Credit ratings agency Fitch has pencilled in the introduction of a permanent basic income grant for South Africa from next year – but there are still questions as to how the additional spending will be paid for over the long term.
“The government has approved a one-year extension of the special relief of distress grant, at a cost of R44 billion, and large unallocated reserves for subsequent years create some room for further continued social spending, but we assume a permanent new social spending will be approved that will exceed these provisions,” Fitch said in its latest ratings action commentary for South Africa, published on Thursday (7 July).
“This and higher compensation would only be partially offset by savings elsewhere. Initially, this could be compensated by high current revenue, but could imply a further weakening of expenditure ceilings as a fiscal anchor.”
The idea of a permanent social assistance grant in South Africa has grown in popularity following the implementation of the Social Relief of Distress Grant to help offset the effects of the Covid pandemic on the country’s poorest citizens.
The Basic Income Grant (BIG) would provide income support for individuals between 18 and 59 years old who are struggling and don’t have any social assistance. But questions remain on how much each individual would get paid, and how much would it cost the government to implement.
In its February 2022 budget, National Treasury said that it was still considering proposals around a universal basic income grant for South Africa, but it maintained that it cannot be done in a ‘fiscally irresponsible way’.
“The Covid‐19 pandemic increased national debate on the possibility of a universal basic income grant, and the government is considering various proposals in this regard,” it said. “Any proposals to expand this system need to be fully and appropriately financed by closing existing programmes to free up revenue, or through permanent increases in revenue collection.”
A report from policy research and advocacy group, the Centre for Development and Enterprise (CDE) published in June found that, in contrast to what proponents of a basic income grant (BIG) claim, a BIG would slow economic growth. While cash transfers to poor households would increase their spending, the higher taxes or increased borrowing needed to finance a BIG would slow the economy and worsen economic sustainability.
Slower growth and increased borrowing would increase the debt ratio. Since 2008, the government’s debt has risen from about 26% of GDP to about 70% – a rise that is among the steepest in the world.
There is no consensus about what a BIG would cost. The Social Relied Distress grant costs about R44 billion a year, but proponents of a BIG want a much larger grant for which more people would be eligible, likely costing between R200 billion and R300 billion a year.