There have been calls to implement a basic income grant in South Africa. ERSA have released our estimates of the macroeconomic adjustment required to accommodate an expansion of social assistance in South Africa using a dynamic stochastic general equilibrium (DSGE) model developed for the National Treasury of South Africa. The paper considers the macroeconomic implications of different funding options, including raising taxes, increasing debt, or cutting government spending programmes.
Overall, the model shows that introducing a basic income grant would involve trade-offs. With high levels of debt and a constrained fiscal position, extension of social transfers would require raising taxes and debt. This would lead to reduced economic growth and higher interest rates – ultimately harming job creation. Expanding the social safety net may therefore have the unintended consequence of creating higher unemployment, deepening structural poverty and inequality. The model suggests that a basic income grant is only feasible if economic growth rises sustainably — this necessitates, for example, increased government infrastructure investment, expansion of employment programmes and, critically, growth-enhancing economic reforms that leverage the private sector.
Table: Summary of results
Notes: pppm = per person per month. Poor cons. is the consumption increase for non-Ricardian (poor) households. Scenario 1 results are based on the estimated parameters from South African data. Scenario 2 and 3 are based on the estimated model with an ‘optimised’ tax instrument response. The model and paper is in 2020 prices. Here the results are scaled to current prices for expositional purposes. The number of recipients has been modelled at 10.5 million reflecting budget take up. Source: Hollander, Havemann and Steenkamp (2022)