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A universal basic income grant isn’t the solution

Despite doubling social protection spending in two decades, SA is more unequal than ever.
Today more South Africans receive social grants than work, writes the author. Image: Moneyweb

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.

Read:
Yes, we can afford a universal basic income guarantee
SA’s basic income versus jobs debate: a false dilemma

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?

Source: Economists.co.za

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.

Source: Economists.co.za

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.

Read: Mandatory social security plan proposes another tax on the middle class

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.

Source: Economists.co.za

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

Please consider contributing as little as R20 in appreciation of our quality independent financial journalism.

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COMMENTS   36

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I read some words and saw some graphs … but all I could hear was those printing presses warming up. Its the only option they have left. The current taxpayer and fiscus are completely dried up, so an IOU to the future ones will do the cadres very nicely thank you. Needless to say, the cadres don’t pay their IOU’s

Without doubt the biggest vote buying scheme in the world, paid for by the faithful 5% who don’t vote ANC.

sounds similar to zumas free university idea for students to promote the anc – does not matter how one look at it – the anc does not now how income is generated and then utilized to the advantage of the community via an employees salary, where a months solid work was done – not a cadre employee where salaries are paid for doing nothing.
if the ex president has a problem to read a 6-digit amount, how can one be the head a country’s government????????

“the ANC does not know how income is generated”

Spot on, Johannes! This is the basis of their entire tax policy, they believe that there is this magical fountain of money powering S. A. ‘s middle class, and can be taxed ever increasingly to fund not only S. A.’s high (rapidly expanding) lowest income populations, AS WELL AS covering for 27 years of disastrous AND socialist policy (Whether disastrous and socialist policies are a double whammy or intertwined, you decide) . S. A.’s social policies have produced more dependents at an alarming rate, and that’ s BEFORE you factor in resource requirements.

Anyone not really familiar with S. A. who reads this article would quickly and clearly see that this is nowhere near sustainable. But in S. A. these shortcomings are being covered up with fallicious and emotional rhetoric (like calling critics “racist” or “counter revolutionary”) or tabling immensely destructive populist ideas (EWC) that will make S. A.’s current economic bloodbath look like a papercut.

To even begin to turn things around would require some stern policy/ideology shifts, but even that requires a general understanding that there is a problem, and to simply carry on and expect a dwindling tax base to pay to fix it will result in eventual implosion

Or simply put another way;

“One universal basic income grant, One Vote”

I’ve always maintained if the 5% alone, us the tax payer, had the only vote, the ANC wouldn’t even have 5 seats in Parliament

We carry the economy as we subsidise theft and the unemployed

As stated in previous comments, I think South Africa needs to look at the work done by Dr Thomas Sowell. I fail to see how grants will make someone employable. More than 20 years of sowing, time to harvest.

You cannot buy pills for stupid and expect a vaccine for laziness!!
The allure of socialism is the shared misery by all —
Only if everyone does not have anything will this magical Gini Coefficient in SA drop to zero !!

Getting there fast though !!!

RSA is NOT an Emerging Market !!
It will never “emerge” : it is in fact a Collapsing Market , never likely to Emerge but rather simply Implode .

It belongs in a whole new category: submerged

Submerged. Good one! SA adhere to the economic theory of Titanicae…

Since 34% of voters did not vote in 2019, only 38% of the population supports the ANC.

Probably a 10% increase in employment in the private sector will make even a larger dent in social security spending.

Vote buying has reached its limits and will provide no benefit to the ANC going forward. It’s time for a reset on economic thinking but we are hearing nothing.

Yes the anc is thinking it’s time for a reset aswell…. Just not the reset u would hope for- good bye property and pensions….

Problem is, they just don’t think that! ANC policy is so dire that vote buying is all they have left, and if it’s anything we’ve learned about the ANC over the past 27 years, it’s that they know how to keep pushing an idea that does not work

The travesty of this article is that nobody and I mean nobody in the ruling party has an inkling or understanding of the consequences on future generations. Cut the grants and cut the birth rate or we are all doomed

Actually I think it’s more on the lines of what Yuri Bezmenov said many years ago; it’s not that people don’t understand, it’s that they can’t understand. The ANC and the majority of people in SA has been brainwashed to the extend that even if you give them the facts and figures (like Mike did) they just can’t accept the truth as the truth. We even have professors coming up with more drivel, despite the overwhelming evidence that ‘rectifying’ inequality and dishing out more grants aren’t the solution. In the end the concept SA has of inequality did more damage than accepting that we were never equal to begin with. Having this inequality narrative going only supplies you with a reason to nurture the feeling of entitlement, which gives you the moral excuse to demand more of what you didn’t work for.

