The tax hikes that could fund a new basic income grant in South Africa

While president Cyril Ramaphosa has been a strong proponent for a basic income grant in South Africa, the government also needs to be rational about the fact that the additional expenses will necessitate raising taxes and budget cuts, says Michael Sachs.

Sachs is an adjunct professor of the Southern Centre for Inequality Studies at the University of the Witwatersrand. He was head of the National Treasury’s Budget Office between 2013 and 2017 and research coordinator at the head office of the African National Congress between 2001 and 2007.

“For many years National Treasury has correctly argued that structural increases in spending must be backed by structural increases in taxation. Taxes are not the only means through which government can extract economic value from society on a permanent basis,” Sachs said.

“But taxation is (by far) the most transparent, accountable, progressive, and efficient mechanism. It has also proven to be the only mechanism that is compatible with sustained growth, especially in large social states. ”

What are the options?

Sachs said there are several options that now need to be considered, including:

• Removing the tax breaks on retirement savings would raise the effective rate of Personal Income Tax for the most affluent;
• Government can also step harder on the brake of fiscal drag, which distributes the burden onto the middle strata but creates inefficiency and perverse incentives;
• A better approach would be to raise the rate of value-added tax (VAT).

In recognition of the permanence of the grant – and a host of other fiscal pressures – some combination of all these tax measures needs to be placed on the table for discussion as soon as possible, Sachs said.

“Tax increases need not be implemented immediately but must be announced far in advance. Delaying tax increases would help reap the multiplier effects of the new spending.

“But upfront clarity on plans for increased taxation is needed to limit the deterioration in financial conditions which, if left unchecked, could overwhelm any positive multiplier effects. Tax changes of this magnitude also require extensive public deliberation and policy work to ensure effective design and orderly implementation can take place.”

Not a case of generosity 

Sachs noted that basic income support is not a question of the government ‘being generous’.

The money will be taken from employed citizens and the affluent, and it is they that the president should be calling upon to be generous while explaining clearly why he believes it is necessary that they pay higher taxes, he said.

“Until now, and in stark continuity with his much-maligned predecessor, he appears to believe that these awkward details can be left to Treasury.

“The trade-offs required to make basic income support sustainable include higher taxes, but also critical compromises on public-sector pay, economic growth, and the transformation of energy supply that the ANC has so far refused to swallow.”

Basic income support also means sacrificing fiscal space for other progressive social policy interventions, potentially for the next generation, and if not handled carefully could accelerate the deterioration in key government services such as basic education, healthcare, and policing, Sachs said.

“An income support grant that reaches poor and unemployed workers can become an effective and prideful part of our fiscal constitution. It will mean sacrifices from the wealthy, but also from those in secure jobs, including public-sector workers and other unionised insiders. And this will take political courage to push through.”

You can read Sachs’ full analysis on the Basic Income Grant on the econ3x3 website here. 

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