The government could fund a new Basic Income Grant for South Africa by borrowing money, but ultimately it will be the taxpayers who will pay for the new program, said Michael Sachs, a professor at Wits University.
In a presentation hosted by the Department of Social Development on Tuesday (October 26), Sachs said a decision to borrow money for the new grant would depend on two factors:
- The current state of the economy;
- The government’s budgetary situation.
Ultimately, even if the government decides to borrow instead of directly raising taxes, Sachs said the issue of spending and taxes cannot be separated and ultimately it is all about a “question of sequencing”.
“We could say first introduce the expenses and wait a year or two before introducing the taxes. But ultimately, in a year or two, every rand we spend on income support means an additional rand of tax. Either now or in the very near future.
While there are several ways the government can extract this money – including printing tickets, conscription and borrowing – Sachs said taxation is the most transparent, accountable, progressive and efficient mechanism.
Taxation has also proven to be the only mechanism compatible with sustained economic growth, he said.
“In my opinion, in the medium term, the only reliable sources of income are the personal income tax (PIT) and the value added tax (VAT).
“These two instruments have several important properties, but most importantly, they exist. A tax that exists and has been shown to increase revenue is a much stronger candidate than a tax that only exists as a concept in someone else’s mind.
While the government may introduce other taxes in the future, in the initial period, those two taxes will have to bear the burden, Sachs said.
PIT vs VAT
Sachs said the PIT is likely to favor the government because it is very progressive and has a very strong focus on wealthy households in the country.
“VAT is widespread, which means it is a reliable source of income. So when you fund something like Basic Income Support, you don’t want the source of income going up and down from year to year.
He highlighted corporate income tax (CIT) as a comparatively more volatile source of income. However, Sachs said there were still issues with the IRP and VAT that the government should grapple with.
“If you focus all of your taxes on a small segment of the population, you run the risk that that tax base will be eroded and that tax base will become less reliable in the future.”
This means that IRP is the most appropriate from an equity perspective, while VAT is likely to be more effective as an income generation tool, he said.
The budget should bring clarity
Finance Minister Enoch Godongwana is expected to clarify the feasibility of a basic income subsidy for South Africa when he presents his Medium Term Fiscal Policy Statement (MTBPS) on November 11.
In a research note this week, investment bank BNP Paribas said it expects the finance minister to promote a grant for job seekers in the country.
“We expect Mr. Godongwana to advocate instead a restructuring of the existing grant framework and perhaps the introduction of a new, more targeted ‘jobseeker’ grant that could replace the current special relief from the grants. distress during fiscal year 2022/2023. It said.
“We estimate that this could cost the tax authorities R 30 billion to R 35 billion (0.5% of GDP per year) as early as next year and would mean that social protection expenditure as a percentage of income stands at 2 -3 percentage points above before Covid- 19 levels.
More generally, BNP Paribas expects the Treasury to continue calling for faster economic reforms rather than sharply increased levels of social dependence on the state.
Read: New tax could be a ‘gold mine’ for South Africa (expert)