New grant for South Africa is a done deal – and you will foot the bill for it: analyst

In 2020, the South African government introduced a Social Relief of Distress (SRD) grant of R350 to provide support for those who were particularly vulnerable to the impacts of the Covid pandemic.

With many South Africans becoming reliant on this grant, the writing is on the wall for the state, says analyst Michael Sachs.

The question is therefore not whether the grant will become a permanent fixture of South African economic policy, but how it will be designed to meet the needs of the population – and who will be picking up the cheque, he said.

Sachs is an adjunct professor at University of the Witwatersrand. He has held positions in government as the chief director of Fiscal Policy and the chief director of International Finance and Development, Currently, Sachs is the deputy chair of the Finance and Fiscal Commission – an advisory body to the South African government.

Speaking in PSG’s latest Think Big webinar, Sachs said the introduction of a basic income grant was now practically a given in South Africa.

“I would argue that the Basic Income Grant; or Basic Income Support as I prefer to refer to it, is (already) in effect – a done deal, and impossible to withdraw for a number of sociopolitical reasons.

“The question is how will this grant be designed in its evolution into prevailing South African policy, and what the parameters will be,” he said.

He noted that country has struggled with increasing mass unemployment and poverty since the onset of democracy, and that it is difficult to envisage a South African state that is able to sustain growth and development to a point where the entire population can be employed.

The R350 grant speaks to this inability to curb record-high unemployment by job creation and economic growth alone, he said.

“When we look at other grants – like child support and old age grants – we see evidence both globally and locally, that cash payments of this nature can serve as an enabler to encourage more people to participate in the local economy.

“R350 could cover taxi fare from a rural location into a city centre; for example, where someone could find employment that would otherwise be inaccessible. When debating this issue, therefore, it’s important to look at South Africa’s history and formulate a plan that considers our experience as a nation and our unique socioeconomic position.”

Taxpayers to foot the bill 

Sachs said the formal issuing of a Basic Income Grant will necessitate the raising of taxes – another inevitability.

The challenge for the government is how far taxes can be raised before the detrimental impact on job creation and growth begins to chip away at the economy, he said.

Value-Added Tax (VAT) and Personal Income Tax are the two most viable candidates for raising the quantum that is required to sustain a Basic Income grant, according to Sachs.

These two forms of tax are tried and tested methods of increasing tax revenue, as opposed to corporate income tax, which fluctuates quite significantly due to its cyclical nature and therefore does not provide the consistent revenue flow that is necessary to produce stability.

Instead of a singular focus on how tax can be increased and possibly how that tax burden can be shouldered by the wealthiest 1%, Sachs advocates for a broader solution that includes how South Africa can broaden the tax base. The redistributive approach of taxing the wealthiest South Africans is idealistic, but not necessarily practical.

Taking this approach could erode the tax base further if the affluent members of society decide to move their money offshore or emigrate.

“VAT, on the other hand, is more broadly distributed and could be a more progressive method of increasing tax revenue. The key is striking the delicate balance between redistributive policies and building a broader tax base that will help to sustain the economy in the long term.”

The haves and have nots 

Sachs referenced the philosophy of former president Thabo Mbeki, who stated that there are two societies and two economies within South Africa – that of the ‘haves,’ and that of the ‘have nots.’

In Sach’s opinion, current events have caused the country to go further down the path of division rather than moving towards solidarity and building an economy that everyone can contribute to.

The question for the government now is whether establishing a grant of this nature will serve to exacerbate or transform the societal divisions that separate South Africans, he said.

“These bigger picture questions are the ones that we need to answer if we are to work towards a sustainable fiscus and economic policy that builds us up in the long-term.”

Read: Treasury’s official proposals to lower South Africa’s petrol prices – including a fuel price cap

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