Financing the basic income support in South Africa under fiscal constraints

Abstract

The lingering effects of the Covid-19 pandemic, exacerbated by the Russia-Ukraine war and climate change-induced disasters that have led to worldwide poverty increases, have re-ignited discussions about the urgency of pro-poor support programs. South Africa offers a current and topical example to this discourse with the government’s intention to introduce a basic income support covering everyone in the age group 18–59 years who is neither disabled nor employed. Expanding social protection to reach those currently receiving no support within a severely constrained fiscal environment raises affordability and developmental challenges relevant to many other developing countries grappling with similar issues. It raises questions such as whether the planned support grant effectively reduces inequality and poverty. How does the grant impact the entire economy? What are the best funding options to create fiscal space? Model-based assessments like the one implemented in this research provide information to contribute to these questions and, therefore to a policy discussion. This study develops a micro–macro modelling approach with alternative fiscal financing options to address these developmental and affordability issues simultaneously and systematically. The analysis suggests that the government could address growing poverty and inequality in the short term with benign impacts on macroeconomic and fiscal outcomes while the country looks for other initiatives to achieve higher growth and employment in the long run. HIGHLIGHTS • Modelling the impact of South Africa’s Basic Income Support (BIS) for unemployed individuals. • Utilises microsimulation and Computable General Equilibrium models. • Assess the impact of various funding scenarios for the BIS on the economy and households. • Overall, BIS reduces poverty and inequality, but there are regional differences. • BIS also stimulates the economy, promoting long-term growth.