SANE Views

Vol.2 No.5, 19 February 2002

The Social and Economic Impact of a Basic Income Grant - A Summary of Current Research

A major process of advocacy of a Basic Income Grant (BIG), spearheaded by COSATU, is underway in South Africa. The Economic Policy Research Institute (EPRI).has been investigating the feasibility of its cost and financing from tax income. A summary of the investigation is attached. SANE fully supports this initiative. We are also extending the investigation under our own steam to include the concept of complementary currencies and other New Economics principles. As the results of this research process develop we shall keep you informed via SANE Views.

Aart Roukens de Lange
Editor, SANE Views)

The Social and Economic Impact of a Basic Income Grant - A Summary of Current Research

What is the potential of the current social security system to address poverty effectively?

Especially the SOAP (Social Assistance Programme) have tangible developmental impacts on people's lives: Having a reliable source of regular income provides an essential security especially in poor rural households. It is widely acknowledged that while the needs of poor people differ, by far the majority budget the money carefully and spend it for the good and development of their whole family.

However, the current system relies mainly on the support for the elderly, whereas children and working age adults are left with little or no support. It is evident that the current support, both in terms of coverage and quality, is far from being able to break the poverty cycle effectively. Over 14 million out of the 22 million people in South Africa who are living in the bottom two quintiles have no access to social assistance and are left in harsh poverty with little means of escape. Even if one assumes that all intended beneficiaries of the current social security system are reached, on average the transfers are only able to close the poverty gap by 36.8% for this group. For about half of the poor the potential transfer into their households amounts to less than R25 per capita per month.

Research has further shown that the current system is ill equipped to deal with the HIV/AIDS pandemic. The support given is so limited that the current system is not able to cushion the additional burden the affected households have to carry. Furthermore, the group most affected by HIV/AIDS, namely working age adults, are left with virtually no support, which results in a severe increase of the number of people without any income. The expected consequence is a worsening of the overall poverty situation in the group of young working age adults and children, if no drastic measures are taken.

The concept of a basic income grant

Following COSATU's proposal at the Job Summit in 1998, a Basic Income Grant builds on the experience of a broadly based cash transfer system. A minimum of R100 per month would be paid to all except those already receiving social assistance. In practice the grant would be calculated per person and paid out preferably to the primary care-giver in the household. The money being paid to the people not in need is to be reclaimed through the tax system.

The social and economic impact

A Basic Income Grant of R100 nearly triples the average per capita amount potentially going into poor households, from R46 under the current system to R120. The average closing of the poverty gap would increase to over 80% for people in the bottom two quintiles. This in effect means that a Basic Income Grant of R100 doubles the amount available for consumption for people in the first quintile, going a long way to improve the overall diet and food security especially for the poorest.

The gross costs of a Basic Income Grant of a R100 and full take-up amount to R40 billion. Deducting the money which can be recovered from higher income earners through changes in the tax structure (meaning taking the money back which is additionally paid to this income grouping through the Basic Income Grant) the net costs amount to between R20 to R25 billion annually. These costs to the state can be financed through progressive taxation and or re-prioritisation.

The reduction of inequality - one of the greatest legacies of Apartheid -has also been identified as a prerequisite for economic growth and investment in developing countries. Given the fact that South Africa has one of the highest levels of inequality in the world, a reduction is imperative. The Basic Income Grant in a combination with a solidarity tax reduces inequality on a broad scale and ensures that nobody is left without any income.

A Basic Income Grant takes account of the various living arrangements in South Africa without favouring one over the other, avoiding incentives for people to change their living arrangements. This is of particular importance for the impact of the HIV/AIDS pandemic as here people should be able to make their arrangements according to their needs and not according to the payment of social assistance.

The Basic Income Grant is a universal grant without a means-test as the administrative consequences of a programme based on a means test are severe. This experience makes it clear that, given the current infrastructure and administrative capacity in South Africa, any option requiring a means test is in danger to overload the administration and thereby to jeopardise the success of the whole programme. E.g. The current administration has not been able to administer the means test for the CSG (Child Support Grant) in an effective way, leaving millions of poor children without their legitimate support. However, a universal grant requires far less in terms of personnel, building of infrastructure, training or time, making it by far the cheapest administrative option. A universal grant has the further advantage of cutting out the possibilities of corruption as everybody qualifies.

Going hand in hand with the means test is the question of incentives. Any means test by definition creates desired and undesired incentives. People who fall just below the cut-off point of the means test might be discouraged to change their situation in order not to lose the grant. This is an incentive which definitely has to be avoided. A Basic Income Grant shows none of these negative incentives.

An even more direct and measurable impact in the economy of cash transfers into households is the increase and stabilisation of demand, consumption and savings. Local and especially rural markets benefit greatly from these transfers as they have the potential to kick-start the economy in the underdeveloped rural areas. The Basic Income Grant, by providing a universal, stable, and continuous income source, has the highest developmental potential as the people can count on it and better plan their economic activities.

For details see:

HAARMANN, Claudia 2001. Poverty and the current social assistance programmes in South Africa. Cape Town. (Research Monograph Series 21)
HAARMANN, Claudia 2001. Social assistance programmes: Options and impact on poverty and economic development in South Africa, Cape Town. (Research Monograph Series 22)
HAARMANN, Claudia & HAARMANN, Dirk 1998: Towards a comprehensive social security system in South Africa. written for the Congress of South African Trade Unions (COSATU).
SAMSON, Michael; BABSON, Oliver; MACQUENE, Kenneth 2000: The macroeconomic implications of poverty reducing income transfers. Presentation at the conference: 'Towards a sustainable and comprehensive social security system'. Cape Town EPRI.
United Nations Development Programme (UNDP) (principal author: V Taylor), South Africa: Transformation for Human Development (2000).