President Cyril Ramaphosa delivers his State of the Nation address. (Dwayne Senior/Bloomberg via Getty Images)
A universal basic income grant is now firmly on the table — a development that couldn’t come sooner with the country’s unemployment and cost of living crises threatening to lay waste to the economy.
Last week, President Cyril Ramaphosa remarked in his state of the nation address that “work is underway to develop a mechanism for targeted basic income support for the most vulnerable, within our fiscal constraints”. The announcement comes as the government’s other efforts to inspire growth have failed dismally, leaving the poor more exposed than ever.
Though the president’s speech put Eskom at the top of his administration’s agenda, underlining how burdensome the power utility has become, the introduction of a basic income grant is now just as important to securing the country’s economic health. If it becomes a reality, the grant could be the single biggest step Ramaphosa’s administration has made towards achieving economic growth.
It is easy to accept that the energy crisis has a deleterious effect on the country’s economy. Last month, the South African Reserve Bank indicated as much when it warned that load-shedding could shave as much as two percentage points from the country’s growth in 2023. If the bank’s forecasts are correct, seeing 0.3% growth in 2023 and 0.7% in 2024, the country’s socio-economic conditions will deteriorate quickly.
For this reason, Ramaphosa’s speech was largely dedicated to his government’s cures to the energy crisis, which has chipped away at economic confidence, forcing investors to adopt a “wait and see” approach.
The president’s administration has pinned its hopes of growth on encouraging a wave of private sector investment, a scenario that has not yet come to bear — largely because of the slow pace of the government’s efforts to address structural constraints, like the energy crisis. And while the president’s speech was meant as a display of his administration’s resolve on the matter, it was clearly not enough to undo the private sector pessimism that has been building for the last five years.
Investec chief economist Annabel Bishop pointed out that, though the state of the nation address was comprehensive and positive in its messaging, it did not rouse markets. This was as the state’s poor track record for delivering on its promises has demanded continued cynicism.
Last Friday, ratings agency Moody’s warned that “South Africa’s longest-ever stretch of power cuts is credit negative”.
By Monday, the rand breached R18 to the US dollar, trading at its lowest level since mid-December 2022, amid rising concerns over the energy crisis and the country’s economic outlook. Eskom has, after all, said we’ll have to wait two years before its recovery plan bears fruit.
In response to the speech, Business Unity South Africa echoed the markets’ diffidence, stating that the address has failed to instil confidence in the government’s ability to operate efficiently and to account for inadequate performance and delivery.
Busi Mavuso, the chief executive of Business Leadership South Africa, also expressed her scepticism, mainly towards Ramaphosa’s announcement of a national state of disaster and of the appointment of a new electricity minister. Both interventions, Mavuso suggested, could disrupt the working relationship between government and business in solving the crisis.
What is evident from these responses is that, for whatever reason, the government continues to lose in its efforts to woo the private sector. Investors are still going to take some time to convince and — in the meantime — growth will continue to elude us.
According to a recent analysis by clearing house BankservAfrica, the Reserve Bank’s forecasts (measured against population growth) imply that on a per capita basis, the average South African citizen will become poorer in 2023.
Meanwhile, the country’s unemployment rate has remained stubbornly high. Without growth of about 5% per year, there is no hope of bringing down the unemployment rate to a more sustainable level.
It is no wonder then that, despite having played hardball on fiscal consolidation for some years now, the government has now started to show it increased willingness to budge on an intervention like the basic income grant.
Like load-shedding, the cost of living crisis also threatens growth and the Reserve Bank’s dire forecasts take into account modest levels of household spending. Household consumption accounts for about 60% of the country’s GDP.
After having painted itself into a corner, the government has been forced to admit that South Africans simply cannot continue to endure the onslaught of its failed economic policies. The government’s reform agenda has simply not managed to address the scale of the crisis before us and other options have to be considered seriously.
The enduring question, however, is how a basic income grant will be funded. The numerous reports that have been written these last three years have been preoccupied with answering this question, which has become a major sticking point for the government. In pursuing a financing regime — especially if it compromises the public purse — it stands to further alienate markets and investors who are worried about the country’s fiscal outlook.
However what tends to be brushed over, especially in public debates, is the basic income grant’s multiplier effects, the promise it holds of stimulating an economy in such dire need of defibrillation.
An early assessment of the social relief of distress grant found that, in its current form, it could add 0.5% to GDP each year. Certain other options have suggested the country’s annual GDP growth rate could be pushed beyond 5% with a higher basic income grant.
The government’s recent posture towards the basic income grant suggests it is less willing to discount its part in avoiding a further economic backslide.
Indeed, the country’s current economic conditions demand that the government use everything in its arsenal to arrest this crisis. A basic income grant could be the first step towards bringing back the growth that the country’s economy so desperately needs.
Its changed position on the basic income grant is hopefully an indication of the government’s genuine concern for the economy, and its impact on people’s livelihoods, rather than about the existential threat it poses to the ANC’s leadership. Afterall, this could be the difference between the government delivering a grant that has significant economic outcomes and one that is more limited in its design.