The “inequality” term is a myth – another version of the African Begging Bowl.

The real issue is poverty – not playing off the small middle class against the poor, by lazy politicians who do not want to put in the hard work of real development.

The majority of the people here are not worse off than their peer groups in surrounding countries, on metrics like income, housing, medical and legal care, amount of businesses started and businesses listed – in fact, local people are better off, that is why many are streaming into this country (to benefit from the inequality!)

Of the so often mentioned triple challenge of poverty, inequality and unemployment, the real one that is mostly the cause, at the base of the other two, is as the article describes so well : UNEMPLOYMENT.
Endlessly dishing out social grants to an increasing number of people will only make things worse.
How can we have already have 18m+ persons on grants, who spend for a not unimportant part money on products, that are manufactured abroad ? Why are there so few factories left in SA ?
Because our unholy, clueless tripartite alliance allowed the wages to rise completely unreasonably, and labour ethics, work discipline decline at an alarming rate. Few people in SA want to work for wages that people in the clothing factories earn in neighbouring countries like Lesotho, and Eswatini, or in Bangladesh.
The whole economic system is messed up.

How can you want equality of benefits with such a wide inequality of mindset?

Take two key issues: The rich (middle class taxpayers) vote for good government – the poor vote for large scale corruption and mismanagement.

The rich do not have more children than they can afford – millions of the poor have children they cannot afford.

Inequality = take is example: one family has 3 kids with 1 highly successful as a Charter Accountant, 1 average as a teacher, 1 poor uneducated. Now tell me, is it the parents, the education or what that brings inequality to this family and millions of others around the world?
South Africa has massive numbers of poorly educated people, we have nothing to offer to the world, because of our poor skills. We have abundance of raw materials, but we lack skills to add value. We do not have policies in place to drive better education for the sake of better products, ie. diamonds without a cutting industry, iron ore and very small steel products, gold with no international jewelry trading, special metals with industries to add value.

There are no sensible solutions to an insurmountable problem. Socialist ideology is a failure of the cognitive process. How can the same process that created the problem, provide solutions to the problem? The populist policies are built upon wrong assumptions about the economy and on a misunderstanding of basic human nature. That is why, once they decide to go down this road, they will make increasingly catastrophic decisions.

Let’s look at an analogy to explain the situation. Will it solve the problem if we made every poor person a millionaire overnight? Say we manage to give R1 million to every needy household in the country. What will the economic status of that same household be 3 years from now? Well, according to scientific studies about lotto winners, those families will have nothing again, and will be even poorer than they were before they “won the lotto”. More than 95% of lotto winners become destitute after 3 years and many end up in prison. The 5% who still benefitted after 3 years, were wealthy already before they won the lotto. According to these statistics, winning the lotto is the worst thing that can happen to poor people.

What do these facts tell us?
1. You cannot improve a poor person’s position by giving him money, because money does not change the mindset that caused his poverty.
2. A person with a productive mindset will start out with nothing and become wealthy because he harbours valuable thought patterns.
3. Receiving money for having the wrong mindset incentivizes the development of even worse attitudes.
4. Punishing(taxing) the productive mindset to reward the unproductive mindset leads to the implosion of the formal economy and the degradation of society.

You must be a boomer, only could type this nonsense

I sense that you are struggling to make some point, but I have no clue what that might be.

Me thinks the connotation associated with “Universal Basic Income” is often confused with the definition of “Social Support / Social Welfare”.

Universal Basic Income is guaranteed amount for all citizens above the age of 18. This allows for individuals to choose how the will best satisfy their own needs whilst the government does NOT render any other products or services for Free. This results in the economy being stimulated, individual being able to live a happier & fulfilling life.

Social Support / Social Welfare is when the state decides which products an individual requires instead of what they need. This results in a economy which is dependant on the state for support, a society which may not decide for themselves the products that will best satisfy their needs and general misery.

I suggest reading the book “Raising the Floor” by Andy Stern and Lee Kravitz.

…. To matters more important than discussing the Amalgamated Network of Corruption….. How is Western Cape Secession doing….?

