While social benefits increase in absolute and relative terms so does inequality. South Africa is unequal while many are in poverty. Nobody should doubt that.
The solution to this however is not a universal basic income grant. Nor is the solution getting the government to create a social security tax which will add to the world’s tenth highest income tax burden.
In the late 1990s government expanded the old age grants and instituted a child grant. Social protection expanded from 6.7% of GDP in 2001 to 10.1% by 2015 according to the International Labour Organisation (ILO). The number of people who received grants expanded from 2.7 million in 2001 to 18.4 million now. Overall government spending increased from about 32% of GDP to 42% of GDP.
SA already has one of the biggest social welfare programmes in the developing world.
International definitions of social protection include government health spending, child and family help and government-funded pensions. All this excludes private pensions and health expenditure.
Out of 90 or so emerging markets (EMs), South Africa currently has the highest inequality (not all countries want to calculate inequality). The public has been told that hundreds of times … but some things we have not been told put a very different solution in one’s head.
Firstly, international numbers on social protection show that of over 100 EMs South Africa spends the fifteenth most of its GDP on social protection. Outside of the rich world South Africa covers the nineteenth highest number of people with government spending, out of 110 developing countries with data.
But when compared with EMs in 2017 on social protection, South Africa covers the third-highest percentage of its children (76.6) with payments in this EM universe. The country also covers twenty-seventh biggest share of its pensioners in the EM universe by government; when adding private pensions this number expands to 113% of the pension age population, as some can claim both private and government old age grants.
We cover the thirteenth most unemployed, the fifteenth highest share of the disabled (we have a large disabled population yet we still cover a lot of them), and the forty-sixth highest share of people who get injured on duty.
In general, our government covers the fifteenth highest share of the vulnerable population of all developing countries.
Interestingly the ILO does not include private pensions and medical insurance in these numbers. So the spending and numbers here are truly indicative of money going to vulnerable population.
The ILO does not include free water and lights in its analysis either, but that also is a cost to the fiscus.
SA doubled social protection spending in two decades, yet the country is more unequal today than ever.
With the expansion of social protection over the last decade and government spending increasing in both absolute and relative terms, there is one big mystery here that we need to have explained.
Why did inequality increase from a Gini of 58 (still horrible) in 2001 to a stunning Gini of 67 in 2017? Our Gini got worse. What? We doubled our real spending on the vulnerable while increasing their number seven-fold. There are more people covered by social protection with more money and yet South Africa became more unequal?
There must be something else at play here.
Is this due to big pay differences?
People are quick to point out that earnings at work are unequal too but, out of 94 developing countries with more than half a million people, South Africa is in the most equal quarter of these 107 countries according to ILO data.
So, the idea that most of our inequality comes from differential earning from work is also misplaced at least in the relative sense.
In short, the country’s labour income is far more equal than people generally believe when compared with other emerging markets and one or two developed countries.
I would argue that in the formal sector when calculated on actual payment scales that companies pay, as regularly evaluated by PwC, the earnings Gini is certainly less bad than many commentators make it to be.
With the world’s most progressive income tax system according to Oxfam the after-tax Gini of the formal sector is probably one of the lowest in the developing world. Moreover, during this 20-year period most income tax reductions were aimed at workers with lower salaries pushing their income up which should have contributed to help make post tax earning more equal.
SA also limited retirement savings and medical insurance deductions as well as vehicle deductions.
In a nutshell, salaries post income tax should have become more equal, yet still inequality rose. Government increased in size and spending as a share of GDP. Moreover the public servant today probably makes up close to 40% of the top decile of working earners.
If it’s not salaries or social spending what is the big cause of inequality?
People do not understand that something else is going on that is the major cause of poverty and inequality and that is unemployment. This is particularly true of the unemployment of women in a largely woman-headed household country.
Numbers from the ILO and the World Bank show that the correlation is close to 70% between the adult employment ratio world ranking and the inequality ranking.
There is data for 104 countries with data on women’s employment ratio and inequality. These countries were selected where women are not discouraged to work for religious reasons, i.e. in mainly Eastern orthodox and Muslim countries.
No country which has more than 55% of adult women employed has a Gini of higher than 50, which is halfway between total inequality and absolute equality. Overall data shows that when women make up more than 55% of the overall work force the average Gini drops to around 40 for developing countries, while in countries like South Africa where less than 40% of adult women work the Gini is closer to 47.
Similar trends are at play with the ratio of men working but the correlation is lower.
However, SA is a country with the fewest adults working and that tells me the biggest cause of inequality is the lack of an income from work.
Social grants cannot ever make up the earning shortfall.
The lowest legal wage is already over R3 750 per month, and we are talking about a fraction of that for the UBIG. Today more South Africans receive social grants than work. Add another 10 or so million and we will have two people on grants for every person working.
But wait it gets worse. The private sector is the main value creator in most countries. The number of PAYE workers in the private sector would be far less than the seven million or so that Treasury data indicate. Take away loss-making state-owned entities (SOEs) and one gets close to the true private sector number of PAYE tax payers
Of the seven million PAYE individual taxpayers only about five million work in the private sector. There are about two million government employees, of whom about 90% pay PAYE and then about 250 000 SOE employees. As government employees are actual beneficiaries of the tax pool, one needs to remind oneself that only the five million private sector PAYE taxpayers are net contributors to the fiscus (government and some SOEs get their money from the tax revenue).
That is the not sustainable and many a business feels let down by the constant we need more money while they themselves struggle to make ends meet. The UBIG will add about 10 million or even 12 million, making that ratio of private sector individual PAYE payers to dependants on the money provided over six to one.
Personal income tax makes up 40% of all SA tax revenue, so when looking at this source know it can no longer just be taxed more.
The UBIG therefore will require a higher tax burden, which is already one of the tenth highest in the world. Increasing this to be say the seventh highest will lead to fewer entrepreneurs and professionals wanting to stay in the country. The younger professionals will leave and the old will not be replaced.
If there is one thing that the last two decades tells us, it is that more spending will not make things more equal.
We need to create income from jobs. Those jobs must come from profits and confidence – not more government positions and certainly not another 10 million people on government social payments.
Create an environment for the creators of jobs and money to flourish and stop expensive pipe dreams that all can be equal if only we spend more.
It is madness to think that just spending more will solve the problem if it has not done so over the last 20-odd years.
Listen to the SAfm Market Update interview with Johan Gouws, head of advice at Sasfin Wealth, on the mandatory pension system proposal below (or read the transcript):
Mike Schüssler is the owner of Economists.co.za