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Views expressed in this report do not necessarily represent the views of
the Inclusive Society Institute or its Board or Council members.
Author: Dr Roelof Botha
Editor: Daryl Swanepoel
FEBRUARY 2023
Content
Chapter 1: Introduction
Chapter 2: New reflections on the welfare state
Chapter 3: The Broader context to social grants
Chapter 4: The performance of social protection programmes (SPPs)
Chapter 5: Country case study no. 1: Brazil
Chapter 6:Country case study no. 2: India
Chapter 7: Macroeconomic impact of social welfare – international
Chapter 8: Economic impact studies on South Africa’s welfare system
Chapter 9: Some caveats to the design of social welfare systems
Chapter 10: Modelling the impact of the basic income grant (BIG) on the economy
Chapter 11: Conclusions
Chapter 12: Recommendations
References
Cover image credit: istockphoto.com | Micky Wiswedel
Chapter 1: Introduction
Background and Objective
The detrimental economic effects induced by the Covid pandemic have been particularly severe on the lower income groups in South Africa and unemployed persons, many of whom are dependent on other household members for their subsistence.
As a result, the debate on the feasibility of a basic income grant (BIG) has received new impetus, especially in the wake of the implementation of the social relief of distress grant (SRDG), commonly known as the Covid-grant, which has proven to be fiscally affordable, despite the need to keep a watchful eye on the stability of the country’s public finances.
Several studies have been undertaken in recent years to gauge the likely poverty-reducing impact of South Africa’s welfare grant system, which is widely acknowledged to be one of the most effective in the developing world, although a grant targeted at unemployed persons is still not a permanent part of the welfare system. Over the past decade, few developing countries in the upper-middle income group have matched South Africa in the quest to reduce the prevalence of poverty, whilst the country also ranks in the top-four regarding the indicator for per capita job creation via public works programmes.
Impact studies have nevertheless mostly been restricted to the areas of poverty reduction and lowering the level of income inequality. Recognising the dearth of empirical economic analysis of social protection policies in South Africa, the Inclusive Society Institute (ISI) commissioned such a study early in 2022. The main objective of the study is to determine the macroeconomic impact of a basic income grant (BIG) that is fixed at the food poverty line (R624 per month at the time of the econometric modelling exercise).
It was also regarded as necessary to conduct a comprehensive literature study on the global and domestic experience with social protection policies, both with regard to their composition and their impact on the combating of poverty and the macro-economy.
Structure
The study commences with a discussion of the evolution of social welfare policies over the past three decades. It is pointed out that the state’s role in providing social protection to those in need has become an imperative in virtually all countries, not a choice. There has nevertheless been a noticeable shift in emphasis towards introducing some form of conditionality for beneficiaries to qualify for grants and other forms of welfare in South Africa, as well as combining welfare with programmes aimed at providing temporary employment (referred to as workfare). This section also points out the dangers of resorting to wealth taxes to fund welfare programmes.
The second section provides a comprehensive overview of the broader context of South Africa’s social grant system, including trends in gross and net social benefits received by households, as well as the extent of poverty in the country. This section concludes with a brief analysis of South Africa’s social protection response to poverty.
Section three discusses the performance indicators that have been developed for determining progress with the combating of poverty via a large variety of public welfare initiatives. Significant resources are invested in the implementation of social protection programmes, which necessitates the continuous monitoring of the effectiveness of these programmes.
The focus of the analysis will be on South Africa’s peer group, developing countries that are classified by the United Nations as upper-middle income countries. Clear evidence is provided of the substantial impact that social welfare programmes are making in the global fight against poverty, with South Africa’s performance being exemplary.
Two country case studies follow, namely for Brazil and for India, who, together with South Africa, possess democratic constitutions within the BRICS grouping. Initiatives to combat poverty in these two countries have been quite successful and several of them are either based on conditionality in grant payments or workfare arrangements, whereby temporary jobs are created and policy makers in South Africa could well consider introducing some of their elements into the future refining of domestic welfare programmes.
A discussion of macroeconomic impact studies of welfare policies around the globe is provided in section six, all of which confirm a positive causal effect on GDP and fiscal revenues emanating from grant payments to poorer segments of society. This is followed by an overview of economic impact studies conducted on the South African welfare system (section seven) and a section that identifies a number of caveats to be considered in the design of a social welfare system, namely the dangers of fiscal instability, the problems with a universal approach to a BIG and the inherent paradox that exists in the case of certain welfare policies (section eight).
Section nine contains the results of the macroeconomic impact analysis of a basic income grant, based on the food poverty line as at the end of July 2022 and utilising econometric modelling, including an estimation of the fiscal cost under two different scenarios. This followed by the customary conclusions and recommendations.
Chapter 2: New reflections on the welfare state
The topic of government-funded welfare policy has been at the centre of public debate for more than a century. Ever since the Great Depression, the extent of the public sector’s involvement in what is effectively the transfer of productive income from employed persons to people in need has been a focal point of election campaigns throughout virtually all of the world’s democratic countries.
Welfare policy is also practised in undemocratic countries, although data on the particular elements and outcomes of such policies in countries with oppressive regimes are not always reliable.