One solution would be to deport the 10 million illegal immigrants.

Give them basic grant or not, they will still burn the factories and loot. Solves nothing. Basic lack of religiosity.

Looking at the numbers of unemployables and tax payers in South Africa one realises that there is no solution as both numbers drifting further apart thanx to ANC commie policies.

Like they say: “Each one of us is in charge of their own destiny.”

Just like a diet of eating pizza, drinking beer and watching TV won’t help you to lose weight, but that is what everyone wants. And they will use their vote to get it.

Reading through some of the comments and also some conversations I’ve had regarding the basic income grant, many people somehow think it will stimulate the economy. This is a lie and incorrect, its like arguing that corruption stimulates the economy as the corrupt inevitably spends the money they stole.

Remember that the money being dispensed as a basic income that will “stimulate” the economy was initially “stolen” from the economy in the form of tax. This tax money then enters a government system riddled with ineffectiveness and inefficiencies before being reintroduced into the formal economy where the process repeats itself, but reducing with each cycle as the inefficiencies accumulate. In time the tax base erodes and some form of monetary stimulus is required that leads to inflation, that leads to increasing basic income, that leads to more inefficiencies, etc.

Now don’t get me wrong, I believe we should protect people against absolute poverty and starvation through grants in the short term. But grants will NEVER stimulate the economy and the only way to fix the problem of poverty in the long term is to grow the economy and create employment. The only way in my opinion we will be able to do this is by reducing tax and government intervention in the economy, not increasing it.

The South African economy is like a world class marathon athlete that is being hamstrung by having to drag a weight with him all the time. At first aiming at excelling at the race, then at only finishing the race, then now where the athlete is contemplating whether or not the South African economic race is even worth participating in. This as the athlete has many other races across the world to participate in where he is not being dragged down.

Vintage Schussler essay… At the end of the day… Useless!

Long on interesting facts…

Schussler makes excellent points parading and dissecting these facts.

It is definitely a useful and important contribution. Thanks for that bit, Mike!

But the most important part of entering a debate is NOT just in beating the drum more loudly than others, but to actually HAVE a solution!

Schussler does the usual academic sleight-of-hand.

The body of his essay is essentially a looong discussion OF the problem.

And then the “solution” is literally “mentioned” in a single, short penultimate throwaway paragraph at the end!

There is nothing new about Schussler’s solution.

Schussler is woefully short on articulating the actual specifics of implementing this solution!

If he had invested the SAME effort on dissecting his “solution” – as he had put into his discussion of the problem – he would have quickly found it has major problems. Easy to say, and then actually implement, are two very different fishes!

What would the first problem be, Mike?

It is in fact what YOU yourself had articulated at length (… that just giving money away to the poor doesn’t address the root cause of why the poor become poor, or stay poor, in the first place).

So if we did somehow magically create lots of job openings with lots of OPM (Other People’s Money), how will this – by itself – actually translate into a reduction in the poor and a decrease in inequality?

The short answer is… NADA!

Why so?

Because merely providing “plentiful opportunity” (which is the gist of Schussler’s solution, and very many others too), does NOT acknowledge the underlying foundation requirement for “success to grow”. Which is, the RECIPIENT POPULATION of these opportunities MUST be able to ACT on the opportunity.

It’s pointless offering “opportunity” that requires a high standard of education, intellect and integrity to a populace that is severely deficient in these requirements.

Schussler conveniently skips over these “little details”.
But they are not trivial.

It’s a fatal error – which COMPLETELY UNWINDS the feasibility of his ENTIRE dream scenario.

The problem with Schussler’s Economic Dream is that even when it works, the growth rate of the poor still ACCELERATES faster than the benefits from the new opportunities.

You can see this end-effect directly in action!

Cape Town is a magnet of opportunity. Far from creating a reduction of poverty and inequality in Cape Town, the very fact that these opportunities exist is INCREASING the social problems in Cape Town!

And is doing so PRECISELY because the ill-discipline of excessive population growth is being (deliberately!) ignored.

China FIXED the poverty problem by addressing its root cause head on.

SA needs to follow that lead.

Brilliant!
We need to have a conversation one day.

Jonnoxx, I and PurgeCoin nominate you as a our gold standard. We’ll cast Mike away 😉 You need to write your book!

Mike…….. Would u care to actually debate this jonno character abit here on this topic?? Would be a pretty interesting debate…….

End of comments.

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