In 2020, the South African government introduced a Social Distress Relief (SRD) grant of R350 to provide support to those who were particularly vulnerable to the impacts of the Covid pandemic.
With many South Africans becoming dependent on this subsidy, the writing is on the wall for the state, says analyst Michael Sachs.
The question therefore is not whether the subsidy will become a permanent feature of South African economic policy, but how it will be designed to meet the needs of the people – and who will cash the check, he said.
Sachs is an Adjunct Professor at the University of the Witwatersrand. He has held positions in government as Chief Director of Fiscal Policy and Chief Director of International Finance and Development. Currently, Sachs is Deputy Chairman of the Finance and Taxation Committee – an advisory body to the South African government.
Speaking at 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 say the Basic Income Grant; or Basic Income Support, as I prefer to call it, is (already) in – a done deal and impossible to withdraw for a number of socio-political reasons.
“The question is how this grant will be designed as it evolves into current South African policy, and what the parameters will be,” he said.
He noted that the country has struggled with rising mass unemployment and poverty since the start of democracy, and that it is difficult to envision a South African state capable of sustaining growth and development at a point where the whole population can be employed.
The R350 grant is a testament to this failure to reduce record unemployment through job creation and economic growth alone, he said.
“When we look at other subsidies – like child support and old-age allowances – we see evidence both globally and locally, that cash payments of this nature can act as a catalyst to encourage more people to participate in the local economy.
“R350 could cover taxi fares from a rural area to a city centre; for example, where someone might find a job that would otherwise be unreachable. When debating this issue, it is therefore important to look at South Africa’s history and formulate a plan that takes into account our experience as a nation and our unique socio-economic position.
Taxpayers will foot the bill
Sachs said officially issuing a basic income grant will require raising taxes — another inevitability.
The challenge for the government is how far taxes can be raised before the negative impact on job creation and growth begins to rattle the economy, he said.
Value-added tax (VAT) and personal income tax are the two most viable candidates for increasing the amount required to maintain a basic income subsidy, according to Sachs.
Both of these forms of taxes are proven methods of increasing tax revenue, as opposed to corporation tax, which fluctuates quite widely due to its cyclical nature and therefore does not provide the constant stream of revenue needed to ensure stability.
Instead of just focusing on how taxes can be raised and possibly how that tax burden can be borne by the top 1%, Sachs argues for a broader solution that includes how Africa of the South can broaden the tax base. The redistributive approach of taxing the wealthiest South Africans is idealistic, but not necessarily practical.
Adopting this approach could further erode the tax base if wealthy members of society decide to transfer their money abroad or emigrate.
“VAT, on the other hand, is more widely distributed and could be a more progressive method of raising tax revenue. The key is to strike the delicate balance between redistributive policies and building a broader tax base that will help sustain the economy over the long term.
The haves and the have-nots
Sachs referred to the philosophy of former President Thabo Mbeki, who said that there are two societies and two economies in South Africa – that of the ‘haves’ and that of the ‘have-nots’.
According to Sach, current events have pushed the country further down the path of division rather than moving towards solidarity and building an economy to which everyone can contribute.
The question for the government now is whether establishing a subsidy of this nature will serve to exacerbate or transform the social divisions that separate South Africans, he said.
“These larger questions are the ones we need to answer if we are to work towards sustainable fiscal and economic policy that builds us for the long term.”
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