The macroeconomics of establishing a basic income grant in South Africa

Abstract

This paper quantifies the effect of fiscal transfers on the trade‐off between social relief and debt accumulation and discusses the economic growth and fiscal implications of different combinations of expanded social support and funding choices. Given South Africa's already high level of public debt, the opportunity to fund a basic income grant through higher debt is limited. Using a general equilibrium model, the paper shows that extending the social relief of distress grant could be fiscally feasible provided taxes rise to fund such a programme. Implementing such a policy would, however, have a contractionary impact on the economy. A larger basic income grant (even at the level of the food poverty line) would threaten fiscal sustainability as it would require large tax increases that would crowd‐out consumption and investment. The model results show that sustainably expanding social transfers requires structurally higher growth, which necessitates growth‐enhancing reforms that crowd‐in the private sector through, for example, relieving the energy constraint, increasing government infrastructure investment and expanding employment programmes.