Question NW3704 to the Minister of Social Development
16 November 2023 - NW3704
Stock, Mr D to ask the Minister of Social Development
What (a) different funding models are being explored to fund the Basic Income Grant that has the potential to reduce the Republic’s poverty, unemployment and inequality scales, despite the concerns about its funding and (b) are the advantages and disadvantages of each funding model that is being explored?
Reply:
The key funding options that have been proposed for funding the basic income grant are through an increase in taxation, reallocation of current budget allocations or through borrowing.
The borrowing option has the advantage that it would provide additional funding without a need for budget reprioritisation or tax increases. However, this would be expensive for the country as it would increase the country’s debt burden and also increase the already very high interest payments which are already one of the biggest spending items in our government expenditure, which could crowd out other important spending priorities of government.
A second alternative would be a reprioritisation of current budget allocations. This would have the advantage of shifting funds from some government expenditures which are less effective and/or efficient, and redirect it to the urgent needs of the poor. However, such a reprioritisation would be very complex and difficult to implement quickly, since some projects would require significant time and careful planning to wind down without negative unintended consequences.
The tax options considered include wealth taxes, removal of tax expenditure subsidies, increases in the Value Added Tax (VAT) or personal income tax. The advantage of the VAT is that it would be a broad-based tax which enables government to collect sufficient revenue to fully fund the grant, which would be fairly easy to introduce and collect. The disadvantage, however, is that this would be regressive in that the poor would pay the same as the rich. Such an approach would negate the motivation for the grant as the poor would in effect pay proportionally more than the rich because VAT is a flat rate for everyone.
The wealth tax, on the other hand has the advantage of being quite progressive as it would target the rich only. The disadvantage however is that it could result in significant tax avoidance and thus result in inconsistent revenue on a year to year basis as the wealthy find ways to avoid it.
The tax expenditure subsidies on retirement savings were also considered as a possibility. The advantage of this is that, in addition to providing new tax revenue, it would create greater equity in the tax system by reducing support which is currently benefitting high income earners. However, the disadvantage is that it is difficult to quantify and would be unreliable as the only source of revenue, and may result in disincentivising retirement savings among some high-income earners.
The Personal Income Tax (PIT)approach has the advantage of being a more progressive tax which would take a greater contribution from the high-income earners than the lower income earners, thus ensuring a more sustainable revenue source. It is also more reliable than the other tax approaches, thus ensuring sustainable funding in the long term. The additional advantage of using the PIT to finance the grant would also improve the income inequality in our country, as the poor would receive an increase in their income while the rich would have a reduction based on the increase in the tax rate that they have to pay.