The Social, Economic and Fiscal Impact of a Basic Income Grant for South Africa Dr. Michael Samson Economic Policy Research Institute 13 November 2002

The Social, Economic and Fiscal Impact of a Basic Income Grant for South Africa

Dr. Michael SamsonEconomic Policy Research Institute

13 November 2002

Briefing for thePortfolio Committee

on Social Development

Overview• Social impact: how effective is the

basic income grant in addressing poverty?

• Economic impact: how will the basic income grant affect growth, development and job creation?

• Fiscal impact: is the basic income grant affordable?

Measuring the social impact

• Use household surveys and micro-simulation models to evaluate the poverty impact

• Poverty headcount--how many people are freed from poverty?

• Poverty gap--how much does the policy reduce the gap between the incomes of the poor and the poverty line?

South Africa’s current social security system can at best reduce poverty only by a third

Poverty line

Income distribution (per month per adult equivalent)

R 0

R 401

R 51,000

Num

ber o

f peo

ple

in S

A

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

per a

dult

eq.

R 1

2

R 1

7

R 2

5

R 3

6

R 5

3

R 7

8

R 1

14

R 1

67

R 2

44

R 3

57

R 5

23

R 7

65

R 1

,121

R 1

,641

R 2

,402

R 3

,517

R 5

,149

R 7

,538

R 1

1,03

7

R 1

7,77

5

R 2

6,02

5

R 5

0,71

5

The basic income grant enables the social security system to eliminate destitution

and three-quarters of the poverty gap

Extreme poverty is effectively eradicated.

Many people escape poverty.

Inequality

is reduced 0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

per a

dult

eq.

R 1

2

R 1

7

R 2

5

R 3

6

R 5

3

R 7

8

R 1

14

R 1

67

R 2

44

R 3

57

R 5

23

R 7

65

R 1

,121

R 1

,641

R 2

,402

R 3

,517

R 5

,149

R 7

,538

R 1

1,03

7

R 1

7,77

5

R 2

6,02

5

R 5

0,71

5

The social impact of the BIG

PolicyPoverty

gapreduction

Additionalpeople freedfrom poverty

Currentsituation 23% --

Full take-upof existinggrants

36% 0.8 millionpeople

BasicIncomeGrant

74% 6.3 millionpeople

The BIG is developmental and supports economic growth

• The government’s HRD strategy identifies how poverty and inequality undermine human capital development and thus constrain higher incomes – the poor are trapped by their poverty

• The Basic Income Grant provides income security, promoting productive risk-taking and helping to break that trap

• The grant supports improved nutrition, health, education and productivity

Poverty is a tax on workers--the Basic Income Grant reduces that tax and supports both higher wages

and job creation

Living standards and finding a job

02468

101214

KwaZulu Natal Gauteng Western Cape

Living standard prior to finding a job (quintile)

1 2 3 4 5 KwaZulu Natal

1 2 3 4 5 Gauteng

1 2 3 4 5 Western Cape

The macro-economic impact supports investment and growth

• The government’s MTBPS recognises that “a more equal distribution of wealth favours higher rates of growth.”

• Providing all South Africans with an economic stake improves social stability and re-inforces the foundations for more investment and economic growth

• Shifting spending power to the poor stimulates job-creating economic activity

Government Revenue OECD Comparison

0 10 20 30 40 50 60 70

Korea

South Africa

USA

S w itzerland

Ja pan

Australia

Canada

Iceland

Ire land

Portugal

UK

Spa in

Gre ece

Cz ech Re p.

Italy

Germ any

Fra nce

Austria

Belg iu m

Norw ay

Ne ther la nds

Finland

De nm ark

S we den

p erce nt of na tio na l incom e

South Africa’s tax revenue is relatively low by

international standards

0 10 20 30 40 50

Percent

HUNGARY

POLAND

BRAZIL

URUGUAY

GABON

OMAN

TRINIDAD & TO.

PANAMA

SOUTH AFRICA

VENEZUELA

TURKEY

THAILAND

MEXICO

Government Revenue as a Percent of National Income (GDP)

Source: IMF

The Fiscal Impact

• Tax effort analysis demonstrates that South Africa can raise taxes by five percent of national income without undermining international competitiveness

• The basic income grant only requires an increase in taxes of two percent of national income

• The positive growth and development effects improve the affordability of the grant in the medium-to-long run

Conclusions

• The Basic Income Grant is the most effective policy option for eliminating destitution and reducing poverty

• Effective social security reform is developmental, generating a positive growth impact that promotes job creation while improving the effectiveness of social delivery

• The cost of the grant is substantial but affordable, requiring an increase in taxes equal to approximately two percent of national income