/ 19 December 2023

Basic income grant: Peering beyond the endless impossibilities

Gettyimages 894667876 612x612
A vendor counts out rand banknotes while working in an African craft market in South Africa. Photographer: Waldo Swiegers/Bloomberg

Some months ago, a leaked presentation that appeared to have been drafted by the treasury made the rounds among journalists and analysts.

The document set out various funding options for an extended Covid-19 social relief of distress grant, which is viewed as having laid the foundations for universal income support, something that has been publicly debated for 26 years.

Funding the R350 grant, the presentation posed, could require closing several government programmes or raising VAT to 17%. In the absence of a long-term financing solution, extending the grant for a year would require a comprehensive review of the social grant system, according to the presentation.

Considering South Africa’s economic predicament — which is characterised by very low economic growth and very high levels of inequality — any one of these options would be untenable.

Since its introduction, discussion about the grant’s future has focussed on the trade-offs it would precipitate. And whatever pain a basic income grant would inflict would inevitably be felt most acutely by those most vulnerable to economic turbulence.

But this type of thinking does little to move us forward, instead trapping our economy in a state of endless impossibilities.

Last week, research by Applied Development Research Solutions (ADRS) and the Institute for Economic Justice (IEJ) showed that, when it comes to a basic income grant, South Africa does have options. Mind you, this report isn’t the first to offer this insight, instead adding to a growing body of literature that contradicts a more fatalistic view of the country’s overburdened fiscus.

Speaking at the launch of the report, ADRS director and chief economic modeller Asghar Adelzadeh noted that some might question the need for another review of the basic income grant’s potential effects.

He suggested that the models used by the treasury, the department of social development and others have tended to be limited by a set of macroeconomic assumptions. Moreover, these simulations fail to take into account changes to the economy as well as eligibility and entitlement over time.

The ADRS-IEJ research goes into this dilemma a bit more, pointing to what it deems “mainstream economic tools”, such as the Computable General Equilibrium and Dynamic Stochastic General Equilibrium modelling, which normally predict that a basic income grant will ultimately hamstring the economy — leading to substantially higher borrowing costs and debt-GDP ratio, as well as a lower investment, output and employment. 

In reality, however, these models are built to reflect a neoclassical view of a market economy, the paper notes. This view suffers from a number of interrelated fallacies about macroeconomics, such as the theory that modelling must reflect “rational expectations”.

Describing what he viewed as the “irremediable flaws” of economic modelling, Dutch economist Servaas Storm wrote: “Each flaw is fatal on its own. Taken together, they constitute an unbearable pomposity that is asphyxiating modern macroeconomics.”

The model on which this new research relies shows that a basic income grant can instead have a win-win effect, significantly reducing poverty and inequality while also increasing economic growth and employment.

Its simulations show that a basic income grant can be funded without changes to the income tax or VAT, each of which would be difficult to bear by already pinched consumers. 

Instead, it could be funded through a combination of a relatively small wealth tax and a social security tax, which would be collected from all formal employment wages. These would bypass the need to finance the grant through expanded borrowing or by restructuring the budget, which have proven undesirable in the wake of tight financial conditions and the already deleterious effect of fiscal consolidation on state capacity.

According to the research, a well-designed basic income grant would stimulate demand in the economy, triggering higher output, investment, employment and income. Growth in domestic expenditure will in turn generate higher revenues from VAT, which could be used to finance the new grant.

Also speaking at the report’s launch, the IEJ’s Gilad Isaacs drew parallels to a previous effort to develop a more just economic policy framework in South Africa through the national minimum wage — which was formulated with contributions by the ADRS and the IEJ in mind. “We are confronted with a situation where the conventional wisdom is that a policy that is pro-poor, that is pro-development, is then classed as being unsustainable and having negative macroeconomic outcomes,” Isaacs said.

But the national minimum wage’s promised economic blow never came to bear and its effect was far more closely aligned to the ADRS’ projections, according to Isaacs.

Isaacs noted that the ADRS-IEJ basic income support modelling does not take into account the deliberate obstacles which have curtailed access to the social relief of distress grant. Even before the economy takes the first step down the modelled pathways, “we already have one foot tied to the bannister”, he added.

“And actually walking these pathways is increasingly difficult.”

The lesson is that policymakers ought to take the broadest view possible of the problems in front of them as well as their solutions. Doing so allows them to look beyond the limits of conventional paradigms which have done little to put the economy on a better track, instead leaving it in a state of inertia.