A universal basic income grant is now firmly on the table, a development that could not come sooner with the country’s unemployment and cost-of-living crises threatening to wipe out the economy.
Last week, President Cyril Ramaphosa commented in his state of the nation address that “work is underway to develop a specific basic income support mechanism for the most vulnerable, within our fiscal constraints.” The announcement comes as other government efforts to inspire growth have failed miserably, leaving the poor more exposed than ever.
Although the president’s speech put Eskom at the top of his administration’s agenda, underscoring how burdensome the utility has become, the introduction of a basic income subsidy is now just as important to ensure economic health. from the country. If it becomes a reality, the grant could be the biggest step the Ramaphosa administration has taken 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 Reserve Bank of South Africa indicated as much when it warned that burden reduction could cut the country’s growth by as much as two percentage points in 2023. If the bank’s forecasts are correct, see 0.3% growth in 2023 and 0.7% in 2024, the country’s socioeconomic conditions will deteriorate rapidly.
For this reason, Ramaphosa’s speech was largely devoted to his government’s cures for the energy crisis, which has undermined economic confidence, forcing investors to take a “wait and see” approach.
The president’s administration has pinned its growth hopes on encouraging a wave of private sector investment, a scenario that has yet to materialize, largely due to slow government efforts to address structural constraints such as the crisis. energetic. And while the president’s speech was intended as a sign of his administration’s resolve on the issue, it clearly wasn’t enough to undo the private sector pessimism that has been building over the past five years.
Investec chief economist Annabel Bishop noted that while the State of the Union address was comprehensive and positive in its message, it did not galvanize markets. This was because the state’s poor record of delivering on its promises has called for continued cynicism.
Last Friday, ratings agency Moody’s warned that “the longest stretch of power cuts in South Africa is bad for credit”.
On Monday, the rand topped R18 against the US dollar, trading at its lowest level since mid-December 2022, amid growing concerns over the energy crisis and the country’s economic outlook. After all, Eskom has said that we will have to wait two years before its turnaround plan bears fruit.
In response to the speech, Business Unity South Africa echoed the mistrust of the markets, stating that the speech failed to instill confidence in the government’s ability to operate efficiently and to account for inadequate performance and delivery.
Busi Mavuso, executive director of Business Leadership South Africa, also expressed skepticism, mainly towards Ramaphosa’s announcement of a state of 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 clear 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 be convinced, and in the meantime, growth will continue to elude us.
According to a recent analysis by clearinghouse BankservAfrica, Reserve Bank forecasts (measured by population growth) imply that, on a per capita basis, the average South African will be poorer by 2023.
Meanwhile, the country’s unemployment rate has remained stubbornly high. Without growth of around 5% per year, there is no hope of bringing the unemployment rate down to a more sustainable level.
It is not surprising then that, despite having played hardball with fiscal consolidation for a few years, the government has now begun to show a greater willingness to compromise on an intervention like the basic income subsidy.
Like load shedding, the cost-of-living crisis is also threatening growth, and the Reserve Bank’s dire forecasts take into account modest levels of household spending. Household consumption represents about 60% of the country’s GDP.
Having pushed itself into a corner, the government has been forced to admit that South Africans simply cannot take the onslaught of its failed economic policies any longer. The government’s reform agenda has simply failed to address the scale of the crisis before us and other options need to be seriously considered.
The lingering question, however, is how a basic income grant will be funded. The numerous reports that have been written in the last three years have been concerned with answering this question, which has become a major point of conflict for the government. By seeking a financing regime, especially if it compromises the public purse, you will further alienate markets and investors who are concerned about the country’s fiscal prospects.
However, what tends to be overlooked, especially in public debates, are the multiplier effects of the basic income subsidy, the promise it holds to stimulate an economy that so badly needs to be defibrillated.
An initial assessment of the pinch welfare grant found that, in its current form, it could add 0.5% to GDP each year. Certain other options have suggested that the annual growth rate of the country’s GDP could increase beyond 5% with a higher basic income subsidy.
The government’s recent stance towards the basic income subsidy suggests that it is less willing to discount its share to avoid a new economic downturn.
In fact, the current economic conditions in the country demand that the government use all its arsenal to stop this crisis. A basic income grant could be the first step in bringing back the growth the country’s economy so desperately needs.
Hopefully his change of position on the basic income subsidy is an indication of the government’s genuine concern for the economy and its impact on people’s livelihoods, rather than the existential threat it poses to the government’s leadership. ANC. After all, this could be the difference between a government providing a grant that has significant economic results and one that is more limited in design.
