/ 25 August 2022

OECD: How South Africa can afford the R350 grant permanently

Covid R350 Grant Applicant Veronicah Sehoke Photo Delwyn Verasamy
A woman applies for the special R350 Covid-19 grant. (Delwyn Verasamy/M&G)

The Organisation for Economic Co-operation and Development (OECD) has recommended that the South African government make the R350 grant a permanent feature of the country’s social protection system.

The OECD said this in its 2022 economic survey of South Africa, released on Thursday morning, which notes that risks to the country’s outlook remain high. This is as Covid-19’s after-effects continue to ripple through South Africa’s labour market and the country’s energy crisis and low levels of investment hit growth.

The so-called social relief of distress grant, which was introduced during the pandemic, is set to expire at the end of March 2023. 

At the beginning of August, the South African Social Security Agency received just under 12-million applications for the R350 grant, which has been the subject of public outcry following regulations that excluded some potential beneficiaries. Earlier this year, about 15-million people applied for the grant.

In his State of the Nation Address this year, President Cyril Ramaphosa said until then, the government would “engage in broad consultations and detailed technical work to identify the best options to replace this grant”.

“Any future support must pass the test of affordability and must not come at the expense of basic services or at the risk of unsustainable spending,” he added.

As the country continues to endure very high levels of unemployment — and as the social tensions seen last July threaten to boil over again amid the cost of living crisis — dropping the grant could be a dangerous political move for the ANC-led government, especially with national elections on the horizon.

According to data released this week, the country’s official unemployment rate was 33.9% in the second quarter of this year. Meanwhile, the unemployment rate among 15 to 24-year-olds was staggeringly high, at 61.4%.

The OECD has projected that unemployment will remain elevated into next year, hitting 34%. Prior to the pandemic, the unemployment rate was 30.1%.

In its survey, the OECD notes that making the grant permanent “should go along with reviewing and strengthening the overall social grant system to protect the most vulnerable individuals”. 

“In the context of limited budget space,” the OECD survey reads, “the government needs to strike a balance between increasing already high social transfer spending and increasing social cohesion in a very divided and unequal society.”

The OECD points out that a basic grant at R350 per month, covering 10.5-million people, would cost about R42-billion annually, representing around 19% of social grant spending.

There are different ways to accommodate this spending increase, which represents around 0.8% of South Africa’s GDP, the OECD states. 

Savings and strengthened public procurement procedures could offset part of this additional cost, it notes. The OECD also recommends increasing the value-added tax (VAT) rate, or broadening the basis of corporate and personal income taxes to support government revenue. 

South Africa’s VAT rate is relatively low, the OECD says, meaning there is additional scope to raise revenue through this mechanism. According to the OECD, lifting the rate by two percentage points could raise VAT revenue by around 1% of GDP. 

The concern, however, is that increasing the rate would hurt the poor and widen inequality. 

“To mitigate any potentially adverse distributional effects and to increase the political acceptability of a further VAT rate reform, it is preferable that any increase in the standard VAT rate be accompanied with increased transfers to low-income households and that efforts are increased to reach all low-income households,” the OECD survey reads. 

“If, in the future, the social relief grant covering all the unemployed working age people is permanent, it will allow for a further tailoring of the support to poor people when increasing the VAT rate.”

On the other hand, the corporate income tax rate is relatively high. At 28%, the rate is above the OECD average of 23%.

The OECD notes, however, that there is room to broaden the corporate income tax base, by redesigning tax deductions. This would help reduce the rate, while also improving revenue.

The same goes for revenue from personal income tax, which according to the OECD is undermined by sizeable tax deductions and allowances benefiting mostly high-income earners. 

“Tax allowances and deductions reduce the effective tax rate, and the progressivity of the personal income tax, as higher income-earners end up facing lower effective tax rates than middle-income earners. Tax allowances and deductions are substantial and, most importantly, regressive.”