Basic Income Grant: briefing by Coalition

Meeting report

SOCIAL SERVICES SELECT COMMITTEE
25 June 2002
BASIC INCOME GRANT: BRIEFING BY COALITION

Chairperson: Ms L Jacobus (ANC)

Documents handed out
Basic Income Grant - Powerpoint Presentation
South African for a Basic Income Grant statement (Appendix 1)
Frequently asked questions on BIG (Appendix 2)
Fiscal Impact of BIG (Appendix 3)
BIG Submission to the Department of Social Development
Report by the Committee of Enquiry into a Comprehensive Social Security System (in chapters on Department website)
Basic Income Grant Review of Research (pdf) by EPRI
South Africa's Tax Capacity: A Developing Country Analysis by EPRI

SUMMARY
A presentation was made by the Basic Income Grant Coalition on the proposal that every South African should have access to a basic grant of R100 per month. In order to do away with administrative hurdles and corruption, the means test would not be used in order to access the grant. Instead South Africa's tax system would ensure that those earning above a certain level would pay back the grant in the form of tax. The social, economic and administrative impact of the grant was examined. After the presentation and discussion, the chair suggested that other relevant committee, such as finance and other departments within the social security cluster, should integrate the proposal.

MINUTES
The Basic Income Grant
Ms Isobel Frye (Black Sash) explained the formation of the Coalition for a Basic Income Grant.

Mr Neil Coleman (COSATU) said that the Basic Income Grant is a critical and decisive intervention in addressing poverty. The Constitution entrenches the right of everyone to have social security and the Constitutional Court gives content to some of these measures in the Grootboom judgement. There are huge gaps in the present Social Security system with children being the most vulnerable section of society and far too many people in South Africa are living in poverty. In terms of the Gini Coefficient, South Africa has the most unequal distribution of income. There are high levels of structural unemployment but only 7% of those unemployed receive unemployment benefits. HIV/AIDS would deepen the dire situation as child-headed households would need appropriate social security.

The current Social Security system has failed to satisfy the demands of the Constitution, making the State vulnerable to court challenges. The Grootboom court case established five criteria against which state programmes are to be tested. The particular programme should be comprehensive, give immediate relief to those in need, policies must be reasonably implemented and extended to a large number of people. The availability of resources is an important factor. The Grootboom judgement gives an indication of the direction to follow.

The Basic Income Grant would apply across the board thus doing away with the means test. The Unemployment Insurance Fund and the Compensation for Occupational Injuries and Diseases Act (COIDA) are not comprehensive because they provide relief to very few people. If BIG is implemented, poverty would be reduced by 74% and the number of people living in severe destitution would be reduced to zero. BIG would target most vulnerable people such as women living in the rural areas. It was emphasised that the current system does not meet the state's obligations.

Regarding means testing, Mr Coleman stated that international experience shows that this has failed people and it is open to abuse by corrupt officials. The administration of such a system is also very expensive for the State.

An integrated system of social protection which would be developmental in nature so as to avoid the situation where people become dependent. The developmental package such as one implemented in Brazil improved the level of schooling and employment. He pointed out that it was no good having a progressive grant system if one had to continue to pay for basic necessities such as health and education. The approach that the Government has adopted for water and electricity should be extended to these necessities. Some of the progressive policies that the Government has introduced since 1994 such as the Public Works programmes for poverty alleviation have not had the desired effect. The Basic Income Grant would be implemented in a phased basis. The first phase would give priority to children under the age of eighteen and in the second phase the grant would be extended to all South Africans. The removal of the means test would simplify the process of applying for the grant. The target set by Government had underestimated the number of children subjected to poverty. (see BIG submission to the Department)

Discussion
Mr B Tolo (ANC) noted that the means test would be scrapped with the implementation of BIG. If so, would even the kids of the Chairperson or Oppenheimer be able to access this grant. If the means test is abolished, the Coalition is simply saying everyone must access the grant.

Mr Coleman replied that people earning above a certain level would not be entitled to it. However the means test would not be used - instead taxation would ensure this. People could access the grant in theory but if they earn above a certain cut-off point, they would pay it back in tax. The rich would be cross-subsidising the grant. For example, a domestic worker earning R500 would get the full amount but a mine worker earning R1000 would receive R50 and so on. Due to the efficiency of the South African tax system, this method would thus ensure that people would get grant if they applied for it. It would be much fairer than the means test. He said some of the grants they have address specific needs for an example they do not have a fund where everyone contributes towards old age pension then they believe that old age pension should remain in place. The system would be phased in the current child grant would be higher this would recognise that children have special needs.

