Now is the time for better basic income grants
Some countries have pledged to give citizens money each month to help them through the Covid-19 crisis. For most South Africans, a basic income could keep bread on the table.
Author:
14 April 2020
Almost two decades after a seminal report recommended that the government should pay a basic income grant of R100 a month to every South African, the idea has made a dramatic comeback with a set of non-governmental organisations and policy experts saying it is the best way to counter the devastating economic impact of the lockdown and Covid-19. The proposal is in line with international best practices, where many Covid-19 stimulus packages have sought to stabilise household incomes through innovative measures such as temporary “helicopter drops” of cash and wage guarantees for retrenched workers.
In 2002, the report of the Commission of Inquiry into a Comprehensive System of Social Security, chaired by Viviene Taylor, said: “The last vestiges of state racial discrimination have subsequently been removed, but a key underlying principle of the system remains in place – the assumption that those in the labour force can support themselves through work, and that unemployment is a temporary condition. In reality, those who cannot find work (and who do not, or no longer qualify for UIF payments) fall through a vast hole in the social safety net.”
South Africa has since extended the child support grant to all children under the age of 18, as the Taylor Report recommended. There are now 12.8 million beneficiaries of child support grants and 3.7 million beneficiaries of the old-age pension. During the year to March 2020, the government spent R175.2 billion on social grants, which was equivalent to 3.4% of Gross Domestic Product (GDP), the value of all goods and services produced in the economy, according to National Treasury’s Budget Review. In 1993, the apartheid government spent 3% of GDP on social security and welfare, according to that year’s Budget Review.
The vulnerable slip through the cracks
However, after 26 years of democracy, the government has still not addressed the vast hole in the country’s social safety net. South Africa has a working age population (people aged 15 to 64) of 37.7 million. This includes 16.4 million who are employed; 10.4 million who are unemployed, according to the expanded definition, which includes discouraged work seekers; and 11.9 million who are not economically active. This category includes students, homemakers, those who are too young to work and people who are ill or living with disabilities.
The Unemployment Insurance Fund (UIF) covers 10 million workers, equivalent to 60% of the employed, who receive benefits when they are retrenched. A contributor gets one day of benefits for every four days of employment up to a maximum of 365 days if they have worked continuously for four years. The benefits are a maximum of 60% of the wage for the lowest earners with a sliding scale down to a minimum of 38% for workers who earn more than R17 712 a month. The Covid-19 Temporary Employee/Employer Relief Scheme (C19 TERS) will provide benefits to employees who are temporarily laid off during the lockdown period.
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Makhosonke Buthelezi, the UIF’s marketing and communications director, says its actuaries have calculated that there is a maximum R15.7 billion surplus available for the fund to spend on the Covid-19 scheme and other labour activation schemes, which provide training and other forms of assistance that help retrenched workers to re-enter the labour force. “But as the economy deteriorates, the UIF’s asset value will also decrease and shrink the surplus available for the fund to spend on any disaster or economic stimulus schemes,” he says.
The UIF does not cover almost 3 million vulnerable people in the informal sector or those who have never worked and contributed to the fund before. It covers 26.5% of the working age population and 37% of the labour force. Therefore, policy experts have called for other interventions to close the hole in the country’s social security system and stabilise household incomes during the Covid-19 economic earthquake and humanitarian disaster. The lockdown involves shutting down about two-thirds of GDP for two or three months. The economy could take a direct hit of up to R600 billion of lost GDP if the lockdown lasts for two months.
A report by PricewaterhouseCoopers (PwC), the global accounting and management consulting firm, has painted a horrifying picture with three scenarios for the economy during 2020 based on the scale of the government economic policy responses. The three scenarios all assumed that the government has a budget constraint and will implement a fiscal stimulus, the injection of new money into the economy, of only R59 billion, which is equivalent to 1.2% of GDP. The “mild” scenario assumes that the Reserve Bank will also slash interest rates to 1% from 5.25%.
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Under this best case, South Africa’s GDP will plunge by 8.4% during 2020. The economy will collapse by 13.8% under the “medium” scenario and 20.4% under the “severe” scenario. By comparison GDP declined by 1.5% in 2009 in the wake of the global financial crisis. The economy lost one million jobs between December 2008 and March 2010. PwC’s best case scenario is almost six times worse than the GDP decline after the global financial crisis. It is frightening to even try to project the scale of the looming jobs bloodbath.
Nobody is sure how long the global recession will last. Initially, there was talk of a “sudden stop” in each country over one quarter that would be followed by a “sudden start” during the next three months – a so-called V-shaped recovery. Now, there is talk of intermittent lockdowns with cycles of tightening and easing as governments reintroduce social distancing measures as new clusters of cases or outbreaks emerge after initial successes. Recently, the United Nations said: “A large-scale coordinated and comprehensive multilateral response amounting to at least 10% of global GDP is needed now more than ever.”
