The Role of Social Grants In The South African Economy
By Keamo Segwagwe
Considering the upcoming elections, I think it is paramount to interrogate some of the very conventional socio-political instruments that exist in South Africa and how these instruments affect the economy. It is also important to provide valid critiques of these instruments as well as feasible alternatives. I will be focusing particularly on the evolution of social grants in the South African context, this is because of the discourse among politicians in the governing party during election campaigns which has sentiments that suggest that grant beneficiaries who voted for the opposition are somehow betraying the hand that feeds them. As well as the economic suitability and sustainability of social grants in the South African context
The Historical Context of Social Grants
Social grants in the South African context can be defined as a grant implemented, paid and administered by a separate national government agency, the South African Social Security Agency. There are five major social security grants in South Africa: The State Old Age Pension, the Disability Grant, the Child Support Grant, the Foster Child Grant and the Care Dependency Grant. Eligibility for each grant is dependent on an income-based means test. The grants are financed through general tax revenues, collected on a national basis.
The historical approach to social security in South Africa has been one of meeting the needs of the white minority. “Social security for the elderly began with the Old Age Pensions Act of 1928, which explicitly excluded most black South Africans. In the late 1930s and 1940s, the social security system was extended more broadly, but with racially differentiated benefit levels. In 1994 therefore, the first democratically elected government in South Africa inherited a fragmented social security system rooted in a concern for the interests of the apartheid constituency”, (Policy Brief 1, 2006)
The challenge faced by the post-apartheid government was to give meaning to the mandate in the new Constitution, that states
“everyone has the right to have access to social security, if they are unable to support themselves and their dependants, appropriate social assistance should be provided” (1996 Constitution of the Republic of South Africa, Section 27, 1c).
At the same time, however, the biggest challenge was that levels of benefits previously provided to the white minority under apartheid South Africa were such that they could not be delivered in a fiscally sustainable manner.
The Social Grants Crisis
With an unofficial unemployment rate of about 27,1% in the 4th quarter of 2018, a poverty rate estimated at approximately 55%, which according to the Poverty Trends Report for 2006 to 2015, translates to 30.4 million people living in poverty and one of the most severe measures of inequality in the world, South Africa truly faces substantial challenges in addressing poverty, inequality and unemployment.
According to a report by the department of National Treasury: The Estimates of National Expenditure 2018, social grants account for an estimated 94.4 per cent (R176.1 billion per year on average) of the department’s total budget over the Midterm expenditure framework (MTEF) period. The department expects to disburse social grants to 18.1 million beneficiaries in 2020/21, from 17.2 million in 2017/18. As a result, spending on grants is expected to increase at an average annual rate of 8 per cent over the MTEF period, reaching R189.8 billion in 2020/21. An additional R2.6 billion has been added to social grants over the MTEF period to offset the likely inflationary impact of new tax measures.
To further contextualise the above-mentioned figures, according to the South African Institute of Race Relations in 2001 around 12.4 million people were employed with around 3.9 million people receiving social grants. This roughly translated to 330 people with jobs for every 100 people on social welfare. By 2012, the ratio had dropped to 90 people in employment for every 100 social welfare beneficiaries. By 2016 the number of people receiving grants had increased by 328% while those with jobs increasing only by 24%, (Gerbrandt van Heerden, 2017). There are currently more people receiving social grants in South Africa than there are people with jobs, according to the IRR’s latest “South Africa” survey, in 2016, there were 15,545,000 people with jobs in South Africa while 17,094,331 people were receiving social grants
The above statistics clearly indicate that the sustainability of social grants using tax revenue for the distribution of social grants is a financial unsustainable approach, this is granted that as the economy stagnates tax revenue slows and the demand for more grants increases. The government will then have to cut other areas of expenditure to meet the popular demands for more and higher grants.
There are various solutions that we can look at particularly at the policy level including labour market reform which focuses on large-scale job creation in the long-term. Part of doing this means supporting start-up companies and small-, micro- and medium-sized enterprises self-through policy reform.
On other policy related reforms, government could look at upscaling infrastructure and education investment in order to enhance economic growth, this is because improved infrastructure leads to more cost-effective transportation of goods and services which is great for business.
A highly educated population has increased chances of being high-income earners and as such has increased spending money and becomes a high-income tax contributor. These are policy methods that have been explored extensively and hold much merit in terms of the economic suitability globally and particularly to the South African economy.
