South Africa’s social relief grant likely to be extended for another year: analyst

South Africa’s social distress relief grant (SRD) is likely to be extended for at least another year, says Intellidex analyst Peter Attard Montalto – and even though the government is reticent to say it, the grant is being viewed by the market as a permanent fixture in the budget going forward.

In a research note on Thursday (3 February), Attard Montalto said that the SRD grant will likely be the “largest single expenditure item” in the 2022 budget, coming in at around R45 billion for the year.

This is up from the annualised R39 billion in the current financial year, mainly due to possibly uplifting the amount closer to the food poverty boundary. However, it is likely to still target the same population eligible as before – around 9.5 million he said.

Revenue overruns for South Africa in 2021/21 have been so significant – by approximately R76 billion versus the mid-term budget estimates – that much of the SRD grant payments can be paid for through revenue forecast revisions, not tax hikes, Attard Montalto said.

However, National Treasury is under pressure from all departments and sectors for funding, the analyst said, with financing for the grants going forward not as clear-cut.

“Treasury is sitting under the weight over much broader R600 billion-odd spending demands that were unresolved from last year’s Medium Term Expenditure Framework process into the Mid-term budget.

“Overall, we think the SRD extension will likely be partly subsumed in the R20.1 billion of unallocated and contingency reserve, but the rest then being paid for with revenue forecast revisions – not tax hikes. As such we see the deficit profile roughly stable, despite all this going on under the surface.”

The hole

President Cyril Ramaphosa and National Treasury are under pressure to make the social distress relief grant permanent, with calls from departments, unions and social groups to transform the grant into a basic income grant (BIG).

In the last week alone, two contrasting reports have been leaked from the president’s economic advisory panel, expressing views for and against the grant, respectively.

On one hand, some on the panel and more socially-focused government departments like the Department of Social Development have stressed the benefits of introducing such a grant, namely alleviating poverty and encouraging economic participation.

On the other hand, the majority on the panel and more economy-focused government departments like the National Treasury have warned against the income grant, highlighting its unaffordability and wider impact on the economy.

Research conducted by the National Economic Development and Labour Council (Nedlac) showed that, based on various scenarios and target groups, the cost of a BIG could be anywhere from R95 billion (targeting the unemployed at R350 a month) to R550 billion (universal grant at R1,270) a year, even in the most optimistic circumstances.

Despite the revenue overruns experienced in 2021, any future basic income grant is widely expected to be funded through taxes.

If funded through personal income tax, a universal BIG at the level of the special Covid-19 Social Relief of Distress Grant (R350) would result in an approximate average increase in effective tax rates at 8.2%.

According to Attard Montalto, talk around the SRD – and by extension, the BIG – in relation to taxes has saddled National Treasury with a communications problem.

“At the MTBPS (Treasury) said it needed to hike taxes if there is extra expenditure – yet we don’t think they will, given revenue overruns pencilled in. We think they will sidestep this by pencilling in future unspecified tax hikes in the future in part as well as SRD only being one year,” he said.

This is not in line with market views, however, which see the grants as permanent.

“As such, there will be a gulf of credibility on two fronts – future tax hikes are politically challenging especially ahead of the 2024 elections in either the 2023 or 2024 budgets, and not recognising the SRD grant as permanent, while technically correct from a policy perspective, will be a hole that the markets will be peering into,” he said.

Read: Basic income grant in South Africa won’t stop people looking for work: chairperson