To be sure to win the 2024 election, the ANC may need to come up with a generous present for many voters.
Making the Covid Social Relief of Distress (SRD) grant permanent, making more people eligible for payouts, and raising the amount could greatly raise the party’s support at the polls.
The ANC dropped below 50 percent at the local government election last year and there is a strong chance that it could find itself with less than half the vote in 2024. With the economy essentially stagnant, unemployment at record levels and poor service delivery, the ANC is under considerable pressure in the run-up to 2024.
The SRD grant, by giving the unemployed income support, relieves hardship. It makes up for much of the failure of ANC policies to create jobs, and in the short-term, removes the pressure to carry out politically costly big-bang reforms to free up the economy and encourage investment.
These politically costly key reforms include privatising or liquidating state owned enterprises, reducing the size of government, scrapping labour laws that much of business finds burdensome, and ending black empowerment hurdles that limit investment. All these would cause pain in the party.
Whatever the merits of the grant as a poverty relief measure, it is not sustainable, given the country’s low growth rate and pressures on tax revenue. Grants have helped to take millions out of poverty in this country, but with a weak economy, questions of sustainability have to arise. Some of those who argue for the grant say that it is necessary, given the country’s high and growing unemployment rate and the grant’s role in alleviating poverty. However, creating jobs by having policies that encourage investment, rather than handouts which cannot be sustained, should be the current priority.
The economic devastation of the very tight lockdown did call for special temporary measures of income support for the most destitute. They might have been strictly temporary as originally conceived, or at least far better targeted and based on household income surveys and detailed knowledge.
Life of its own
But the problem is that an emergency temporary measure has taken on a life of its own. It has been extended twice, its eligibility criteria relaxed, and in time is bound to be raised. That would, in time, put the country’s financial stability at risk, if there are no serious reforms to boost growth and jobs.
The Black Sash, an organisation which lobbies for rights, is correct in saying that that, “the SRD grant is an acknowledgement of the limited work opportunities for the unemployed in South Africa. The grant is the first step towards the permanent extension of the social assistance framework to include the unemployed while working towards a Basic Income Grant, BIG.”
Under one idea for a Basic Income Grant, payouts would be made to all those registered to pay tax. Those falling under the tax threshold would keep the grant, and those above would pay it back in tax. We currently have a targeted approach to grants in that they are paid to people who meet specific criteria. A BIG is universal, it could mean that much is not repaid in tax due to anomalies in the system. In the end, if the budget is restricted to the current grant budget, a BIG could mean payments to the most needy are watered down.
The Covid SRD grant was introduced on a temporary basis during the tight lockdown in 2020. The idea was to fill a gap in the South African grant system by giving R350 a month to those who are of working age and unemployed, and ineligible for any other grant. There are other grants for old age, disability, and child support. Those who have paid into the Unemployment Insurance Fund only receive payments for a limited period.
With the bounce-back of the economy last year, the SRD grant was scrapped in March. But weeks after the mass violence and looting last July it was extended until March this year and the eligibility criteria were also expanded. Previously one had to have no earnings to be eligible, but now people with incomes of R595 a month and caregivers can also apply. And then in the State of the Nation Address last week, President Cyril Ramaphosa extended the grant until March next year.
Big questions
At its current level the SRD grant is estimated to cost the state about R50 billion a year. One of the big questions to be answered in the Budget to be delivered next week is how this will be financed. A tax revenue windfall estimated to be around R200 billion, due mainly to higher prices for exports, will carry much of the cost this year. Ideally, this windfall should have gone toward reducing borrowing and paying debt service.
In extending the SRD grant by a year last week, President Cyril Ramaphosa said options about its future replacement needed to pass the test of affordability. That is going to be very difficult.
Windfalls are not repeated annually. There are bound to be annual rises, even if they are only linked to inflation. The Black Sash wants the grant raised to at least the Food Poverty Line, currently R624, and they want permanent income support for the unemployed at R1 335 per month, the upper-bound poverty line.
To make room for the grant system in future years, cuts will have to be made elsewhere, and that will force some hard choices.
With the threat of growing unemployment, the grant system will become a significantly growing burden on the state, requiring massively increased borrowing. After the education budget, debt service is the second largest item of government spending. Rising debt service crowds out other spending on service delivery and infrastructure, and investment which is key for growth.
And as debt rises, borrowing costs rise, and in the event of extreme risk aversion to emerging markets, it is not inconceivable that holders of our bonds will try to suddenly dump their holdings, precipitating a default and with that a domestic financial crisis. As the economy continues to falter, the numbers requiring income support will rise, bringing closer the prospects of a financial crisis.
Spending on grants
The government’s estimate of the cost of a universal income grant at the level of the food poverty line is about R233 billion a year, about 3.8 percent of GDP. Our spending on grants is already much higher than the average for emerging markets, and while our inequality is higher, there is currently no fiscal space for expansion. All this should raise the pressure for immediate and massive reform, but this is not happening. The political pressure is for more grants.
That is why the expansion of the grant system could well push the country over the fiscal cliff. One consequence of this will be to increase populist pressure to end Reserve Bank independence and get the central bank to finance the deficit, so that grants can be sustained. That could become crucial to maintaining support for the ruling party.
The result would be hyper-inflation and erosion in the real value of a grant, but at least grants will be paid, thus creating a delusion that the party pays.
[Image: https://pixabay.com/photos/construction-site-workers-4686908/]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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