It was a typical Wednesday morning, garbage removal day, and the early sun was streaming through my study window. I had already wheeled the bin to the curb and was back at my desk, ready to work.
As I began crafting my argument about why a basic income grant (BIG) would not work, I noticed a man at the bin. He was carefully rummaging through its contents, pulling out tin cans and whatever else he could find.
I sat there for a moment, watching, feeling the weight of what I was writing. It struck me that while I approach this as part of my work, to be analysed, discussed, and debated, for people like him, these are far from abstract. They mean something tangible – food, shelter, survival.
I could not help but wonder if policies like a BIG would genuinely make a difference for someone like him. A BIG is often sold to low growth economies as a silver bullet – a basic safety net for the poor to help them out of survival mode and into a mindset of improving their quality of life, and to stimulate economic activity by having recipients spend the grant on goods and services. But, the question of whether this approach confronts the real, underlying problems that create the need for a safety net in the first place remained with me.
The late Dr Otto Count Lambsdorff, who served as the German Federal Minister of Economics from 1977 to 1984, offered a pointed critique of welfare states when he delivered the 41st Alfred and Winifred Hoernlé Memorial Lecture, hosted by the Institute of Race Relations (IRR) in 2006.
Speaking on the theme of “Poverty Alleviation or Poverty Creation,” he remarked: “The welfare state is misused to buy political support of various special interest groups. And it has created a huge bureaucracy, which has its own very strong interests. Among the needs which have to be satisfied by the welfare state, the needs of the poorest in many cases do not enjoy priority.”
Debate
The crux of the debate around expanding grants, whether introducing a BIG or increasing the Social Relief of Distress (SRD) grant beyond inflation, boils down to one question: Can we keep adding more people to the grants system as well as continually keep increasing payments?
To conceptualise this, consider first that government spending on social protection increased from 9.3% as a proportion of total expenditure in 1994/95 to 16.6% in 2023/24. The number of beneficiaries of social grants also increased from 2.4 million in 1996/97 to 19.1 million in 2023/24. Moreover, half of all households benefit from social grants and 23% of households rely on social grants as their main source of income.
The dependency ratio worsened dramatically from 2001, when for every 100 social grants 313 people had jobs, to 2023, when just 62 people had jobs for every 100 social grants. This suggests the number of people unable to sustain themselves is growing, a trend that places a question mark over the sustainability of ongoing increases in the size of the dependent population, without corresponding increases in the size of the productive population.
Secondly, can the fiscus bear this growing burden? Increasing grants beyond inflation, or significantly expanding the pools of recipients, will undermine the macroeconomic stability of the country. Expanding social assistance on this scale would require substantial reforms and increases in revenue streams.
One proposed solution that has been floated in the media is to finance increased grants through a higher Value Added Tax (VAT) rate on luxury goods. This option was thoroughly evaluated, and dismissed, by the David Tax Committee in its second Report on VAT. The committee found that implementing a luxury VAT would be prohibitively expensive to administer, create loopholes, and provide opportunities for corruption.
If VAT were increased across the board instead, the regressive nature of VAT would disproportionately burden poorer households. This approach would result in a circular and administratively wasteful process of effectively taxing the poor more to pay the poor more without achieving meaningful redistribution.
Alternative proposals
Weighing alternative proposals to increase other tax rates will also mean grappling with the evidence that South Africa is beyond the peak of the Laffer curve, an inverted U-shaped curve that illustrates the relationship between tax rates and tax revenue. Beyond the tipping point, higher tax rates will yield diminishing returns by supressing economic activity and discouraging compliance.
This is evident from the 2017 increase in the maximum personal income tax rate from 41% to 45%, applicable to individuals earning more than R1.5 million per annum.
At the time, the increase was expected to affect around 100,000 taxpayers and generate an additional R5.46 billion in revenue. However, the result was a R6.48 billion drop in total personal income tax revenue, which according to the United Nations University’s World Institute for Development Economics Research, demonstrates that the “new top tax rate [is] on the wrong side of the Laffer curve.”
Increases in tax revenue are therefore not a reliable means to finance additional social assistance. If increased grant payments are not financed through higher taxes, the only remaining options are to redirect existing expenditures or resort to borrowing.
However, redirecting spending is fraught with limitations and government is quickly approaching a 76% debt-to-GDP ratio. So, adding to this debt burden is simply not a sustainable option.
One-way ticket
Continuing down the road where more and more people cannot provide for themselves is as good as a one-way train ticket. Such circumstances, where social assistance risks being increasingly seen as an entitlement, and therefore very hard to reverse, economically or politically, can be dangerous. South Africa is not yet at the end of the line. However, the word of caution is “yet.”
The reason people require a social safety net is because they cannot provide for themselves, either because they are unemployed or underemployed, or because they simply do not earn enough to take care of themselves and their dependants. It is a painfully obvious problem.
The solution is relatively easy: create more jobs so that more people can have self-earned incomes and become self-sufficient. This will lessen the need for welfare resources and allow the envelope available to be put to use in serving those least able to provide for themselves.
Consider first what not to do. Do not restrict the labour market. Restricting the labour market with burdensome and strict labour regulations, particularly when poorly implemented as in South Africa’s case, ultimately results in fewer employment opportunities.
The insights of Dr Lambsdorff on Germany’s experience with its pay-as-you-go old-age insurance scheme offer a cautionary parallel for South Africa. Labour costs increased, unemployment soared to almost 5 million people, and yet the German government could still afford to pay generous unemployment benefits and other forms of welfare. Reflecting on this, he warned: “But we live at the cost of future generations.”
“The high unemployment rate shows that we are paying a high price for the welfare state not only in financial terms: the attitudes of many people have adapted to the welfare state. They trust the government more than they trust themselves. Many people rely on social benefits more than on their own productivity.”
In his blunt assessment, “The welfare state does not create welfare.”
What does this mean for SA?
What, then, does this mean for South Africa?
Firstly, increasing grant payments beyond inflation, or significantly increasing the pool of beneficiaries, comes with serious risks, irrespective of one’s assessment of the welfarist outcomes. Doing so, without increasing growth and opening up employment opportunities, could add to increasing dependency on state support. This will depress economic activity, causing fewer people to find jobs and forcing even more people to depend on grants. As more people rely on unconditional social grants and fewer gain employment, the tax base will shrink further.
For this reason, in a recent response to the National Treasury’s invitation to make proposals on national tax and spending, the IRR urged the National Treasury to recognise that taxpayers are the engine of the economy. Their continued presence, investment, and economic activity are essential for the country’s financial stability. To retain them, the government must provide certainty on the future of the grants system and associated tax implications.
Raising the SRD grant beyond inflation, introducing a Basic Income Grant (or any other kind) or significantly expanding the pool of recipients, will not address the grassroot causes of poverty and inequality. To confront these causes, policy must be focused on raising the demand for labour to reduce state dependency and promote self-sufficiency.
This can be achieved by implementing growth-friendly policies that prioritise economic development, trade, and employment opportunities.
Strong and sustained economic growth must take precedence. This way South Africa can create opportunities for people like the man at my bin – offering them the dignity to work, the means to support themselves, and a way out of poverty. The real measure of our policies should not be how much they give, but how much they empower individuals to provide for themselves and productively contribute to the growth of the economy.
The man at my dustbin has shuffled off, though he will probably be back before long. He does not have much choice. Nor, for the moment, do millions of others.
We must confront the reality that it may already be too late to change his circumstances. It is not too late to ensure that the 148 babies that were born in the past hour are spared the same fate when the consequences of an overcompensating government eventually come home to roost.
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