1. The Social, Economic and Fiscal Impact
Briefing for the
Portfolio Committee
on Social Development
The Social, Economic and Fiscal Impact
of a Basic Income Grant for South Africa
Dr. Michael Samson Economic Policy Research Institute
13 November 2002
Thank you for the opportunity to present these research findings to you. The Committee of Enquiry commissioned the E.P.R.I. to investigate the social, economic and fiscal impact of a basic income grant for South Africa. We have presented these findings to the committee, to government and to the F.F.C., and we are delighted to have the opportunity to present them to civil society today. The project team included international and South African researchers, many of whom are here at this meeting.

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?
I want to address three questions today:
(1) on the social impact, how effective is the BIG in terms of its capacity to reduce poverty, in particular with respect to that extreme poverty we term destitution.
(2) on the economic impact, what effects would a basic income grant have on economic growth, on socio-economic development, and in particular on job creation
(3) and third, on the fiscal impact, can South Africa afford a basic income grant?

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?
The most important of these questions, obviously, is the social impact. The reason for a basic income grant is to reduce poverty--irrespective of its economic and fiscal consequences.
How do we predict the social impact? How can we identify whether it will reduce poverty? We use household surveys, like that undertaken by SALDRU at UCT and those carried out by Statistics South Africa, as well as the census. We identify how deep the problem of poverty is, and what are the characteristics of poor households. Then we use an economic model to assess the impact of policy reforms, for instance changes to the existing social grants, other alternatives, and the basic income grant in particular.
The starting point for this kind of analysis is the estimation of a rand value for the poverty line. Who is poor? And how can we identify the poor in a way that we can analyse the whole problem of South Africa’s poverty? Our research estimates a poverty line of R400. A person with income of less than R400 per month is considered poor.
We measure two specific indicators--one is called the poverty headcount: how many people are freed from poverty by a particular social security reform? How many people are freed from poverty by each social grant? The poverty headcount indicator measures this. But small grants like the CSG and the BIG don’t go too far in moving most poor South Africans all the way out of poverty--so the headcount measure is not sufficient for our analysis.
The second indicator we use is the poverty gap measure. The poverty gap is the difference between the incomes of the poor and the poverty line. How much does a social grant reduce a person’s poverty gap? How close does the grant come to eliminating the poor person’s poverty? That is measured by the poverty gap. We use these two indicators together to get a more complete picture of the social impact of a policy reform.

4. (per month per adult equivalent)
South Africa’s current social security system can at best reduce poverty only by a third
R 401
Poverty line
500,000
1,000,000
1,500,000
2,000,000
2,500,000
per adult eq.
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
Number of people in SA
R 0
Income distribution
(per month per adult equivalent)
R 51,000

5. Extreme poverty is effectively eradicated.
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
Here are the results of our research and modeling.
Currently, there are more than 22 million poor South Africans--a little more than half of all South Africans are poor. The current system of social grants only reduces the country’s poverty gap by 23%--less than a quarter. One big problem with existing grants is the poor rate of take-up--less than half the people eligible receive them, and the take-up rate is particularly poor for the child support grant, and for the most vulnerable in general. Ironically, or perversely, because of the means test and other administrative requirements, the poorest have the least access to the social grants.
Some policy analysts have suggested making it a priority to better implement the existing grants. But our modeling demonstrates that even if we could get full take-up of existing grants, we would only reduce the poverty gap by 36%, and free less than a million more people from poverty.
The BIG, on the other hand, reduces the poverty gap by nearly 3/4s, and frees more than 6 million people from poverty. More importantly, it almost eliminates severe deprivation, freeing nearly all the destitute from extreme poverty. We examined several other options, and no policy reform was anywhere near as effective as the BIG.
If the aim is to eradicate poverty, the BIG is the most effective option.

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
While the social impact is our primary concern, the research team also made a number of important findings on the economic impact of the BIG. Conventional economic wisdom sometimes stumbles into the notion that providing social grants to the poor is bad for the economy--by removing the worst consequences of poverty you someone undermine economic incentives. This idea is at the heart of the welfare trap arguments in industrialised countries. Evidence demonstrates that this notion does not apply to South Africa, given the severe nature of this country’s poverty. The evidence shows that attacking poverty is unambiguously positive for the economy.
The government’s HRD strategy recognises this, discussing how poverty and inequality prevent people from attaining the education and skills necessary to become employed and work their way out o fpoverty--that is, the poor are trapped by their poverty.
Think of the predicament of a poor person in a township isolated from employment opportunities--and with two children and only ten rand in assets. Should she spend that ten rand on transportation to look for work, or for her and her children’s survival that day? Looking for work is a high return investment--it might free her from poverty. But in the current economic environment, it’s very risky--she probably won’t find a job and then has no resources. The poor face risks--and if there is no protection from the worst consequences of destitution--the poor are trapped. A basic income grant provides the kind of security that enables the poor to break out of that trap.
A quarter of South Africa’s children are severely malnourished--not because there are neglected--their parents are on average even more malnourished. But households that receive social grants have significantly better nutrition, the children--particularly girls--are more likely to attend school. Households with grants are healthier, And the workers in these households are more productive.
SOCIAL GRANTS ARE DEVELOPMENTAL.