Helicopter drops
The London Business School (LBS) has evaluated various possible economic policy responses and concluded that universal incomes to households and cash grants to firms are most likely to stop immediate economic collapse. “Government spending should be now and as large as the predicted economic costs, focusing on cash disbursements to households and firms. Central Banks should provide financial backing to the government, not just through their own reserves but also by printing money if necessary.”
In the United States, households will receive $600 billion or 30% of the country’s record $2.2 trillion stimulus, which is equivalent to about 10% of GDP. This includes a helicopter drop or cash payment of $1 200 to every citizen that was worth $300 billion. A helicopter drop, a term coined by economist Milton Friedman in 1969, refers to a last-resort measure to stimulate an economy. In the UK, the government will pay up to 80% of the wages of workers who are retrenched. In Denmark, the government will pay between 75% and 90% of wages. The Dutch government will pay 90%. Spain is planning to introduce a universal basic income to mitigate the impact of the coronavirus. The country’s deputy prime minister has said it could become a permanent instrument.
Hong Kong made a cash payout of $1 300 to each citizen, which was worth $9.2 billion. Singapore announced cash payouts to citizens of between $211 and $632 depending on income levels as part of a $37.8 billion stimulus that was equivalent to 11% of GDP. To protect jobs, Singapore will pay 25% of every worker’s wages for nine months. In Malaysia, the government announced a stimulus that was equivalent to 17% of GDP. It included a one-off payment of $370 to 4 million households living on less than $900 a month. According to a World Bank and International Labour Organisation review of responses to Covid-19, 106 countries had introduced social protection and jobs responses by early April. Cash transfer programmes – 124 in 71 countries – were the most widely used intervention.
The South African scenario
The above benchmarks from the United Nations and the London Business School imply a required South African stimulus of between R500 billion (10% of GDP) and R600 billion (the predicted economic shock). However, the government’s economic measures, most of which do not involve the injection of new money into the economy, are, at best, less than 1% of GDP. Kate Philip, a development economist, has proposed a special Covid-19 grant paid over five months targeted at the poorest-income decile or population group, who have no access to social grants. She says none of the existing measures will reach the informal sector. Targeted at six million people with payments of R1 000 a month for three months and R750 and R500 for the last two months, such a grant would cost R25.5 billion.
Five academics – Ihsaan Bassier, Joshua Budlender, Murray Leibbrandt, Rocco Zizzamia and Vimal Ranchhod – from the universities of Cape Town, Oxford and Massachusetts Amherst have proposed a R500 a month top-up to the R445-a-month child grant that would cost R6.2 billion a month. However, both proposals do not close the hole in the country’s social security system or come anywhere close to achieving the required fiscal stimulus. In an open letter to President Cyril Ramaphosa, a group of more than 150 economists proposed a helicopter drop of R1 000 a month for four months to households, which they did not cost.
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The Southern Africa Social Policy Research Institute estimates that providing a basic income of R561 – the food poverty line – to everyone who does not receive a grant (about 33 million people aged 18 to 60) would cost R18.6 billion per month. The Reserve Bank, which has foreign exchange reserves worth R800 billion, could fund a basic income for six months. While the mantra of international Covid-19 stimulus packages is to have “timely, targeted and temporary measures” for three to nine months, it would be difficult to withdraw such a benefit in the South African context of high levels of poverty and inequality.
The annual cost of providing such a basic income, as an entitlement and without a means test, would be R223 billion at the food poverty line, R323 billion at the lower-bound poverty line of R810 a month and R488 billion at the upper-bound poverty line of R1 227 a month. It would be possible to claw back some of the costs through the tax system as employed people pay back some of the benefits. There can be taxes on wealth, land and financial transactions. Also, the multiplier (or secondary) impact of the new spending would generate a higher rate of GDP growth and new sources of tax revenue that would offset a significant portion of the costs.
Sustainably supporting communities
In a recent interview, Taylor said: “It is important to act now as part of a humanitarian response to the crisis and guarantee the country’s political and economic stability. A basic income is the most efficient means of achieving a redistribution of income. The benefits are immediate. It results in higher levels of consumption for the poorest members of society. The new money will circulate in local economies, including spaza shops, which will trigger broader benefits in terms of economic development. People will use the money to search for employment or to invest in their microenterprises. A basic income is a more sustainable way of supporting communities and individual livelihoods than investing in large companies.
“Global crises, related to finance, health and climate, are now part of a globalised economic system. These crises are now more frequent. Every country must prepare for them. Part of the preparations should be to have a robust social security platform. Never again should we leave millions of people vulnerable to such sudden economic shocks. I was part of a United Nations commission, which found that countries with sound social security platforms recovered faster than others after the East Asian crisis of 1998 and the global financial crisis of 2008. We should evaluate the costs of implementing a [Basic income grant (BIG)] against the costs of doing nothing. However, the benefits of a BIG for South Africa go beyond the economy. It is an essential requirement for social cohesion, political stability and a reduction in destitution.”
