Magical thinking about the BIG question does more harm than good

A spectre haunts SA’s public finances: a large new spending commitment in the form of a basic income grant (BIG).

SA’s social safety net is relatively well resourced: at more than 3% of GDP, grants account for three times the share of national income that is average for developing countries. Until the introduction of the R350 a month social relief of distress grant, however, grants were available only to children, the aged and disabled. No grants existed for able bodied, working age adults, many of whom are desperately poor because SA’s economy generates so little employment.

It is, given the context, unsurprising that many people President Cyril Ramaphosa included believe that a BIG needs to be implemented to address poverty.

Calls for a BIG have taken on new urgency and gained momentum as the implications of the economic and social damage done by Covid lockdowns and last year’s violence in KwaZulu Natal have seeped into the national consciousness.

One criticism of a BIG is that it encourages recipients to withdraw from the labour market: why work if the state provides a guaranteed income? This concern is generally exaggerated and, in SA’s context, where the costs of searching for a job or establishing a micro business are high, the overwhelming likelihood is that a BIG would help more people look for work, rather than encourage them to stay home.

The difficulty is that, were a BIG to be implemented, there would almost certainly be fewer jobs for people to look for. This is something that proponents of such a scheme generally refuse to consider, with many twisting economic theory into knots to make the case that a BIG would accelerate economic growth when it is overwhelmingly more probable that it would slow growth. Indeed, it could lead to economic crisis.

The critical thing to understand about a BIG is that SA’s public finances are on a grossly unsustainable path even before new spending is added to existing commitments.

This is not a controversial claim: for at least the past seven years, the government’s budget has been framed by a commitment to do something about the large gap between tax revenues and spending that has resulted in a massive buildup in debt. Since 2008, government debt has risen from about 26% of GDP to about 70% a rise that is among the steepest in the world. Debt service costs have increased to exceed spending on education or health, and are squeezing out spending on other critical functions.

There is no consensus among proponents of a BIG as to what it will cost because there is no clarity about how many people would be eligible or how much the monthly payments would be. Nevertheless, having read the various proposals it is reasonable to think that they all expect a BIG to cost between R200bn and R300bn a year within a few years. This would add between 3% and 5% of GDP a year to government spending.

It is self evident that a country whose public finances are already unsustainable cannot simply increase spending by 3% of GDP, much less 5%. Depending on who is talking, those who favour a BIG have four different responses to this challenge. Columnist Duma Gqubule thinks we can print the money. His proposals are, I am afraid, not worth the paper they are written on. As any Sri Lankan will now tell you, developing countries that adopt wild, unorthodox ideas will quickly crash. If it were so easy to print money and promote growth through giving it to poor people, why are there so many poor people in the world?

Former banker Colin Coleman thinks the BIG would spark a growth acceleration so that, combined with some structural reforms, it would pay for itself. This view is also implausible. It is true that there are circumstances in which ramping up public spending can stimulate growth. But those circumstances don’t really apply in our case, where the constraints on growth are on the supply side of the economy. Equally important, Coleman fails to recognise that excessive public debt is one of the prime drags on growth, so a growth plan that is premised on spending money we haven’t got will make it even harder for any economic reforms he imagines being implemented to gain traction.

The Institute for Economic Justice thinks we should raise an additional R300bn a year in taxes from better off South Africans. An expert panel convened by the department of social development thinks we should raise VAT. At least both of these have the merit of recognising that a permanent increase in spending must be accompanied by a permanent increase in taxes.

Raising taxes to fund a BIG, however, will slow growth. It will also leave the existing budget deficit entirely unchanged. The result: a debt ratio rising even faster than it is now.

A BIG is not affordable unless and until SA’s public finances are on a sustainable footing and the economy is growing more quickly than it is.

So, my critics could ask, what is the alternative to a BIG? How can we tackle the growing challenge of poverty, now so deep that reports of children starving to death are starting to emerge?

Appalling policy choices over more than a decade, topped off by a badly managed pandemic, mean there are no easy answers for the country’s socioeconomic challenges.

Poverty can be reduced. This will require an approach to growth, jobs, governance and redistribution that is vastly different from what we have today.

We have to maximise faster and more labour intensive growth, and dramatically improve outcomes of current redistributive spending for the poor, where too much money is absorbed by unproductive public servants.

A BIG, while superficially appealing, would significantly undermine the quest for faster growth by making our public finances even more unsustainable. This will lead, at a minimum, to lower levels of investment and higher interest rates neither of which will result in more employment.

Magical thinking about the benefits of a BIG that ignores the costs and the risks does more harm than good. SA focuses too much attention on compensating the poor for their exclusion. It is way past time that we put more effort into their inclusion.

Bernstein is head of the Centre for Development and Enterprise CDE . This article is based on a new CDE report, ‘Poverty and a Basic Income Grant: Six questions about a BIG’

Article published by Sunday Times

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