8. Poverty is a tax on workers-- the Basic Income Grant reduces that tax and supports both higher wages and job creation
And more productive workers are more likely to find jobs, earn higher wages, and free their households from poverty. Which leads to one of our most important findings: POVERTY IS A TAX ON WORKERS. Most of the poor in South Africa receive no social grants. Where is their safety net? Unlike in industrialised countries, the survival of the poorest is not financed by the upper income groups, but rather by the working poor. Economists are quick to point out the negative effects of taxes on upper income individuals, but these same effects apply to the working poor who, through remittances, provide the bulk of the social safety net for South Africa’s poorest. This is one important reason for the high unemployment in the country. The working poor are substantially overburdened by the double commitment of supporting their own productivity while maintaining much of the country’s social safety net--on a voluntary basis. A basic income grant goes to the heart of the problem--taking the strain off of poor workers, who then can allocate more resources to improving their households nutrition, education and productivity. As a result, our research shows, a basic income grant will increase both market wages and employment, helping to fuel a virtuous circle of growth and job creation.
We investigated the existing household surveys, and the empirical evidence supports this research. FOR INSTANCE, this graph shows, for the 3 provinces for which we had sufficient data--social grants support higher living standards, and higher living standards promote employment. There’s no evidence that being in dire straits makes people more inclined to find a job. Rather the opposite--as people’s living standards improve, they look for work more intensively and more extensively, and they find jobs more successfully. A basic income grant addresses the real constraints--it improves people’s employability.

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
We also looked at the macroeconomic impact of the basic income grant. Here, we take guidance from the government’s MTBPS: “a more equal distribution of wealth favours higher rates of growth.”
The government’s growth strategy depends on investment--and what are investors most concerned about? Analysis of research reports demonstrates that they are more than happy with South Africa’s inflation and fiscal deficits--they are concerned with social and political stability, with the pace of social delivery, with social backlogs, high unemployment and unrelenting poverty. The BIG provides all South Africans with a stake in the economy--it addresses these concerns head on, and re-inforces the foundations for more investment and economic growth.
And the BIG shifts spending power to the poor, which stimulates economic activity. Since Sept 11, nearly every country has focused on expanding demand to cope with the global economic slowdown. South Africa still operates below its capacity because there is not enough demand in the domestic or global economy. A basic income grant stimulates that flagging demand, and, because the poor consume primarily labour-intensive goods, it does it in a job-creating manner.
Yes, the BIG is a social policy, aimed at addressing the social problem of poverty. But it also has unambiguously positive effects for the economy in terms of socio-economic development, job creation and growth.

10. South Africa’s tax revenue is relatively low by international standards
One way to illustrate the results of the research are tax comparison tables. Here is South Africa compared to industrialised countries. We measure SA’s average tax rate--total tax revenue expressed as a % of the country’s total national income. South Africa collects much less in taxes than in the comparison group. One inference is that SA can raise taxes without undermining its competitiveness.
Wait, is this the right comparison group? Well, one reason we worry about taxes being too high is that upper income individuals will emigrate, taking their skills and capital. But to where do they emigrate--to the UK and US and Australia and Canada--the same countries in this comparison group.

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
SO, to recap-- SA can raise an addition 5% of national income in taxes without undermining its competitiveness
Yet the BIG only requires taxes equal to an additional 2% of national income
It’s still a lot of money--R24 billion rand--but over time that fiscal burden will be reduced. In particular, the resulting growth expands the tax base, generating additional resources to help finance the grant. And over time, the positive social effects reduce the government’s fiscal burden--healthier students have lower repeat rates, taking stress off the education system, and healthier people put less strain on the public health system, also lowering the fiscal burden.

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
Let me conclude by emphasizing three key points--
(1) first, on the social impact, the BIG is the most effective policy option for reducing poverty--and particularly for eliminating the severest poverty we term destitution. That is the main finding supporting the basic income grant.
(2) Second, the economic analysis shows how social security reform is developmental--a BIG promotes economic growth, it reduces the poverty tax on workers and thus promotes job creation, and it improves the effectiveness of social delivery.
(3) Yet the BIG has a big pricetag--approximately 2% of national income. The cost is substantial, but it is clearly affordable given the country’s capacity to mobilize tax revenue.
Thank you, and I’ll look forward to your questions.