A basic income grant could hobble the poor forever

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Everyone is picking from the unrest what they want to fit their purpose. Complex, conflicting, crosscutting narratives and drivers are not allowed.

The reality is messy — a mix of political, criminal and opportunistic as well as socioeconomic factors. Yet simplistic narratives are combining with a great sense of guilt now emerging in some quarters — with long-term strategy on the left to push for a basic income grant (BIG) that is seizing their moment — and then with some criminal modelling and analysis from proponents of BIG.

Economist Isaah Mhlanga detailed in these pages the problematic attempts from Applied Development Research Solutions to show huge transfers are neutral for growth. This model has been called out by SA Reserve Bank researchers in the past.

There were also mistakes here on Friday that a BIG would mean a one-off 2% of GDP rise in debt, when in fact a debtfunded 2% of GDP BIG will mean a cumulative 2% of GDP more debt each and every single year — forever.

The Institute for Economic Justice says R250bn a year in additional taxes can be raised to pay for a BIG. That is another 4.7% of GDP in taxes every year, an increase in revenues by 20%. It glosses over the consequences of raising such a huge amount in a low-growth economy with a steep yield curve that is reliant on markets buying bonds.

Is a new social security tax of 1%-3% really going to lose only

R140m through behavioural changes for every R10bn it is meant to raise? About R40bn a year of resource rents to be extracted is on the table from a mining sector that is barely investing, given how unattractive a jurisdiction SA is. How is this meant to avoid further damaging the poor investment case?

There is a more fundamental problem. The idea is to remove R250bn a year from a narrow tax base of those who supposedly save too much and give it to those who don’t consume enough — yet with little effect seen. This is a public policy choice that could be made but has serious consequences needing mitigating actions and is why we need a proper debate and proper modelling considering the behavioural reality of how the economy works.

SA is already a low savings economy with financial markets that need more inflows, not less. Who exactly is expected to buy the government bonds or invest in the equity of new companies that are meant to emerge to service those being paid BIG? Those getting the grant won’t be.

The shift in incentives to invest and build businesses — such as now in KwaZulu-Natal — are forgotten. It is not the rich who will suffer but the middleclass entrepreneur who wants to set up a shop or restaurant but faces 3% more social security tax, a five percentage point higher dividend tax and especially a wealth tax on their success under the proposals of the Institute for Economic Justice. The hurdle rates for investment and to take risks go up as a result.

Bond markets being asked to buy an extra 1% of GDP in bonds every year forever is not going to go down well when debt levels are around 90% of GDP. There will be a faster grinding higher in debt service costs that are already squeezing out other spending. The Bank is not going to magically bring a money tree to the rescue and buy bonds to fund a BIG.

So who is meant to pick up the pieces when a social security tax raises half of what it is meant to, given these behavioural changes? At that moment the

IT’S A TIME FOR FAST, INTENSE DEBATE TO FIND SUSTAINABLE ANSWERS

politics of BIG will mean it will sit there like a whale on the fiscus — not able to be cut — creeping upwards as unemployment continues to rise. Instead deep cuts will have to come, to fire public sector workers en masse, to the police and army, to infrastructure spending (and the private sector won’t be able to pick up the pieces).

The problem is cast as contrasting not just the cost of doing a BIG but setting it against the cost of not doing a BIG. Yet the full set of reactions on both sides of this equation are never transparently laid out by proponents. SA needs a social security net — there is no doubt in that. But the fallout risk from throwing around large numbers is not being debated. It is precisely because I want SA to have an effective social security net that I am interested to understand it in its totality. A destabilised fiscus that loses market access at sustainable interest rates is no help to anyone, in particular the poor. We need to ask more basic questions — what is affordable here in the short term (where, yes, there is limited cash available) and what is affordable in the long term in permanent changes to spending are very different?

Cash transfers are not the only option. An expansion in employment tax incentives to get people out of unemployment and deal with the root cause of so much poverty and inequality is an option. An employment tax incentive allows for skills transfer and has wider known benefits including better income for the individual than just the cost of the employment tax incentive to the fiscus.

Similarly, isn’t it better to try to transfer assets by redoubling housing programmes? Where is the debate between these other conceptions of support?

SA is about to take dramatic, permanent, policy choices — possibly in haste after a deep political shock. It’s a time for fast and intense debate to find the right, sustainable, answers, not saddling the poorest with a wider set of risks in the long term.

● Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company.