The economic hardship from Covid-19 lockdowns has boosted campaigns across the world for basic income grants from governments.
With growing concerns about poverty and inequality, and the rise of populism, many countries may soon resort to basic income grants. With that, we may soon see far higher taxes and a massive further build-up in public debt to support these schemes.
Talk about basic income grants is confused by the many different types of schemes that are placed under the term. There is additional uncertainty about whether some forms of basic income grant would complement or replace other protection programmes, and what spending cuts are needed to give space for these initiatives. There is also the problem of how the beneficiaries are defined, and whether conditions should be attached to the grants. In the growing public clamour, little attention is paid to possible alternative policies, or to how this increased spending is to be financed.
There is a consensus between much of the left and the right, or at least free marketeers, on the desirability of a basic income grant. The free market economist, Milton Friedman, favoured them as a negative income tax which would help support the poor without the administrative burden of the US welfare system.
While not calling it a basic income grant, President Donald Trump and his successor, President Joe Biden, have given sizeable handouts to US tax payers. These schemes to put money into the hands of Americans certainly have the look and feel of a basic social grant, although they are called stimulus packages.
And populists tend to like the idea of such giveaways. After all, handing out cash has long proved to be an effective way of buying votes. Brazil’s Covid support programme includes paying $110 a month to 50 million people, slightly less than a quarter of the population. The country’s populist President, Jair Bolsonaro, did not initially support the programme, but then saw it could help his political prospects.
Brazil already has a conditional cash-transfer scheme, the Bolsa-Familia, that was put in place by Bolsonaro’s socialist predecessor, Lula da Silva. This has been widely regarded as a success, partially because disbursement is conditional on parents ensuring their children go to school and are vaccinated. Not many supporters of income grants want conditions attached.
So far there have only been a limited number of pilot basic income grant projects.
It has to be telling that after many apparently successful pilot projects, no country has adopted any version of a basic income grant scheme. One reason has to be the sheer cost of such a policy. A launch nationally would possibly require the scrapping of existing government welfare support programmes and spending cuts to make way for such a mammoth venture. Governments are also worried about endless demands for increases in the grant as well as inflationary pressure.
Governments are also likely to worry about the amount of tax they could recoup with such a grant. Clearly government would recoup some of the grant in the form of VAT, but as most beneficiaries are below the tax threshold little would be gained.
There is considerable debate about whether such a grant would act as a disincentive to work. The supporters say the pilot projects refute this, but it is likely to depend on individual circumstances and the level at which the grant is paid.
South Africa could be on its way to introducing such a grant. The Minister of Social Development, Lindiwe Zulu, said last year that South Africa would introduce a basic social grant. With the termination of the Covid-19 Social Relief of Distress grant of R350 per month at the end of last month, there are mounting appeals for a more permanent replacement.
Last year the government proposed that it would first target 18- to 24-year-olds and those between the ages of 50 and 59 with a R500 grant. The plan, according to Zulu, would then be to expand the scheme to include those who are in the 18 to 59 age cohort, something favoured with a detailed proposal by the Black Sash, but at a higher level. This would cover a gap in the welfare system, as child support grants are not available for children over the age of 18 and eligibility for old age grants begins at the age of 60. The cost of an initial rollout would be in the region of R77 billion, and once the entire cohort was included it would be R210 billion, about 4 percent of GDP. The only condition for access would be that beneficiaries receive no other grant.
This is at a time of tight tax-raising constraints and borrowing limits in the market, while there are plans to also initiate National Health Insurance and free higher education. There have been endless bailouts to failing state owned companies, and continuing pressure for raises from public servants. Marginal taxes are already high in South Africa and, as was recognised in the budget presented in February, there is little room for tax raises.
South Africa currently has one of the most comprehensive welfare systems among developing countries. In the Budget of 2019/20, the year before the Covid-19 lockdown, more than 60 percent of the budget was allocated to social services, the bulk of which was to the benefit of the poor. This category covers education, health, community development and the grant system. The money for social development, the bulk of which is spent on grants, is the second largest spending category after education and amounts to more than 15 percent of the budget.
Social grants are paid to about 30 percent of the population, around 18 million people, who are eligible for old age, disability, war veteran, care dependency, foster care, and child support aid from the state. There are gaps in the system, particularly for those who are of working age and are not eligible for unemployment benefits. While families on grants can be highly stretched, it is acknowledged that the grant system keeps millions out of deep poverty.
A far more targeted and cost-effective alternative to the proposed basic income grant would be support that is aimed at the unemployed in the 18-59 year old cohort.
But the best alternative to a rush to adopt a basic income grant would be employment creation with rapid economic growth to make inroads into poverty. A first step would be to ensure flexible labour markets that would eradicate a job-destroying wage determination system. Through industry bargaining councils, the unions and larger companies impose minimum wage structures on smaller firms that are not parties to these pacts. High minimum wages mean low employment and low investment, and ultimately contribute to low growth and high poverty rates.
That is South Africa’s economic trap. A basic income grant would essentially be a type of subsidy for poor people in a system that does not permit rapid employment creation.
[Photo: Mail & Guardian]
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