The Chairperson wanted further clarification as to whether a child of Oppenheimer would be able to access this grant. She also asked to what extent the Coalition is engaging with other Government departments.

Mr D Kgware (ANC) asked what had been the response in consultations with relevant Departments.

Ms E Gouws (DP) commented that the Basic Income Grant is a wonderful concept but presently they are struggling with the administration of existing grants.

Dr. P Nel (NNP) asked if Oppenheimer or a poor man from the rural areas wanted the grant, must he apply for it.

Mr R Nogumla (ANC) noted that access to land would help in poverty alleviation and he pointed out that the State has land available. He asked what the BIG Coalition could do to pressurise the State to make land available to the people who need it.

Mr M Sampson, Economic Policy Research Institute (EPRI), commented that in the scenario they have presented there would be no extra tax burden.

In terms of consultations with government departments, Mr Coleman replied that the Committee of Enquiry was interdepartmental and the Cabinet Cluster had processed the Committee report. The Ministry of Social Development had told the Coalition that they wanted to wait for the Report by the Committee of Enquiry before they could engage in debate. He said that the Treasury has taken a narrow view and it is not even a fiscal view. They are very defensive. The Coalition was disturbed by the comments issued by Treasury and they had requested a meeting with the Minister of Finance to clarify the issue.

Mr Coleman said that it is true that the entire population would benefit. On the efficiency of the administrative system, he said that if one goes to the rural areas, one would find that there are mini-Post Offices / Post Banks (as originated in the White Paper on Communications) where people can access grants. Home Affairs would introduce a smart card which the Government could use to pay the grant. He said that the Coalition is not in a position to answer questions about the land issue but briefly it does believe that people from the rural areas who are tied to the land can access the grant in order to buy seeds.

Economic and Social Impact of the Basic Income Grant
Mr Mike Samson (EPRI) addressed the economic and social impact of the Basic Income Grant. He noted that to measure the impact of something that does not yet exist is problematic. In their quest to measure the impact of the Basic Income Grant they had used the October Household Survey (1991) Statistics South Africa and its poverty head-count, as well as UCT's SALDRU (1993), to establish how many people the Basic Income Grant can free from poverty. When they analysed the poverty gap they realised that they could move 74% out of dire poverty. The October 2001 Census found that 51% of households are in poverty and that translated to 22 million people. BIG can reduce this number by 6.3 million and that would have a positive impact on the economy. Poverty and inequality reduces economic growth. BIG would provide income security and that would encourage the poor to take the risk of investment. He gave the example of an unemployed woman with two children in the township who has ten rand in her pocket. She has to make a choice between spending the money on transport to look for work or buying food for the family.

BIG would provide children with sufficient income and it would improve educational attainment, particularly for girls. Poverty drains the capacity of people to find employment. BIG would raise living standards. According to the household survey, the willingness to look for work increased as living standards improved and there is no evidence that people would become dependent on the Basic Income Grant. He said that a more equal distribution of wealth favours economic growth. Poverty makes investors uncomfortable about investing in the economy. BIG would shift spending power from upper to lower income groups. Lower income groups tend to spend money on local manufactured goods but high income earners tend to spend more money on imports.

Mr Samson then looked at how much BIG would cost and whether the economy could afford it (see Appendix 3 below). He said a micro simulation model showed that the gross costs of BIG is R46 billion. Using taxpayer data provided by SARS, the analysis identified adjustments to tax rates that recovered R22 billion of this amount. Thus the net cost of the grant is R24 billion.

He said if taxes are high, skilled workers emigrate. However South Africa's tax revenue is relatively low compared to countries with comparable income levels. 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. Thus South Africa has the capacity and ability to raise an extra R70 billion. The R24 billion that is required is equal to the tax cuts over the last two years. In the short run, BIG is affordable and it becomes more affordable in the long run as the positive growth and development effects improve the affordability of the grant.
When one invests in people that generates fiscal savings and health spending savings.

Mr Samson pointed out that in the Eastern Cape, 95% of those who qualify for social security grants could not access them because of the administrative burden as well as the means test that requires a lot of documentation. The long queues that people have to stand in also discourages them from accessing the grants. He said in April the Government had adopted a macro economic reform strategy and the President had made it clear that poverty is the number one priority. Social Development is the most effective way of reaching the poor.

Discussion
Ms Gouws commented that it would appear that BIG requires a once-off registration.

Mr Tolo asked if the Coalition does not see the need for some type of sliding scale because needs do differ.

The Chairperson asked if the R46 billion is a gross cost per year and how had they arrived at the R24 billion figure.

