Unaffordability of grant is clear from the Institute for Economic Justice’s proposal, which would cost R280bn in 2023/2024

In early June the Centre for Development & Enterprise (CDE) released a report in which it was argued SA could not afford to introduce a basic income grant (BIG).

Our analysis concluded that while a BIG might reduce poverty, it would do so only if its introduction did not fatally undermine the country’s public finances (“Can SA afford a BIG? The short answer is no”, June 21).

In our assessment, the likelihood of fiscal and financial crisis would increase significantly if a BIG were introduced, and if this happened it would cause severe damage to SA’s long-term economic prospects, and therefore to its capacity to reduce poverty. At the time there was no consensus among proponents of a BIG relating to its key parameters — how many people would be eligible and what the grants would be worth — which meant we had no clear idea about how much the BIG would cost.

Since the release of our report there have been two important developments: the BIG’s principal proponents nailed their colours to the mast about eligibility and value; and Business Unity SA (Busa) released a report commissioned from Intellidex focusing on the financing of a BIG. Both developments reinforce and heighten our concerns. Our guess about the potential cost of a BIG was a dramatic underestimation. Busa’s detailed analysis reveals just how high SA’s taxes already are, and how implausible it is to contemplate raising them to pay for a BIG.

Regarding the costs of a BIG, two weeks after CDE released its report the Institute for Economic Justice (IEJ) issued a statement proposing that a BIG should be implemented from April 2023. It should be paid to “all in SA aged between 18-59”, which we take to mean that the IEJ includes non-South Africans who live in SA, or about 34-million people. It also argued that the BIG’s minimum value must be the food poverty line (about R620 per month this year, and about R660 next year), but that it should rise in time to “at least” the upper-bound poverty line.

Implemented in line with the IEJ’s approach, a BIG would cost a minimum of R280bn in 2023/24, but it would cost more than double that amount by the time the value of the grant reached the upper-bound poverty line, now somewhere approaching R1,400 per month. And that is before any increases associated with a growing population and rising inflation is considered.

Clearly, when our report concluded that a BIG is unaffordable based on a cost of R200bn a year, we were underestimating the ambition of BIG’s proponents. However desirable spending this kind of money on poverty alleviation might seem, the Busa (Intellidex) report demonstrates in great detail just how little space there is to finance this through new taxes.

Media coverage of the Intellidex report has been misleading, implying that a BIG could be financed by raising VAT from 15% to 17%. In fact, the report finds that such an increase would generate R50bn in new revenues each year. To raise R100bn, VAT would have to be raised to 19%. The report does not estimate how much VAT would have to rise to raise R280bn, but our estimate is that it would have to nearly double, to about 27%.

The Intellidex report argues that raising the VAT rate is the least bad way to fund a BIG because it is the least distortionary of the major tax types. The report shows that raising VAT would have a smaller effect on the economy than increasing either personal income taxes or corporate income taxes, both of which are far more distortionary. It is also the only major tax type in which SA’s levels of taxation are lower than other developing countries. In these countries far more reliance is placed on indirect taxes like VAT than is the case here.

However, the problem is that raising VAT even a little is politically untenable. Hence the IEJ’s insistence that a BIG be paid for by higher personal income taxes. How much would they have to rise? Well, raising R280bn in new taxes using personal income tax would require raising everyone’s tax bill by an average of 48%.

Unusually low

Regarding other major tax types, the report shows just how heavily taxed South Africans are. SA’s ratio of tax to GDP is exceptionally high for a country of our level of income. Among the nearly 90 countries with per capita GDP of less than $20,000 in 2019, average tax ratios were 18.5% of GDP. SA’s was more than 28%.

While it is true that at 45% SA’s top marginal rate for personal income tax is not unusually high compared with rich countries, the level at which the top rate applies is unusually low. In the US and UK the top rates are 45% and 40%, but they kick in at the equivalent of €500,000 and €180,000 respectively. In SA, the top rate applies to all income above €90,000.

Generating more corporate taxes by raising the rate of corporate income tax is also constrained. The rate is already relatively high. Only a small minority of businesses make a taxable profit: in aggregate, the 360,000 businesses whose taxes were assessed in 2019 made a collective loss of R330bn. Fewer than 350 businesses paid nearly 60% of all corporate income taxes.

These facts show just how implausible it is to think there is an easy way to raise enough taxes to finance a BIG. They will be crippling. But that is only one part of the problem. The other is that raising taxes is not a free lunch for government. When taxes rise — especially from an already-high base — there are consequences for growth, not all of which are easily predicted or modelled.

Easy ways

Using research from the Davis tax committee and the Reserve Bank, the Intellidex report argues that the net effect of raising taxes is to slow economic growth. Raising R100bn in new taxes and spending it all on a BIG, they argue, will reduce GDP by a full percentage point after about four years, an effect driven by a six percentage point decline in the value of investment in the economy due to higher taxes.

Are there arguments in favour of a BIG? Of course there are: if poor people are given money by government they will be less poor and many good things flow from that. But the cash has to come from somewhere, and when you raise taxes (or borrow more), the effect on the economy should be factored into the calculus. Proponents of a BIG seldom do this, pretending there are easy ways to implement their proposals and that those who disbelieve them are blinded by ideology or greed.

The facts are that SA is already highly taxed. Raising new taxes to fund a BIG (which would be, as Busa says, a “forever tax”) is likely to result in a fiscal crisis sooner rather than later. Meanwhile, it would further squeeze the government’s budgets for health, schooling, policing and everything else that is pro poor in the budget and that society needs if it is to prosper.

Written by Ann Bernstein, head of the Centre for Development & Enterprise

Article first published by Business Day Live