The Big Questions About South African Income Inequality

This brief contains highlights from a discussion with HSF research fellow, Prof. Alex van den Heever regarding the implementation of basic income support in South Africa.
The Big Questions About South African Income Inequality

Ahead of our Roundtable discussion later today (about which more can be found here), the Helen Suzman Foundation recently sat down with one of our research fellows, Prof. Alex van den Heever, to talk about the provision of basic income support (BIS) in South Africa. Alex is the Chair of the Expert Panel on Basic Income Support, commissioned by the International Labour Organisation and the Department of Social Development, that recently recommended that our existing Social Relief of Distress Grant (SRDG) serve as a platform for an expanded system of BIS which can then be improved incrementally over time.

The long-term objective of such an expanded programme of social assistance is the elimination of income poverty, as measured using the upper-bound poverty line (currently at R1335 a month, and roughly double the food poverty line). This conception of an incremental increase in the value of BIS aligns neatly with the constitutional imperative to take reasonable measures to progressively realise the right to social security.

Don’t be mistaken though: there is nothing neat about the Expert Panel’s report – which is all the more impressive for its willingness to confront the hard policy choices that South Africa needs to make in contemplating the institutionalisation of an expanded system of social assistance, the difficult trade-offs, and the unknowns of behavioural consequences and long-term economic effects.

We at HSF are of the view that the debate about BIS can’t take place simply in financial terms, important as those are, but must involve a discussion of what we owe each other as South Africans. In the aftermath of a post-pandemic world that has shown to be terrifyingly fragile and with the scenes of last year’s July unrest still all too fresh, we have to ask how we condition our interdependence so that we are collectively more resilient, rather than frighteningly vulnerable.

While Alex was generous enough to share his thoughts with the HSF on BIS, what appears below is necessarily an edited version of that discussion and any errors or misrepresentations are those of the HSF.

Q: What is the difference between a Basic Income Grant and Basic Income Support?

A: The Basic Income Grant (BIG) is defined generally as a universal grant provided to every person, with no conditions attached. BIS is different, because it is conditional upon the recipient’s income level and/or age – which will naturally result in a narrower class of beneficiaries. In the Expert Panel Report, we did not exclusively consider the feasibility of a BIG, because the South African reality is such that we have certain high priority groups in need of BIS. This means that some form of BIS arrangement is most appropriate in the short to medium term but that down the line we could consider something like a BIG. So, what we have conceptualised in the Expert Panel Report is a form of BIS akin to what we ordinarily think of as an unemployment grant.

Q: Why is a form of Basic Income support necessary for South Africa?

A: We have incredibly high levels of unemployment and deeply skewed disparities in distribution of income in South Africa. The hardships that these cause for so many simply cannot be addressed, within a reasonable time, through an employment programme or through GDP growth. Those must, of course, be pursued but South Africa can’t afford to neglect income protection for people who will inevitably have no other source of income for an extended period.

Q: How are recipients of Basic Income Support to be determined?

A: There are two options that we discuss in the Expert Panel Report. First, you can offer a grant on the basis of a means test that is designed to target those most in need. This approach comes with the administrative burden of actually conducting the means test, however, and it risks inefficiently distributing the grant among intended recipients. Second, you could grant BIS to the whole of our working-age population and then introduce a mechanism into the tax system that recovers amounts paid to people above the intended income bracket. This avoids the perils of a means test, which have already proven to be immense.

At this point in time, in respect of the Child Support Grant (CSG) and others, SASSA can handle maybe a million applications a year. So, with the SRDG for example, it was impossible to apply the conventional means test approach used for other grants, given the sheer size of the eligible population. What happened in practice is that grant applications for the SRDG came through cell phones and then, if people were rejected and they appealed, SASSA would then perform a more careful assessment.

Even so, the eligible income levels are still very low. Treasury has allocated only R44 billion in the current budget and has said that is all its giving, despite the fact that it is demand driven. Currently the means test that is applied is very low. It is nowhere close to the means test that is applied for the CSG, which is very close to the minimum wage.

Q: What are the benefits of a cash grant? Why would it be more effective in offsetting the effects of poverty than vouchers? What are the benefits of a cash rollout as an effective form of social assistance?

A: The whole idea of BIS is that it is meant to improve agency and that it does not predict or control what someone would actually use it for. There’s the now famous story of the “ice-cream guy” in Soweto, who used his SRDG to top-up other forms of income and start an ice-cream business that now employs several people. This wouldn’t have happened with a voucher that sought to predict and control the uses to which he put his grant.

There’s also the more commonly occurring fact that we have mixed income households, whose demands and spending habits are quite complex. So, you might have a household, not necessarily all living in the same place, but working together as a network to cover expenses that will not always map neatly onto the conditions of a voucher.

Q: If South Africa raises its social grants contributions relative to GDP ratios, what does that mean for other government departments?

A: Critics, sometimes even within Treasury, sometimes try to undermine BIS proposals by saying: ‘okay, we’re going to have to cut health or cut education.’ In reality, however, there is no net overall reduction in GDP, no net reduction overall in tax revenue as a consequence of this. One could argue that by providing BIS, you’re really only restructuring which government department spends the money – as opposed to constraining other departments in their spending. It’s like saying that instead of me spending the money, somebody else who has considerably less income has an opportunity to spend the money that I would have spent.

But the overall fiscal effect of the BIS will depend on its net economic effect and its funding mechanism. In terms of the SRDG, we were in a relatively good position, because we had a budget surplus and its fiscal impact was limited. However, without a funding mechanism, that essentially means government funds the BIS from borrowing and then we need to be able to capture the economic benefit of the attending economic stimulus in order to fund that increased debt burden. The trouble is that our economy is not properly structured to capture the benefits of an economic stimulus, which tend to end up overseas. This is a real problem that we have to deal with and it’s about rethinking our industrial policy. So, in the Expert Panel Report, we don’t rely in our analysis on potential economic stimulus as a way of recovering tax revenue. Instead, we argue that you finance the full value of the demand stimulus via increasing tax revenue.

Read the Expert Panel’s Report here and its Executive Summary here.

Join the HSF’s discussion of BIS online on our YouTube page here.