Mr Sampson agreed that a sliding scale can be considered because if one gives money to poor households it is pooled together. The R46 billion is based on the number of people that BIG has to pay and the R24 billion is what is still needed after adjustments to tax rates. Anybody who earns less than R30 000 per annum would not be taxed for the grant. In real terms R24 billion will decrease over time as people get jobs and thus pay taxes.

Administrative Impact of the Basic Income Grant
Ms Karen Kallmann from Black Sash said the vital component for implementing BIG is a fiscal and administrative structure. The implementation of BIG would not be an additional burden to Government departments. Social Development is upgrading a computerised system of grant payments. Multi Purpose Centres can serve as one-stop-shops for people to register. The HANIS National Identification System, the Automated Fingerprints System and Population Registration can be integrated to serve the purpose of administering BIG. There would be a smart card on which information can be loaded and use could be made of the Fingerprint and Identification System to prove that one is eligible. The BIG would be loaded onto the smart card. This can be an advantage for rural people because it can be linked to spaza shops. The Post Office Bank would give access to people in the rural areas. They are also looking at financial institutions because it would a huge incentive for them to get involved at a cost-effective rate.

Registration drives can be popularised through the registration campaign of the child support grants and the registration for the upcoming general elections. The extension of the Post Bank infrastructure is currently being considered and will help in delivery. The targeting of civil servants and the public through education campaigns will assist, as will using the existing Departmental forums.

Dr Nel asked whether the R46 billion would also include the costs of implementation and if the means test would still be applicable for old age pensions.

Mr Samson said the R46 billion includes recurrent annual expenditure.

Ms Frye said there is a shift in emphasis in the Taylor Report to needs-based assessment.

The Chairperson commented that when she had mentioned BIG to the Chairperson of the Finance Portfolio Committee, there had been an indication that they needed to commit themselves to forming a forum together with Finance so as to further interrogate the matter as some of the Members of Parliament do not know what is it all about. She believed it was useful to bring colleagues from other committees on board.

Mr Coleman said the Coalition has a contribution to make and they need the Taylor committee's recommendations to be worked through before Government takes a final decision on the issue. The Coalition is working on the issues of policy and implementation. VAT should not be used because it is a regressive tax system where the poor are paying more than the rich. He suggested that a forum be created that involves all relevant stakeholders and people should not raise hurdles or obstacles for their own sake. There must be a determination to find solutions as a country.

Ms Frye commented that the poor have always been invisible in these deliberations.

The Chairperson welcomed the recommendation and said public hearings could also be utilised.

The meeting was adjourned.

Appendix 1:
South Africans for a Basic Income Grant

Poverty and inequality pose the greatest threat to South Africa's young democracy. A bold initiative is urgently needed to confront this challenge.

We, the undersigned organisations, call for the introduction of a universal Basic Income Grant as a key intervention to combat poverty and improve the lives of the majority of South Africans.

At least 22 million people in South Africa--well over half the population--live in abject poverty. On average, they survive on R144 per person per month. A Basic Income Grant would
provide rapid and sustained relief to all South Africans by:
· providing everyone with a minimum level of income,
· enabling the nation's poorest households to better meet their basic needs,
· stimulating equitable economic development,
· promoting family and community stability, and
· affirming and supporting the inherent dignity of all.

The Basic Income Grant should be founded on the following fundamental principles:
Universal Coverage: It should be available to everyone, from cradle to grave, and should not be subject to a means test.

Relationship to existing grants: It should expand the social security net. No individual should receive less in social and assistance grants than before the introduction of the Basic Income Grant.

Amount: The grant should be no less than R100 per person per month on introduction and should be inflation indexed.

Delivery Mechanisms: Payments should be facilitated through Public Institutions. Using community Post Banks would have the additional benefit of enhancing community access to much-needed banking services.

Financing: A substantial portion of the cost of the grant should be recovered progressively through the tax system. This would demonstrate solidarity by all South Africans in efforts to eliminate poverty. The remaining cost should be borne by the fiscus. A range of new measures should be introduced to increase revenue so that the additional cost can be accommodated without squeezing out other social expenditure.

Thus far, the following organisations have come together to endorse this basic platform and to commit ourselves to working with government to make the Basic Income Grant a reality. We call on all South Africans to join us in this campaign and invite them to add their endorsement to this platform.

