State must do everything possible to end SRD grant now

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This article was first published by Business Day on 2 October 2023

Lower-than-expected commodity prices and higher-than-expected expenditure mean government finances are facing the worst combination of circumstances. We are facing a fiscal cliff. The solution lies in creating the conditions for long-term economic growth and mercilessly shrinking the size of government, but these options are not without political costs in the short term.

Over the past two years, SA benefited from higher commodity prices due to deficit spending by governments around the world to make up for their Covid-19 lockdowns and the uncertainty caused by the war in Ukraine. Now interest rates are elevated as governments try to deal with the inflation they caused, and the markets have a better idea of how the war in Ukraine affects the costs of critical commodities. This has led to a collapse in commodity prices and therefore a collapse in the windfall revenue SA’s Treasury has been receiving since the Covid-19 lockdowns.

Making matters worse is the increase in expenditure that the Treasury has had to fund outside its initial projections. In February, the government budgeted R36.1bn for the period up to March 2024 for the social relief of distress (SRD) grant, the R350 grant given to all unemployed people since the Covid-19 lockdown. This was never meant to be a permanent grant and would not exist if the government had not pursued the disastrous lockdown policy.

At the time the SRD grant was introduced as a temporary lockdown measure some of us warned that with our high, structural unemployment rate, the government would not be able to get rid of this grant once it was introduced. It would simply not be politically possible to take away money from 10-million unemployed people once they started receiving it. Three years after the initial lockdown government is now looking for a way to make the grant permanent.

This will further erode the entrepreneurial spirit of South Africans and therefore make it harder to reduce unemployment in future. It’s not a coincidence that countries with social safety nets, like SA and Botswana, tend to have smaller informal/small business sectors than those that don’t.

Extending the grant will also exacerbate the entitlement problem in the country. If it is easier to burn tyres and demand an increase in the SRD grant instead of looking for a job or starting a business, that is exactly what young people will do.

It should also be noted that some young people have used, and will continue to use, the SRD grant to start successful small businesses. This is a wonderful consequence, and if this was most of the effect of the grant, the Treasury would not need to worry since the grant would fund itself through GDP growth. But this is not the case for most people, so the grant is a net loss for the economy and for taxpayers.

It would be better for SA in the long run if the SRD grant had never been introduced but now that we have it, the government should do everything in its power to end it as soon as possible. The country cannot afford to pay 70% of SA’s unemployed 15-24 year olds and 42.4% of all working age adults a monthly stipend indefinitely (using the expanded definition of unemployment, since all of those people would qualify for the grant regardless of whether they are looking for jobs).

The government must act with urgency to create conditions for business that are conductive to growth and job creation. Regulations, especially those pertaining to the labour market, need to be removed and the tax burden reduced to encourage investment. It has been reported that the National Economic Development & Labour Council is currently in deadlock because business and labour cannot agree on the labour market reforms needed to start creating jobs.

The government will need to break the deadlock by choosing between jobs for the unemployed and privileges for unions and unionised workers. This call will determine the future SA, and therefore the survival of this government. It is the core issue in SA politics; everything else is a sideshow.

In addition to the SRD grant, the government has also had to fund an unexpected wage increase for public-sector employees. It initially budgeted for a 1.6% increase and ended up having to fund a 7.5% increase. This is a common theme in SA’s fiscal drama, with the government continuously having to fund higher wage increases than were budgeted for. One of the consequences of this is where the government needs to hire more employees, as in the police service due to the increase in crime, it ends up hiring fewer because more of the budget is consumed by current employees.

This again shows the corrosive power of unions. The government will have to find a way to deal with this influence once and for all. A good way to start is reviewing the legislation that enables collective bargaining, the Labour Relations Act. Other labour legislation such as the National Minimum Wage Act and the Employment Equity Act are also destructive, but not quite as destructive as the Labour Relations Act, which forces everyone working for a company where some union dominates to join that union against their will. This is clearly a violation of South Africans’ right to associate or disassociate freely.

Another common theme in SA’s fiscal drama is core functions of the state such as safety and security being sacrificed for politically expedient functions such as grants and the wages of unionised government workers. The government is hostile to private security and firearm ownership, yet it is reducing expenditure on the policing functions that protect ordinary South Africans. The budget for VIP protection will no doubt be left untouched or even increased.

SA needs a more direct link between paying taxes and the right to vote. While many will refuse to even discuss the possibility of linking the vote to the taxes a person pays, the consequence of not doing so are policies that are actively hostile to taxpayers and their safety, as we currently experience in SA. This is a recipe for creating a banana republic. The course SA is now on will only be reversed when we are ready to make hard but rational decisions.

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The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation. This article may be republished without prior consent but with acknowledgement to the author.

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