22 July 2022

BUSA and BLSA launch a second research report on basic income grant (BIG) focusing on funding

As the debate on the feasibility of a basic income grant (BIG) advances, Business Unity South Africa (BUSA) with the support of Business Leadership South Africa (BLSA) today launched a research report authored by Intellidex that focuses on the funding options for such a grant.

“The BIG is not an allocation of funds for a few years but rather a ‘forever’ decision that must be carefully considered as, realistically, it cannot be undone once implemented,” says BUSA CEO Cas Coovadia.

The CEO of Business Leadership South Africa (BLSA) Busi Mavuso agrees: “There is so much at stake when it comes to the BIG and decisions must be based on meticulous research into how it would be funded.”

The research shows that there are only three options to fund a BIG: cutting other expenditure, issuing more debt, or raising taxes.

Cutting other expenditure is simply not a viable political or technocratic option. There is no “free fat” available anymore and the impacts of widespread “top trimming” as seen in the past few years, though necessary given a lack of political will or complex decisions being made, has ended up being negative for service delivery especially at lower levels of government.

Raising debt may well have been easy in recent years when global and local interest rates were low, but this is no longer the case. The research finds that raising tax is the only theoretically viable option.

There are two tax options, the first being organic tax taken from faster growth as an upside to ongoing reforms which can be directed towards BIG spending. The social relief of distress grant (SRD) now benefiting from the terms-of-trade commodity boon, is the most obvious example, yet unfortunately it is unsustainable given the lack of mining investment happening and the inability to boost production volumes given the transport logistics constraints on mining export companies. A rise in growth would expand the tax base and make spending on a BIG sustainable. The sustainability of a BIG in such circumstances is also enhanced because coverage will, in all probability, decline as a result of increase in employment.

The other option is to try to take more tax from the existing tax base through higher rates or new taxes.

The issue with tax options is that they can simplistically be hiked continually until they hit the required level of revenue, yet such a strategy is not credible given the negative consequences – behaviourally on taxpayers and on the economy at large. Most tax options are simply far too small in their existing size, their potential tax base and also how they, or their tax base, have behaved dynamically in the last decade. This is true for instance of corporate tax which has been shrinking because taxable onshore profits of companies have been shrinking.

With corporate, personal, and other taxes, the research finds that there is a remarkably small tax base in terms of absolute numbers of firms or individuals paying tax and behavioural changes are all the more acute in tax systems with such characteristics. Tightening capital controls or preventing tax emigration are simply not viable options.

Tax hikes would need to be broad-based, and as the report shows, would have to be paid by the middle and even lower middle classes to provide some broad sense of sustainability given how narrow the overall tax base is.

There is a broader concern with funding based on tax as BIG is just the first issue on the social wage in front of the fiscus. Any choice here on any funding front will simply not be available in future for other social wage policy choices such as National Health Insurance (NHI) and comprehensive social security reform. There is also President Cyril Ramaphosa’s desire for more spending on the jobs programme to consider. All this could amount to an additional R500bn a year. The social positives of a BIG in poverty alleviation, while clear, are not obviously better than a broader set of choices balanced off each other including better health care such as the NHI.

Much of the modelling in the research report assesses the possibility of trying to raise an additional R50bn or R100bn of revenue. Given the newest propositions for a BIG are more like R300bn, the sheer impossibility of funding this within the current tax base becomes all too apparent. This is equally true regardless of what the social wage spending option is.

“A key takeaway from the research is that there is precious little room for any additional spending at all. So whatever amount is approved and why it is chosen is exceptionally important.

“This of course is not to say that the proceeds of reform and future higher potential growth causing the tax base to expand cannot be spent on the social wage – including even a BIG if that is the political choice. One must be realistic however on when such tax base expansion will credibly happen,” Coovadia concludes.

END

Notes to Editors –

BUSA has today also published an updated version of their position statement on the Basic Income Grant, available on the BUSA website.

Links:
Report: https://www.busa.org.za/?p=3590
BUSA position on BIG: https://www.busa.org.za/?p=3593

For more information, please contact:
Sizwe Maswanganye
Tel: 011 784 8000/0766516444
Email: sizwe.maswanganye@busa.org.za