Introduction
President Cyril Ramaphosa’s ambitious plan to implement a Basic Income Grant (BIG) in South Africa has garnered significant attention. The urgency of providing support to millions of unemployed citizens, as emphasized in the ANC’s January 8th statement, raises crucial questions about how the government intends to fund this initiative.
The Current Dilemma
Addressing the dire situation of millions of unemployed working-age adults, President Ramaphosa, in his address at the ANC’s 26-29 January 2024 national executive committee lekgotla, highlighted the need for a permanent solution. The existing R350 Social Relief of Distress (SRD) Grant, introduced during the COVID-19 pandemic, laid the groundwork for a more sustained form of targeted income support.
Exploring Funding Models
1. Increase in Taxation
Wealth Taxes: A Progressive Approach
Minister of Social Development Lindiwe Zulu outlined various taxation options, including wealth taxes. While progressive, concerns about tax avoidance and inconsistent revenue make this route challenging.
VAT Conundrum
Considering a Value Added Tax (VAT) increase, Zulu acknowledged the potential setback: the poor might bear a disproportionate burden due to VAT’s flat rate.
Personal Income Tax: The Preferred Route
The most likely option is a progressive Personal Income Tax, targeting higher-income earners to reduce inequality. Zulu advocates for its sustainability and reliability as a long-term revenue source.
2. Borrowing
While the borrowing option provides additional funding without immediate budget reprioritization or tax increases, the government and National Treasury express wariness due to potential economic strains.
3. Reprioritization of Budget Allocations
Shifting funds from less effective government expenditures to address the urgent needs of the poor is a complex option. The advantages include increased equity, but challenges in implementation loom large.
Fiscal Challenges and Considerations
Edgar Sishi, head of the Treasury’s budget office, emphasized the delicate fiscal situation in South Africa. Decisions regarding the 2024/25 fiscal year could significantly influence public perception in the upcoming elections.
Current Grant Expenditure
The Department of Social Development has allocated a substantial portion of its budget for grants. In the 2023/2024 financial year, 96.4% of the R263 billion budget is directed towards direct cash transfer payments, with R36 billion used to extend the Covid-19 SRD grant.
Conclusion
As South Africa grapples with the complexities of funding the Basic Income Grant, the government faces critical decisions. Balancing the immediate needs of the populace with long-term fiscal responsibility will determine the success of this impactful initiative.
