The Social, Economic and Fiscal Impact of a Basic Income Grant for South Africa Dr. Michael Samson Economic Policy Rese

1. Briefing for the Portfolio Committee on Social Development The Social, Economic and Fiscal Impact of a Basic Income Grant for South Africa Dr. Michael SamsonEconomic Policy Research Institute 13 November 2002

2. 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?

3. 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?

4. 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 R 12 R 17 R 25 R 36 R 53 R 78 R 114 R 167 R 244 R 357 R 523 R 765 R 1,121 R 1,641 R 2,402 R 3,517 R 5,149 R 7,538 R 11,037 R 17,775 R 26,025 R 50,715 per adult eq. South Africa’s current social security system can at best reduce poverty only by a third R 401 Poverty line Number of people in SA R 0 Income distribution (per month per adult equivalent) R 51,000

5. The basic income grant enables the social security system to eliminate destitution and three-quarters of the poverty gap Many people escape poverty. Extreme poverty is effectively eradicated. Inequality is reduced

6. The social impact of the BIG

7. 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

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

9. 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

10. South Africa’s tax revenue is relatively low by international standards

11. 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

12. 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