How government plans to pay for a Basic Income Grant in South Africa

President Cyril Ramaphosa is looking to try make the shift to a Basic Income Grant a reality following renewed calls in this year’s ANC’s January 8th statement – but questions have arisen as to how the country is going to fund it.

“Millions of working age adults in our country remain unemployed without any form of support and little prospect of gaining employment until economic growth picks up,” said Ramaphosa at the opening address of the the ANC’s 26-29 January 2024 national executive committee (NEC) lekgotla.

The ANC’s January 8th statement says that the R350 Social Relief of Distress (SRD) Grant, which introduced during the COVID-19 pandemic, was “able provide relief to [millions of] unemployed people.” Ramaphosa said that this is “a strong case for a permanent form of targeted income support grant for the unemployed within our fiscal constraints.”

The SRD is currently one of the only sources of financial support to millions of South Africans who are unable to find employment. South Africa’s unemployment rate of 31.9% is one of the highest in the world.

As such, renewed discussions about introducing the Basic Income Grant has fast entered the arena.

Minister of Social Development Lindiwe Zulu was asked in a parliamentary question at the end of last year what funding models are being explored to fund this proposed Basic Income Grant, and she indicated that the options on the table are between:

• An increase in taxation;

• Reallocation of current budget allocations;

• Borrowing.

Increase in taxation

The tax options considered include wealth taxes, removal of tax expenditure subsidies, increases in the Value Added Tax (VAT) or personal income tax:

Minister Zulu said that the wealth tax “has the advantage of being quite progressive as it would target the rich only”; however that route could result in significant tax avoidance and thus result in inconsistent revenue on a year to year basis “as the wealthy find ways to avoid it.”

For the VAT approach, it would be a broad-based tax which has government collect revenue to fully fund the grant. Zulu said the disadvantage, however, is that “such an approach would negate the motivation for the grant as the poor would in effect pay proportionally more than the rich because VAT is a flat rate for everyone.”

“The tax expenditure subsidies on retirement savings were also considered as a possibility,” said Zulu.

In addition to providing a possible new revenue, the department said it would create larger equity in the tax system by “reducing support which is currently benefitting high income earners.” However, the department believes that it would be difficult to quantify and would be unreliable and “may result in disincentivising retirement savings among some high-income earners.”

The most likely is the Personal Income Tax approach, which would take larger contribution from the high-income earners than the lower income earners, with the government saying this “reduces inequality”.

Zulu said that this would a form of ‘progressive’ personal income tax would ensure ‘a more sustainable revenue source.’ “It is also more reliable than the other tax approaches, thus ensuring sustainable funding in the long term.”

The borrowing option

“The borrowing option has the advantage that it would provide additional funding without a need for budget reprioritisation or tax increases,” said Zulu.

However, the government and National Treasury in particular is wary of this as it would be expensive for the country – increasing the country’s already high debt burden and also increase high interest payments which are currently one of the biggest spending items in government expenditure.

South Africa’s gross debt is expected to rise to R6.52 trillion in 2026/27, up from from R5.24 trillion in 2023/24, and reach almost 75% of GDP in 2024.

Reprioritisation of current budget allocations

“This would have the advantage of shifting funds from some government expenditures which are less effective and/or efficient, and redirect it to the urgent needs of the poor,” said Zulu.

However, such a reprioritisation is seen to be complex and difficult to implement.

Senior Research Fellow at the Johannesburg Institute for Advanced Study, Seán Muller said that the most recent budget policy statement has shown two very important things.

“The first is that South Africa’s fiscal situation is arguably at its worst in the post-apartheid era; the second is that any decisions taken, especially about the 2024/25 fiscal year, could affect how South Africans view the current government when voting in (the 2024) elections.”

The Treasury’s head of budget office, Edgar Sishi, told a central bank conference last year that the institution had battled to sell spending cuts to the government. “When those things happen, political leaders find it very difficult; they feel constrained in withdrawing the support,” Sishi said.

Department’s current grant expenditure

The Department of Social Development has allocated 96.4% of its R263 billion for grants; meaning R253 billion has been allocated in the 2023/2024 financial for direct cash transfer payments. R36 billion has been used to fund the extension of the Covid-19 SRD grant until 31 March 2024.

Zulu said in her speech at the budget vote that, in total, “[South African Social Security Agency] Sassa expects to pay to a projected 27 million eligible grant beneficiaries by March 2024.”

Sassa has recently been in the headlines for many wrong reasons. At the tail-end of 2023, it was revealed that the payments system nearly collapsed at the beginning of September due to a system “glitch”, and also that they lost more than R50 million due to fraud and corruption within its ranks over the past two years.