A universal basic income grant is now firmly on the table – a development that cannot come quickly with unemployment in the country and the cost of living crisis threatening to lay waste to the economy.
Last week, President Cyril Ramaphosa said in his state of the nation address that “work is underway to develop mechanisms for basic income support targeted at the most vulnerable, amid fiscal constraints”. The announcement comes as other government efforts to inspire growth have failed miserably, leaving more poor than ever before.
Although the president’s speech put Eskom at the top of his government’s agenda, stressing how burdensome electricity is today, the introduction of the basic income grant is now also important to securing the country’s economic health. If it becomes a reality, the grant could be the biggest step taken by the Ramaphosa administration to achieve economic growth.
It is easy to accept that the energy crisis has a deleterious effect on the country’s economy. Last month, the South African Reserve Bank showed as much when it warned that reducing the burden could cut up to two percentage points from the country’s growth in 2023. If the bank’s forecast is correct, it sees growth of 0.3% in 2023 and 0.7% in 2024, the situation the country’s socio-economics will quickly deteriorate.
Therefore, Ramaphosa’s speech was largely dedicated to his government’s efforts to tackle the energy crisis, which has weakened economic confidence, forcing investors to adopt a “wait and see” approach.
The president’s administration had hoped to boost growth by encouraging a wave of private sector investment, a scenario that has yet to materialize – largely due to the slowness of the government’s efforts to overcome structural obstacles, such as the energy crisis. And while the president’s speech was a display of the administration’s resolve on the matter, it clearly wasn’t enough to reverse the private sector pessimism that has built up over the past five years.
Investec chief economist Annabel Bishop pointed out that, although the country’s address was comprehensive and positive in its messaging, it did not rouse the market. It is the country’s poor track record in delivering on its promises that cynicism continues.
Late on Friday, rating agency Moody’s warned that “South Africa’s longest electricity cut is credit negative”.
On Monday, the rand broke through R18 to the US dollar, trading at its lowest level since mid-December 2022, amid concerns over the energy crisis and the country’s economic prospects. Eskom has, after all, said we have to wait two years before its recovery plan bears fruit.
In response to the speech, Business Unity South Africa echoed the market’s disbelief, saying the address failed to instill confidence in the government’s ability to act efficiently and delivered inadequate performance and delivery.
Busi Mavuso, chief executive of Business Leadership South Africa, also expressed his skepticism, particularly about Ramaphosa’s announcement of a national disaster and the appointment of a new electricity minister. Both interventions, Mavuso suggested, could disrupt the working relationship between government and business to resolve the crisis.
What is evident from these responses is that, for whatever reason, the government continues to lose out in its efforts to attract the private sector. Investors will still take some time to convince and – in the meantime – growth will continue to elude us.
According to a new analysis by house cleaner BankservAfrica, Reserve Bank forecasts (measured against population growth) show that on a per capita basis, the average South African will become poorer by 2023.
Meanwhile, the unemployment rate in the country remains high. Without growth of about 5% per year, there is no hope of lowering the unemployment rate to a more sustainable level.
It is not surprising that, despite having played hardball on fiscal consolidation for several years now, the government has now begun to show that it is increasing its willingness to participate in interventions like basic income grants.
As well as reducing the burden, the cost of living crisis also threatens growth and the Reserve Bank’s forecast assumes low levels of household expenditure. Household consumption is about 60% of the country’s GDP.
After painting itself into a corner, the government has been forced to admit that South Africa simply cannot continue to endure the onslaught of its failed economic policies. The government’s reform agenda alone cannot deal with the scale of the crisis before us and other options must be seriously considered.
The question that remains, however, is how the foundation grant will be funded. Many reports have been written in the past three years, they have been busy to answer this question, which has become the main point of the government. In reaching the financing regime – especially if it compromises the public purse – it stands to further alienate the market and investors who are worried about the country’s fiscal outlook.
But what tends to be brushed over, especially in public debate, is the multiplier effect of the basic income grant, its promise to stimulate an economy in need of defibrillation.
A preliminary assessment of the social relief of hardship grants found that, in its current form, it could add 0.5% to GDP per year. Some other options have suggested the country’s annual GDP growth rate could be pushed beyond 5% with higher basic income grants.
The government’s recent stance on the basic income grant shows that it is less willing to reduce its share in order to avoid falling behind the economy.
Indeed, the current state of the country’s economy requires the government to use all its arsenal to arrest this crisis. A basic income grant can be the first step to bring back the growth that the country’s economy needs.
The changed position on the basic income grant is hopefully an indication of the government’s true concern for the economy, and its impact on people’s livelihoods, rather than the existential threat it poses to the ANC leadership. After all, this can be the difference between a government that grants funds that have significant economic results and those that are more limited in their design.