Basic income grant can stimulate South Africa’s economy

The government’s shameful decision not to pay the R350 a month social relief of distress grant during April and May and withhold R8-billion from 11 million people who had previously received it has highlighted the need for South Africa to introduce a basic income grant at the end of March 2023. 

In a statement, five civil society organisations said: “The minister has confirmed that while 13.4 million people in South Africa have no income and 18.3 million live below the food poverty line , the budget allocation for the social relief of distress grant inexplicably and unjustifiably provides for only 10.5 million people to receive assistance. This is 400 000 fewer than the number of approved applications in March 2022.” 

The treasury excluded people by introducing bureaucratic obstacles so that it could meet an arbitrary budget ceiling that was not based on any objective measure of poverty.

In a forthcoming paper, the Social Policy Initiative has considered two options from eight scenarios for implementing a basic income grant. While other research reports that have been published over the past two years propose various taxes to finance the implementation of a basic income grant, this initiative investigates the feasibility of implementing an unfunded basic income grant. 

“This,” the paper says “would provide the maximum possible stimulus to an economy that is reeling from the effects of a lost decade in terms of economic development between 2009 and 2019 during which GDP per capita did not grow and a once-in-a-century recession that decimated the livelihoods of millions of people. New taxes, depending on which ones are selected, can withdraw money from the economy and reduce the size of a stimulus and the efficacy of fiscal policy.” 

The first option of providing a basic income grant for adults aged 18 to 59 would cost an additional R374.8-billion over the three-year phased implementation period, assuming a 70% uptake — many people would elect not to receive the grant — and a clawback from taxpayers. 

After escalating the 2021 poverty lines by 5% a year, the basic income grant would be at the food poverty line of R655 a month during the first year in 2023-24, the lower poverty line of R982 during the second year in 2024-25 and the upper poverty line of R1 546 during the final year in 2025-26. This would provide a stimulus of between 1.7% and 2.6% of GDP a year over the implementation period, assuming fiscal multipliers of one and 1.5 respectively. 

A fiscal multiplier measures the additional GDP that is generated by each rand of additional government spending. Under this option, there would be a GDP growth rate of between 3.5% and 4.5% a year. 

The economy would create between 1.3 million and 1.6 million jobs — much higher than the 640 000 jobs that would be created under the treasury’s baseline forecast of 1.8% GDP growth a year during the implementation period.

The second preferred option — to also extend the basic income grant to children who currently receive a child support grant of R480 a month — would cost an additional R547.8-billion over three years. Under this option, the child support grant would increase to the food poverty line of R655 a month during the first year in 2023-24, the lower poverty line of R982 during the second year in 2024-25 and the upper poverty line of R1 546 during the final year in 2025-26. This would provide a first stimulus of between 2.5% and 3.8% of GDP a year over three years. 

There would be a GDP growth rate of between 4.3% and 5.6% a year. The economy would create between 1.6 million and 2.1 million jobs — much higher than the 640 000 jobs that would be created under the treasury’s baseline forecast of 1.8% GDP growth a year during the implementation period. 

This option would eliminate income poverty in three years, change the lives of millions of people and become by far South Africa’s most transformative policy since 1994. It would provide a first dignity floor below which no South African should fall. 

During the implementation period, the Social Policy Initiative says the government must also put in place measures to lock-in the higher GDP growth rate until 2030 and beyond through a second stimulus package that will significantly increase spending on infrastructure, industrial policies that will increase the employment intensity of GDP growth and public employment programmes. 

Most people would want a job after receiving basic income. A job guarantee at a living wage of R5 000 a month would provide a second dignity floor for private sector wages and lift millions of working people out of poverty as well as precarious and exploitative work. With a GDP growth target of 6% a year that is binding on the treasury and the Reserve Bank, the basic income grant would be affordable and sustainable.

In economic terms, the R547.8-billion cost of implementing the basic income grant and extending it to children would cost only 2.5% of an estimated GDP of more than R20-trillion during the three-year implementation period. “If a household found that it would only cost 2.5% of its income to eliminate black tax, it would pay the money without batting an eyelid.” 

Finally, the paper rejects the view that South Africa has a high debt to GDP ratio, even when benchmarked against similar upper-middle income countries. 

Although the treasury has projected the debt ratio to increase to 75.1% of GDP in 2024-25, the implementation of the preferred option would increase spending by R312.8-billion over the two-year period. The debt ratio would increase to between 77.5% and 78.2% of GDP. 

An increase in the debt ratio of between 2.4 and 3.1 percentage points would be a small price to pay for a policy that could eliminate income poverty and galvanise township economies in Soweto, Eldorado Park, Umlazi, Mdantsane and the Cape Flats. 

The conclusion is the first and second stimulus packages would provide a near-perfect solution after 28 years of policy dithering on unemployment, poverty and inequality. 

This solution would meet people’s basic needs, provide economic stimulus and lay the foundation for addressing unemployment through re-imagining the world of work as we recraft our economy to take us from dystopia to a credible and more inclusive future.

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Duma Gqubule
Duma Gqubule is a financial journalist, analyst, researcher and adviser on issues of economic development and transformation

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