This is according to a report commissioned by the National Economic Development and Labour Council, which found a basic income grant could add 0.5% to GDP growth by 2025 by improving household demand and boosting employment.
The release of the report comes off the back of growing calls to implement a basic income grant, especially as South Africa’s unemployment crisis continues to deepen. In the third quarter of 2021, the unemployment rate rose to 34.9% — the highest recorded level since 2008.
Finance Minister Enoch Godongwana is expected to make a call on whether a basic income grant is feasible when he delivers his maiden budget speech next month.
The report, which considers the fiscal feasibility of providing income support to individuals between the ages of 18 and 59, concedes that the cost of implementing the grant is significant.
Based on the treasury’s base scenario for economic growth, the cost of extending the R350 social relief of distress grant to 2025 ranges from 2.8% to 2.9% of nominal GDP. This increases to 9.7% to 10.4% of nominal GDP over the projection period if a universal basic income grant is introduced at the upper-bound poverty line, which at the time the report was written was R1 268.
But, according to the report, this high cost may very well be worthwhile. “Implementing a BIG has the potential to make significant inroads into improved income equality in South Africa and possible economic gains through the multiplier effect,” the report reads.
The R350 grant, the report notes, has the potential to reduce the concentration of income of the top 10% to 49.9% in 2019/2020 on an income per capita basis to just below 47.1% by 2024/2025. The share of household income per capita as a percentage of the total in the lowest income decile is projected to increase from 0.8% in 2019/2020 to 7.0% by 2024/2025.
On top of addressing inequalities at the household level, the basic income grant “could impact macro-level economic growth directly, through increasing household productivity and employment, stimulating aggregate demand, affecting labour force participation and influencing savings and taxation”, the report notes.
Basic income support also helps boost investment aimed at improving nutrition, healthcare, housing and transport, the report adds.
The report weighs up whether a basic income grant could be funded by hiking personal income tax. The R350 grant, the report found, would result in an approximate average increase in effective tax rates of 8.2%. A universal BIG at the upper-bound poverty line
would result in an approximate average increase in effective tax rates of 30%.
The government has been cautioned against increasing the personal income tax, which would further burden South Africa’s small tax base. But, the report notes, “there are strong moral arguments given South Africa’s history and high-income inequality” for expanding personal income tax to fund a basic income grant.
Given the significance of the cost attached to a universal basic income grant, the report suggests looking into whether a wealth tax should be implemented.
But a wealth tax may only be practically implemented over the medium term, the report notes. This means that personal income tax, corporate income tax and VAT remain the alternatives over the short-term if the implementation of a basic income grant takes place within the short term.