Studies found that higher taxes, especially those used to fund transfers such as the Big, reduce economic growth
The recent riots, vandalism and looting of warehouses, shopping malls and shops in KwaZulu-Natal and parts of Johannesburg have been characterised by some as a result of the pressure-cooker effect from a quartet of inequality factors: access to quality education, job opportunities, income and wealth.
The visuals, including that of a young boy with a plastic bag containing takkies and underwear, reminded us of what we have always known: there is ravaging poverty among many South Africans. This has given impetus for renewed calls for the introduction of a universal basic income grant (Big) as a solution to put a floor on the depth of people’s desperation for survival. However, these calls ignore the reality of our fiscal position and the detrimental long-term implications for growth and the nation’s psyche.
SA’s unemployment has been stubbornly high for many years, and inequality and poverty have been worsening. This has always been known. The Covid-19 pandemic worsened all socioeconomic factors to boiling point. Obviously, income support had to be put together to help those further pushed into extreme poverty by the impact of the pandemic. With each stringent lockdown regulation that closes another sector of the economy temporary income support for the duration of the lockdown is required. That temporary income support is not a Big.
While the introduction of a Big appears noble, the long-term consequences for the country have not been ascertained. Applied Development Research Solutions (ADRS) presents what it calls fiscally neutral Big scenarios, where higher taxes on higher-income earners are used to fund the grants. The obvious shortcoming shown up by the modelling is that this does not provide any new injection of resources into the economy, a point that is admitted in no uncertain terms. In effect, the proposal is simply to take more from the narrow tax base to pay those outside the tax base.
The flaw in these scenarios is that there is no attempt to analyse the impact of higher taxation on economic growth and therefore on tax revenues. Out of about 26 studies on the effect of tax on economic growth, 24 found empirical evidence that higher taxes, especially those used to fund transfers such as the Big, reduce economic growth, while two found no effect.
Low economic growth implies lower employment growth. The assumptions embedded in these scenarios of rising economic growth because of the transfers to those with no income increasing their consumption simply misses the reduction in savings and consumption from higher-income earners, and reduced investment by corporates.
Moving away from the obvious methodological deficiencies of ADRS scenarios, a Big at this point is simply not affordable, unless the state makes a deliberate decision to increase debt as a financing mechanism or further reduce spending on other social services such as education, health and policing. Both of these decisions are suboptimal. Rising debt to finance cash transfers without the corresponding improvement in productivity, economic growth and employment will eventually lead to a default on debt, with more dire consequences for the very same poor we seek to uplift.
The past 10 years have demonstrated this path in no uncertain terms, where half of cuts in spending have been used to fund failing state-owned enterprises, leading to higher debt and low growth. These lessons must be heeded and considered. A bandage to a broken bone does not fix the broken bone, it merely covers it up for a while.
The same with a Big; it is not a solution to long-term unemployment, income & wealth inequality and poverty. The institutions that will outlive political office-bearers must make policy decisions that are in line with a sustainable economic future. That future is not the introduction of an unaffordable Big but temporary income relief combined with economic reforms that increase productivity and empower people to stand on their own.