BUSISIWE MAVUSO: SA simply cannot afford a BIG

POSTED ON: July 26, 2022 IN by Admin

By Busisiwe Mavuso

Tightening capital controls or preventing tax emigration are simply not viable alternatives.

Will SA be able to fund a basic income grant (BIG) on a sustainable basis? Given that unemployment in our country has been stubbornly high for years, and that inequality and poverty have been worsening, supporting such a grant in principle is a moral imperative. From a sociopolitical perspective there is a strong argument to be made for the implementation of a BIG, but from a fiscal perspective the situation is complex.

As I wrote last week, Business Leadership SA (BLSA) has been commissioning research and developing strategies to address SA’s most pressing problem areas, and investigating the funding of a BIG is one priority. I firmly believe any decision on this type of grant must be based on a meticulous assessment. A report authored by Intellidex and commissioned by Business Unity SA in collaboration with BLSA has fortunately provided more insight into the grant’s sustainability.

The research finds that there are only three options to funding the grant: cutting other expenditure, issuing more debt or raising taxes. Cutting other expenditure immediately raises red flags because it is not a viable political or technocratic option. “Free fat” is no longer available, while the results of widespread “top trimming” on the past few years have been negative for service delivery, particularly at local government level. And while raising debt may have been easy when global and local interest rates were low along with overall debt levels, this is no longer the case. Theoretically, raising tax is the only option left on the table.

According to the report there are actually two tax options: organic tax taken from faster growth as an upside to ongoing reforms and channelled towards BIG spending. The social relief of distress grant now benefiting from the terms-of-trade commodity boom is the most relevant example, but unfortunately it is unsustainable given the lack of mining investment and the inability to boost production volumes given the transport logistics constraints on mining companies.

The other option is to attempt to take more tax from the existing tax base by implementing higher rates or new taxes.  The report points out that tax options can simplistically be hiked continually until they hit the required level of revenue, yet such a strategy is not credible given the bleak consequences in terms of taxpayer behaviour and on the economy as a whole.

Most tax options are simply far too small, and taxpayers can be expected to respond to drastically higher taxes such that the amount raised will be far lower than a simple extrapolation of the higher rate. This is also true of the corporate tax take, which has been dwindling because taxable onshore profits of companies have been decreasing.

The report finds that with corporate, personal and other taxes SA has a remarkably small tax base in terms of absolute numbers of firms or individuals paying tax, and that behavioural changes are more drastic in tax systems with such characteristics. Tightening capital controls or preventing tax emigration are simply not viable alternatives.

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 offer any broad sense of sustainability given how narrow the overall tax base is.

The report emphasises a broader concern with funding based on tax: the BIG is just one of several challenges confronting the fiscus. Any choice on the BIG funding front will affect other social wage policy choices such as National Health Insurance (NHI) and comprehensive social security reform, while President Cyril Ramaphosa’s desire for more spending on the jobs programme also has to be considered.

Together these could amount to an additional R500bn a year added to the existing total expenditure bill of R2.16-trillion expected this year. While the social positives of a BIG in respect of poverty alleviation are obvious, they are not clearly better than a broader set of choices balanced off each other, including improved healthcare.

We must also consider that the modelling in the research report gauges the possibility of raising an additional R50bn or R100bn of revenue, but now there are proposals for a BIG that would require more like R300bn in new revenue.

The obvious conclusion is that we simply cannot afford to fund a BIG from the current tax base. A BIG on any pressing scale would make the country’s public finances even more unsustainable than they are at present, and in the context of high interest rates would hobble economic growth.

We believe the only sustainable way to pay for a BIG is to accelerate the country’s economic growth to generate more revenue to allocate to social welfare. That will be the subject of my next column.

• Mavuso is CEO of BLSA. This article first appeared in Business Day.

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