The Department of Social Development (DSD) on Tuesday launched a modeling report on basic income support in South Africa.
Empirical work on the issue of transfers is very important in informing the public debate about policy options for addressing poverty, inequality and unemployment.
However, there are several aspects of the study that limit its usefulness in informing this discussion.
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“Significantly higher spending over the long term”
Rate models of the type used in this study have a major shortcoming: they cannot assess the long-term implications of policy changes or incorporate into their analysis the inevitable effects of assessed policy changes on interest rates, the inflation or investment.
This limits the ability of the framework used to assess the costs and benefits associated with changes in basic income support that require significant changes in the fiscal set-up or their impacts on macroeconomic stability.
While this point is acknowledged by the panel (in bullet 37 of the report), this does not prevent them from proposing permanent policy changes that their modeling approach cannot be used to reliably inform.
The policy proposals in the DSD document involve significantly higher spending in the long term.
We estimate that an expansion of the SRD subsidy would cost an additional 0.8% of annual GDP, while the proposed expansion of the lower poverty line would cost an additional 2.3% of annual GDP.
Our model, which assesses the impacts of the fiscal setting on long-term interest rates and the macroeconomy, suggests that accommodating the proposed increases in transfers would require a combination of various forms of financing.
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These would include public debt increases of between 3 and 8 percentage points of GDP, VAT increases of between 0.2 and around 0.6 percentage points, personal tax increases of between 2 and about 5.5 percentage points, and see between 0.25 and about 0.5 percentage points higher. . Type of corporate tax.
Tax increases of these estimated magnitudes would likely result in significant job losses and overwhelm any expansionary effects of higher transfers.
Here are the simple sums
We use some “simple sums” to demonstrate the implications of permanently higher spending for taxpayers.
Having 7.4 million taxpayers and 10.5 million potential beneficiaries of R350 SRD means about 1.5 subsidy beneficiaries for every taxpayer in South Africa. Thus, each taxpayer must contribute 1.5 times the value of the grant to balance the budget.
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The expansion of the SRD proposed in the DSD paper means that the average taxpayer will pay an additional R6 800 per year.
For the average taxpayer, this means a tax increase of around 9%.
The average taxpayer in the highest tax bracket by number (Rs 500,000 to 750,000) will pay Rs 11,855 more annually in tax.
While extending the SRD subsidy is fiscally feasible, proposals to improve social support must consider the long-term sustainability of increased spending, debt and taxes.
As we argue in our paper, South Africa has a small tax base with limited fiscal space for expansionary policies.
Our model suggests that the tax increases needed to finance increased spending would mean fewer jobs and slower economic growth.
Sustaining public spending extensions of the proposed size over the long term would require a clear and credible commitment to other spending cuts or structurally higher economic growth.
Economic models often disagree about the likely impacts of policy changes. But these frameworks are important cross-checks on the sustainability of policy settings. Macroeconomic assessments of policy changes should consider the impact on borrowing costs and growth over at least a five- to ten-year horizon.
The recent financial market turmoil following the UK’s announcement of unfunded expansionary policy demonstrates the danger of trying to implement unsustainable economic policies.
Dr. Daan Steenkamp is the CEO of Codera Analytics.
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This article originally appeared on Moneyweb and has been republished with permission.
Read the original article here.