A jobseekers’ grant and a caregivers’ grant might be “an acceptable compromise” to a permanent Social Relief of Distress (SRD) grant or a basic income grant (BIG), according to a discussion document published by National Treasury in August.
The Department of Social Development is pushing for a BIG or a permanent SRD grant.
However, proposals for both grants must “contain sufficient targeting mechanisms” to be affordable, Treasury says.
It also says that “reprioritisation/shifts within the social wage budget should be considered as an option to extend social protection”.
The proposal for a jobseekers’ grant and a caregivers’ grant is contained in a discussion document published by the Presidency in July.
The document, titled “Putting South Africa to work: An integrated approach for the working age unemployed”, proposes a number of interventions to address unemployment. One of the interventions is “expanded social protection for the working age unemployed” (see below).
Treasury’s discussion document, titled “Consideration when deciding on the future of the R350 grant”, contains a plethora of data and comments that indicate it is not enthusiastic about extending the SRD grant.
Neither the Presidency’s nor Treasury’s documents have been made publicly available. But news agency Groundup published both documents on its website last week.
Treasury sets out the implications for the fiscus if the SRD grant is extended, as well as the mechanisms that could be used to finance extending the grant, including increasing borrowing, reducing public expenditure, and raising taxes.
According to the document, South Africa’s ability to sustain its spending policies over the long term is weak, as the cost of servicing debt increases faster than economic growth. “This implies that South Africa remains on a path to a fiscal crisis without higher growth or primary fiscal surpluses.”
It also draws attention to many “unresolved” expenditure pressures facing the state, including state-owned enterprises, struggling municipalities, e-tolls, and the Road Accident Fund.
Accommodating higher fiscal spending could subtract more than R900bn from GDP over the long term, Treasury says.
It said that accommodating these spending pressures will have a diverse, but overall, negative impact on real GDP.
“The permanent extension of the SRD and higher government compensation add to household consumption and GDP growth, mainly in the near term. However, the negative implications of breaching the compensation ceiling, not fully funding the SRD grant extension in a deficit-neutral manner and providing further funding to SOCs, outweigh the positive impact these have on the economy, with a timing lag,” the document says.
‘Solidarity tax’ or wealth tax won’t be enough
“The extension of the SRD grant, or its replacement with another programme of income support, will require a substantial increase in public expenditure. The lowest cost from the multitude of scenarios that are being explored is around R50 billion per year,” Treasury says.
A “solidarity tax”, which has typically been seen as a one-off measure, would not satisfy the recurring funding requirement for an SRD grant. Permanent increases in expenditure, such as an extension of the SRD, would ideally require a permanent increase in tax revenue to avoid unsustainable increases in debt over the medium term, it says.
Treasury’s document also rejects a wealth tax.
It said the increase in the personal income tax rate from 41% to 45% for those with taxable incomes above R1.5 million in 2017/18 was expected to raise about R4bn, “which is considerably less than the funding requirement for the SRD”.
“Sars micro data suggests that taxpayers responded to the increase by reducing their taxable income. It is likely we did not increase revenue by the R4bn,” Treasury says.
Biggest tax increase yet
It said a tax increase to raise R50bn would be the largest tax increase the country has seen, in a period when consumers and the economy are under pressure from Covid-19, inflation and a weak global economy.
The largest tax increase since 1994 was in 2018, when the government aimed to raise R36bn by increasing VAT to 15%, together with increases in the fuel levies, personal income tax, and the excise duties on alcohol and tobacco.
The document shows that Treasury is not in favour of tax increases for a number of reasons, including that previous rounds of tax increases did not raise much revenue, failed to close the budget deficit, and may have hampered economic growth.
It says further tax increases may not generate as much as expected without efficient tax collection or in an economic downturn.
Scenarios for increasing personal income tax
The document sets out two scenarios to raise R50bn via an increase in personal income tax.
- Scenario A: Not adjusting any of the tax brackets for inflation and increasing the marginal income tax rates by three percentage points, except for the bottom bracket to keep the tax-free threshold the same.
- Scenario B: Not adjusting the tax brackets for inflation but increasing all the tax rates by 1.5 percentage points and reducing the tax-free threshold from R91 250 to R74 850.
It said under both scenarios, most of tax increase would be raised from those earning between R350 000 and R750 000. Scenario B would have a lower tax rate increase, but it would place a heavier tax burden on those earning lower incomes.
Higher VAT rate is an option
Treasury says that given the revenue potential, a VAT increase should be considered as an option.
“From a purely macro-economic standpoint, an increase in VAT rate is relatively less detrimental on economic growth and employment than raising income taxes (personal income tax or corporate income tax).
“Due to its broad base, a rate increase to 16% or 17% could be somewhat inflationary in the short run but could raise an estimated R24.5bn or R49.4bn, respectively.
“Raising VAT will have a (albeit very small) negative impact on inequality (i.e., increase regressivity) unless compensated for through expenditure programmes (i.e., social grants, etc). VAT zero-ratings and exemptions, on the other hand, shrink the tax base and require a higher standard rate in order to compensate for the revenue loss.
“An increase would potentially result in demands for more zero rating, as was the case when VAT rate increased to 15%.”
The document considers various scenarios for increasing the VAT rate to 16% or 17% or keeping it at 15% and reducing the list of zero-rated items.
The Presidency’s grants proposals
The Presidency’s document sets out four options for social protection for the working age unemployed:
- Continuing the SRD grant;
- Replacing the SRD grant with a jobseekers’ grant of similar value;
- Implementing a jobseekers’ grant and a caregivers’ grant; or
- Implementing a minimum income guarantee “to combine all interventions”.
Both the permanent SRD grant and the minimum income guarantee would be paid to all unemployed people between 18 and 59 years whose income (including that of their spouse) was below the food poverty line (R663 in August) and who were not receiving any support.
The difference between the SRD grant and the minimum income guarantee is that the former comes without conditions, whereas recipients of the minimum income guarantee have to register on a database and “must be available for work”, except in “defined circumstances” (for example, they are primary caregivers). Those aged 18 to 24 who do not have a matric must be in school, to qualify for the minimum income guarantee.
The second option is a jobseekers’ grant, also of R350 a month. The eligibility criteria for the jobseekers’ grant are the same as for the SRD grant. However, recipients also have to register on a database. Recipients would receive various forms of support, including opportunities for skills training, counselling, and being matched to job opportunities.
The third option is a jobseekers’ grant and a caregivers’ grant. The conditions to receive the jobseekers’ grant are the same as above. In addition, recipients “are required to be available for work and must accept opportunities that are available (for example, in public employment, training)”. Recipients aged 18 to 24 must be in school/second chance matric if they have not completed their secondary education. The caregivers’ grant would be provided to all unemployed caregivers who are unable to work (subject to the food poverty line threshold, including spousal income).
it is time for ALL South Africans to pay tax, including reducing the taxfree threshold to NIL
Hi Andre. Did you forget that VAT is also a tax. What you are saying is that a 15% tax on expenditure for people on an extremely low income is not good enough. No matter how poor they are, they must still pay both taxes at least 18% income tax on their tiny incomes and then 15% VAT when they spend the remaining 82% of their tiny incomes on basic necessities.