing a widening inequality problem. According to the World Inequality Database, in the past six years, the top 10% of earners have held more than 46% of the country’s national income. 

Some people will inevitably benefit more than others, Davies said. “But the point is, the trickle down will happen. It always does. If companies profit, they will generate more business, employ more people and on we go.”

But South Africa’s current economic picture does not portray the dynamic Davies describes. In 2020 and 2021, the economy was set on the path of recovery. GDP grew, albeit from a low base. 

The latest forecast from the South African Reserve Bank puts the country’s GDP growth rate for 2021 at 4.8%. This figure was revised down from 5.2% because of the effects of the civil unrest last July, which swept through two of the country’s provinces.

Growth has not managed to outpace the speed of South Africa’s deepening unemployment crisis. In the third quarter of 2021, South Africa had an unemployment rate of 34.9%, the highest on record.

Independent economist Duma Gqubule said there is a relationship between economic growth and employment. But, for jobs to be created, the economy has to grow rapidly.

“Let’s say we have 6% growth, that will not be enough to create full employment by 2030,” he said. “There will still be many unemployed people by 2030, so you have to provide them with income support. You can’t expect them to starve while they wait for jobs.”

Gqubule noted one of the president’s economic advisory council’s leaked briefing notes, which said the country cannot grow itself out of poverty.

The briefing note against a basic income grant advises that it, and other similar mechanisms currently under consideration, “would constitute a significant economic policy error, which would undermine the country’s overall growth and employment creation objectives”.

The counter-view states: “We cannot feasibly grow our way out of poverty in any reasonable timeframe, and mass employment creation will realistically not happen overnight. Thus, pro-poor distributional change is required. Social protection is one of the ways of undertaking this.”

‘Populist sloganeering’

The presidency has warned that the effect of the leak “has been to allow for selective quotation from the document, often out of context, to support various agendas”.

Paying social protections, Gqubule added, will also stimulate the economy.

Dick Forslund, the senior economist at the Alternative Information and Development Centre, agreed. “Growth is also dependent on household spending … If you were to introduce a basic income grant, you will of course get a boost in demand for domestically produced goods and services.”

He called the narrative that pits grants against growth “populist sloganeering” used to further the upper-class agenda. “It has no insight into how the economy works and what economic demand means for growth.”

A report commissioned by the National Economic Development and Labour Council, released late last month, found that the grant could add 0.5% to GDP growth by 2025 by improving household demand.

Given the significance of the cost attached to a universal basic income grant, the report suggests looking into whether a wealth tax should be implemented.

If this happens people in the middle class and upper middle class will have to lower their consumption, Forslund noted. The upper class, he added, will have to lower their financial investments. 

“Because they can’t even consume all their income. They are using it for savings and investments, which is being circulated in the financial system. So, by introducing a basic income grant, you skew consumption to basic necessities.”

Forslund noted rapid economic growth can end up reproducing inequalities, because the wealth generated in periods of growth is not distributed into the real economy. “One reason for this is the growth of the finance industry … There is a general trend in the capitalist system of no longer investing in real things, but letting profit swirl around in the financial system.”

Although unemployment continued to spiral last year, 2021 was the best year for the JSE in more than a decade.

The government, Forslund added, is put in a fiscal dilemma when it wants to gain voter support from the majority, while also not spurning the rich. “You can’t be friends with everybody. And I think you should be friends with the majority.”