What I am however putting forth as an economically viable alternative is a move to decrease expenditure on social security grants with very specific exceptions. The exceptions being old age pension grant, the disability grant as well as the foster child grant and the care dependency grant. This is because I am of the view that a large proportion of social grants is spent on people who are fully capable of looking and finding work. Ceteris paribus if these individuals are capable and willing to work and there was actual work available then let us assume that they would work.
On a moral level, I believe that when you give someone a job you give them purpose; you give them the ability to earn an income and live a life filled with some dignity.
The move to eradicate social grants from a logically point of view is that if the billions of Rands that are pumped into social grants can be rerouted in such a manner that grant recipients (excluding the exceptions) are able to receive their grant as a form of compensation for services rendered we’d have higher economic participation from these people as they would contribute to the fiscus through taxes, but more importantly these people would become real economic players. They would be people who begin to have work-related ambitions such as promotions, the desire to work in different industries which would require skills development programs to be set up, these programs would be structured in such a way that the end goal will be ultimately moving these people into more skilled labour over time, (and as such off the subsidy).
There are a lot of small micro medium enterprises that can create mass employment but because of high operating costs, minimum wage stipulations, racial quota stipulations and absent protectionism economic policy/ import controls, some of these companies operate with below par employment. If government can be willing to subsidies particular sectors (particularly sectors that depend on highly unskilled labour) with a percentage of what they spend on social grants in order to offset or rather account for some of the contributing factors that lead to minimum employment by companies, these companies would then potentially be able to take on board an additional number of workers. We need the government to help local producers by providing labour at lower rates (or in this case subsidised labour), reliable infrastructure, cheaper electricity and better roads all in effect to give way to lower business operational costs.
For example, let’s take the poultry industry in South Africa. In 2017 the poultry industry suffered tremendous job cuts with Rainbow Chicken retrenching 1350 workers. Mike’s Chickens a family run business based in Polokwane had to shut down putting more than 1000 people out of work. Country Bird (Free State and North West), the country’s third biggest chicken producer behind Astral Food had to retrench 1 500 workers. The South African textile industry also suffered the same way when Chinese textiles arrived in South Africa.
Let us for a minute purely for the purposes of the economic illustration assume that the government would adopt the above proposal. We could have the companies in mention and government meeting each other halfway in terms of salary-related costs and re-employ some of the people who were retrenched. Let’s say the amount Rainbow chicken needs for 10 salaries is R50 000 for arguments sake, if rainbow chicken would only pay R25 000 and then government subsidies the remaining R25 000 with monies which would be going to social grants recipients in the form of salaries, we could then begin to forge brilliant and viable employment strategies. There are other factors here, of course, to consider such as national minimum wage and accompanying appropriate industrial and economic policies, but essentially this is the crux of the idea.
The above would consequently decrease the unemployment rate, increases the number of people who have access to an income and thus can be better contributors to the economy, which means an increase in economic activity and thus an increase in GDP.
A look at an empirical source of the theory that I am laying down a foundation for this proposal is that of Brazil and minimum wages. Extensive research on the subject shows that a rising national minimum wage accompanied by the “appropriate industrial and economic policies would lead to more people having more money to spend and would thus boost the economy”, (Nkabinde, 2014). Brazil has increased the minimum wage in real terms by 81% (between 2003 and 2010), 17 million formal jobs were created (from 2002 to 2011). Also, the increased incomes fuelled economic growth in Brazil, whereby the contribution of domestic consumption to Brazilian GDP rose from -0.5% in 2003, to 9.1% in 2010; and unemployment fell from 11.6% to 6.1% in the same period” (Nkabinde, 2014). Appropriate industrial and economic policies in the case of South Africa is the eradication of social grants which would free up billions of Rands which can then, in turn, be used to fuel the minimum wage rate and to encourage companies to take on more staff given how they’d be subsidised for it.
In conclusion, it is evident that there are various challenges in keeping an ever-growing social grants beneficiary base afloat. With South Africa’s economic growth stagnating since 2008 the conventional delivery of social grants is becoming economically unsustainable there are also economic indicators that suggest that the current conventional methods of delivering social grants are a recipe for social and political chaos. As such I think it is imperative that we as a nation begin to think of very creative and dynamic ways in which we can rethink the distribution of social grants.