14/12/22

SOUTH AFRICA: Tax hikes can fund new basic income grant, according to study.

As published on businesstech.co.za, Wednesday 14 December, 2022.

A new study commissioned by the Department of Social Development shows that turning the current social relief distress (SRD) grant into a permanent basic income grant can be accomplished – if taxes on the wealthy are hiked to pay for it.

The study was commissioned by the Department of Social Development in collaboration with the International Labour Organisation, and featured a panel of experts and academic researchers from Wits, the University of Pretoria and the South African Social Policy Research Insights.

It looked at four scenarios for a basic income grant in South Africa, all based on the grant being R350 and doled out to 13.1 million people.

The modelling work produced by the report analysed the SRD grant on a zero-based budgeting basis, effectively assuming that the outlay must be financed from new sources of revenue.

A grant of this nature would set the government back R50 billion a year – funding which needs to be drawn from somewhere.

• The first scenario simulated by the experts used a 2% increase in VAT to fund a basic SRD income grant;
• The second used a personal income tax hike on the top three deciles – or top earners in the country – to fund a basic SRD income grant;
• The third used personal income tax hikes on the wealthy to fund a wage subsidy grant for domestic workers, elementary workers, operators and skilled agricultural workers;
• The fourth used personal income tax hikes on the wealthy to fund a basic SRD income grant and a wage subsidy at 50%, ie, an additional R25 billion.

The experts found that in all four simulations, poverty and inequality were reduced, with the weakest results for the wage subsidy simulation (option three).

The scenarios using PIT hikes on the wealthy were described as “highly distributive”.

“The SRD Grant offers significant redistributive opportunities, diminished only by the choice of financing option,” the panel said.

“Where PIT rather than VAT is used, economic output deviates positively while also achieving material positive distributional outcomes. Inclusive growth options appear strong when the SRD grant is combined with a wage subsidy that targets the lowest occupational groups.”

However, in practice, the achievement of a well-targeted wage subsidy scheme may provide difficult, the experts said.

Specifically, using VAT to fund the grants resulted in negative outcomes for the economy. This suggests that VAT should not be considered to address the financing gaps in the programme in the near-term, the experts said.

“If you increase VAT by 2%, which we did in the simulation, then all prices go up by 2%. So inflation goes up, and that is bad for the economy. It’s so clear-cut that we shouldn’t even consider VAT.”

Given South Africa’s extreme income inequality, however, ‘redistributive programmes’ like the grant should make use of progressive taxing options, the panel said.

An SRD grant funded by raising the income tax of top earners would raise household spending, wages, and economic growth, and would reduce inflation, all while reducing the number of households living below the lower-bound poverty line by 15% within two years, the panel said.

“The modelling results show that, depending upon how it is financed, the SRD Grant can be introduced in a manner that is fiscally and economically sustainable while at the same having a
material impact on poverty and income inequality if implemented at the level of 13.1 million beneficiaries.”

A notable finding in the study was that the best outcome for the economy was using a wage subsidy as a way to encourage job-seeking and employment.

However, replicating this scenario in reality would also prove difficult, the experts conceded, adding that more work needs to be done to better identify government-subsidised employment interventions.