Age-in-Action, AIDS Consortium, Alliance for Children's Entitlement to Social Security, Anglican Diocese of Johannesburg, Black Sash, Child Health Policy Institute, Congress of South African Trade Unions, Co-operative for Research and Education, Development Resources Centre, Diakonia Council of Churches., ESSET, Gender Advocacy Programme, Community Law Centre (UWC), Southern African Catholic Bishops' Conference, South African Council of Churches, South Africa New Economics Foundation (SANE), South African NGO Coalition (SANGOCO), Treatment Action Campaign, Young Christian Workers National Secretariat

Appendix 2:
Frequently asked Questions

What is the Basic Income Grant?
The Basic Income Grant (BIG) is a monthly grant that would be paid by the state to everyone legally resident in South Africa, regardless of age, income, family status, or other factors. It would be one way of recognising the right to social security, guaranteed by the Constitution. Supporters of the grant have proposed that it be set at R100 a month at first, but that it increase as prices rise.

What are the benefits of the BIG?
The main benefit of the grant is its ability to improve everyone's life by reducing poverty. People have suggested a number of ways in which the government could ensure that all in South Africa have access to social security. Of all the schemes proposed, the BIG seems likely to liberate the most people from severe poverty. In addition, a BIG would support overall development by enabling the government to deliver social services more efficiently and by promoting economic growth. A wealthier, fairer, more economically active society is in everyone's interest.

What evidence is there that it will really reduce poverty?
Since the BIG would be paid to everyone, it would be of particular benefit to the very poor, who are often unable to access grants that involve complicated application or collection procedures. Studies show that the BIG would lift more people further out of poverty than other options. Economists often measure the extent of poverty by looking at the "poverty gap". This is the difference between people's incomes and the amount they need to meet their most basic needs. Using information about current income patterns in South Africa, economists have shown that the BIG would do the most to close South Africa's poverty gap, enabling all South Africans to live with dignity.

Is the issue of income differences important? How bad is SA's income inequality compared to other countries?

South Africa has one of the most unequal distributions of income and wealth in the world. There is clear evidence that such inequality produces a number of bad effects including social problems, poor and uneven development, lack of investor confidence, and low rates of economic growth.

How would the BIG encourage economic growth?

A BIG would enable people to improve their living conditions. They would have a little bit more money to spend on food, health care, making improvements to their homes and so on. Increased spending would mean more economic activity and more jobs. As people become happier and healthier, worker productivity also improves. More importantly, people would be better able to plan for the future and to take small risks, such as investing in education, looking for work or even starting their own businesses. By promoting greater equality and giving everyone a stake in the society and economy, the BIG would also produce a more stable society, which is likely to attract further investment.

When there is a growing demand for products without an increase in production, the price of these products tend to rise. Would a BIG encourage inflation (price increases)?
This is unlikely. The BIG would shift spending from upper income individuals to poorer people, who tend to spend much less on imported goods. This will increase demand for locally produced goods. South Africa has enough labour, raw materials, the expertise and machinery to produce much more than it does now. All around the world, governments are trying to encourage demand to counteract the global economic slowdown. The South African economy, too, can tolerate increased demand without causing rapid price increases.

What are the disadvantages of the BIG?
The main disadvantage is the initial cost. In the first few years, government would need to spend a great deal of money to set up systems to finance and pay out the grant. After this, the cost is expected to go down as the grant should be fairly inexpensive to administer. At the same time, the grant is likely to stimulate the economy and improve people's living standards. This will generate more tax income for government and decrease the cost of providing other services. (Health care costs go down, for instance, if people can afford better food and are more able to look after their health.)

How much would the BIG cost?
The cost depends on the amount of the grant, the way in which it is paid out, and the ways in which the government finances the grant. A number of affordable plans have been proposed. Paying R100 a month to everyone in South Africa would cost about R48 billion a year. But a large portion of this would be recovered through the tax system. Depending on the way the money is recovered, the BIG could cost the government between R9.9 billion and R22 billion extra a year. This must be seen in the light of the government's excellent capacity to collect tax and the fact that the government cut taxes by R15 billion this year and has done so for the last 5 years. The BIG would also allow government to save money in other areas, so the final cost to the government would be much less.

How could a BIG be funded?
The government could use a combination of methods to raise the money necessary to finance the BIG. It is likely that one method would be to increase taxes--in a manner that places the largest burdens on those most able to pay. This would also strengthen the redistributive effect of the BIG. It should be noted, however, that more effective tax collection also increases the money available to the state. Over the past five years, the South African Revenue Service has consistently collected more tax than predicted, even though the tax rates have been cut. (In other words, companies and individuals are required to pay less, but fewer are able to evade taxes altogether.)

Will people become dependent on the BIG?
Experts who worry about "dependency" are usually thinking of means-tested social security programmes. A "means-test" is an income test. People are typically eligible for means-tested grants only if their income is below a certain level. If a person will lose a grant if he or she earns more money, then that person is likely to be discouraged from looking for work--or may try to hide the fact that he or she is earning other income. The BIG, on the other hand, has no means test, so no one would be penalised for working or trying to earn more. Severe poverty is a much more dangerous type of dependency. The very poor depend on assistance they receive from other family members who are working or otherwise earning income. This acts like a tax on the working poor, undermining job creation and wage growth. Evidence suggests that the BIG would not just be a safety net. It would be more like a springboard, providing the "lift" to enable people to reach for better lives.

There have been many problems with the payment of existing grants. Would the BIG also be affected by these problems?

Most of the current problems are associated with means-testing, which requires officials to collect and check information about applicants' incomes. This is time-consuming work that takes a large number of staff. The BIG would not involve a means test, so it would be much simpler and less costly to administer.

Are there better alternatives to a universal grant?
There are less expensive alternatives, but they are far less effective in reducing poverty. And there are more expensive alternatives--like "workfare", which requires people to work in order to get a grant. However, such programmes have not been very effective in other parts of the world, and they tend to be biased against women.

Shouldn't the social security system target people who are most affected by poverty?
Absolutely. Children, women, and rural residents are the most likely to be trapped by poverty. However, it can be wasteful and ineffective to try to limit social assistance to specific groups of people. By giving a grant to everyone in South Africa, then reclaiming the money from those who don't need it, the government can actually do a better job of ensuring that social assistance reaches most of the people who do need it. And this assistance can be delivered in a way, which doesn't diminish people's dignity by labelling them "poor".

Appendix 3:
Fiscal Impact of BIG
The net cost of the BIG is less than R24 billion -- an amount roughly equal to the income tax cuts of the past two years. Fiscal impact analysis shows that South Africa's tax structure can afford the cost of the grant without undermining the country's international competitiveness.

With an estimated South African population in March 2001 of 44.9 million people, of which 8.4 million people are eligible for existing social security programmes, a basic income grant of R100 per month would result in a gross cost of R43.8 billion. Of this amount, R22.2 billion would go to households in the top three income quintiles (i.e., the wealthiest 60 percent of households). Adjustments to the income tax structure can reclaim most of these transfers without significantly affecting the vertical equity of the net tax burden. Adjusting the tax rates and income thresholds at lower income levels gradually recuperates the grant from middle and upper income earners. The value-added tax, in turn, recovers a significant portion of the expenditure associated with the net transfers. Micro-simulations of various tax adjustment options yield an average recuperation of R16.7 billion through the income tax, and R3.3 billion through the value added tax. As a result, the net cost of the BIG is estimated at R23.9 billion.

South Africa currently collects a relatively small percentage of national income through taxation. A survey recently published by EPRI found that, in comparison with other developing countries, South Africa collects up to seven percent of national income (or R70 billion) less than would be expected given the nation's economic characteristics. This analysis corroborates the findings of research conducted by other institutions. South Africa ranks as the fifth most under-taxed developing country, using EPRI's tax capacity measure. Financing the BIG only requires a tax increase equal to about two percent of national income. This is clearly affordable.

Using the tax system to finance BIG raises a further consideration for a phased approach to implementation. When the BIG is introduced in the second phase (from 2005/2006), it will be necessary to extend access to all eligible people at once in order to justify the associated tax increases.

Although the Minister of Finance has admitted the BIG might be affordable now, he has questioned its long term affordability. However, comprehensive social security reform will generate both developmental growth and fiscal dividends, making the BIG increasingly affordable in the long term. Growth has two effects on the fiscal impact of the BIG. First, it raises overall national income, and thus expands the capacity of the economy to support fiscal expenditure. Second, as lower income households realise the benefits of the BIG and begin to improve their living standards and income levels, they will be able to keep less and less of the BIG. This lowers the overall net cost of the grant over time. The fiscal dividend results from the BIG's capacity to promote more efficient delivery of social services. Higher living standards raise the efficiency of the educational system, reducing the repeat rate and thus economising on educational resources. Improved nutrition raises lifetime health levels, reducing the strain on the public health system. The medium-to-long term impact of the BIG is likely to reduce the cost pressure on several social sectors, resulting in a reduction in the net fiscal impact of the grant.

The BIG represents a substantial commitment of fiscal resources. However, a well-managed programme is affordable and consistent with fiscal responsibility. South Africa's tax structure has the potential to finance the entire cost of the programme without recourse to deficit spending. The long-term growth implications of the developmental impact further support macroeconomic stability and fiscal affordability.