Social policy is the term used to describe the manner in which a society deals with the issues of welfare and social protection. Over a period of roughly 100 years, it has developed into a subject matter relating to the full range of social services, including health, education, employment, housing and community development. It also addresses issues relating to social problems, such as disabilities, crime, inequality and poverty. Importantly, as noted by Spicker (2014), social policy is a subject area that borrows from other social science disciplines, mainly sociology, social work, psychology, economics, political science, management, history, philosophy and law.
The concepts of “welfare” and the “welfare state” are both ambiguous and are approached differently from one country to the next, especially with regard to issues such as the needs of people and their scope to exert choices in achieving well-being. Despite strong arguments for the collective provision of welfare services, it is important to recognise the direct and indirect roles played by other organs than the state in the delivery of social services and welfare.
Welfare has become an imperative, not a choice
From an international legal perspective, the recognition of the right to social security has been developed through universally negotiated and accepted instruments that establish social security as a basic social right to which every human being is entitled (UN 1948 & 1966). In this way, the right to social security has been enshrined in several human rights instruments adopted by the United Nations, and is expressly formulated as such in fundamental human rights instruments, namely the Universal Declaration of Human Rights (UDHR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR). Specifically, the relevant Articles of the UDHR are as follows: 22 of the UDHR lays down that:
Article 22:
Everyone, as a member of society, has the right to social security and is entitled to realisation, through national effort and international cooperation and in accordance with the organisation and resources of each state, of the economic, social and cultural rights indispensable for his dignity and the free development of his personality.
Article 25:
1) Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing, and medical care and necessary social services, and the right to security in the event of unemployment, sickness, invalidity, widowhood, old age or other lack of livelihood in circumstances beyond his control.
2) Motherhood and childhood are entitled to special care and assistance. All children, whether born in or out of wedlock, shall enjoy the same social protection.
Spicker (2014) identifies five basic arguments for the collective provision of welfare services:
Humanitarian -societal concerns about poverty and need have been central to the evolution of the developmental role of the state
Religious - several of the world's major religions view charity as a religious duty. Beyond charity, Catholicism recognises a duty of social solidarity (or mutual social responsibility), whilst Judaism, Islam and Lutheran Christianity require some form of collective responsibility for one's community.
Mutual self-interest - many welfare systems have developed, not from state activity, but from a combination of mutualist activities, gradually reinforced by government.
Democratic - social protection has developed in tandem with democratic rights
Practical - welfare provision has economic and social benefits
Wealth taxes should be avoided
Any consideration of an extension to a social protection system that is already comprehensive will require scrutiny of its likely impact on fiscal stability. The current debate on this topic in South Africa has occasionally touched on the option of introducing a new wealth tax (several wealth taxes already exist), in order to fund an income grant for the unemployed.
When considering the imposition of another wealth tax, the underlying motivation for such a tax must be considered, as well as its likely impact on the economy – specifically the narrow base of highly skilled people that will bear the brunt of this tax. There is little doubt that a new wealth tax should be avoided, as confirmed by a brief discussion of empirical evidence on this issue.
Evidence from the OECD and BRICS
In 2018, a study was conducted by Arendse and Stack on the international experience with wealth taxes over the past three decades. They found that only one of the 40 countries included in the groupings for the Organisation for Economic Cooperation and Development (OECD) and Brazil, Russia, India, China and South Africa (BRICS) has used a recurrent wealth tax on a sustained basis as a part of its economic policy. The levy of a wealth tax is not common and, as a rule, has only been implemented as a crisis measure to generate additional revenue in the face of an economic setback, usually involving a very short lifespan.
Furthermore, none of the countries considered in this study have both estate or inheritance tax and capital gains tax on the assets of an estate. No precedent therefore exists elsewhere for a policy change that adds a new wealth tax to the estate duty, donations tax and capital gains tax that already exists in South Africa. Due to the wealth taxes representing less than 1% of GDP, Arendse & Stack (2018) argue that, in the case of a need for additional fiscal revenues, other types of tax or increases in existing taxes (such as the value-added tax) should be considered.
Both Canada and Australia have deemed disposals on death like the capital gains tax deemed disposal rule in South Africa, but neither of those countries has estate or inheritance tax. South Africa is the only country that taxes the estate of a deceased person as well as the deemed disposal of that person’s assets on death (Ernst and Young 2015).
One of the conclusions arrived at by Arendse & Stack is that South Africa’s estate duty and donations tax systems compare favourably with similar systems used in several other countries internationally in terms of the rates and exemptions that apply. Taxing wealth transfers upon death is one of the most efficient form of wealth tax as it has less impact on economic decisions than other forms of wealth tax, although the real achievement of this efficiency will depend on the use to which the tax revenue is put. If there was any meaningful yield and the tax was spent appropriately, it could go some way towards addressing economic inequality and thus contribute to addressing wealth inequality. The reality, however, is that wealth taxes are not a viable option and can do more harm than good, especially in view of the following considerations:
The Covid pandemic has served to fast-track the fourth industrial revolution in creating an environment of high and increasing levels of international mobility of highly skilled persons, who will tend to seek the most advantageous tax administration they can find
In view of the low yields on the sparse wealth taxes internationally, it is very unlikely that there would be sufficient tax revenue to have any impact (Evans 2013)
Administrative constraints have usually made wealth taxes both unproductive and inequitable in developing countries and their most sophisticated version – the net wealth tax – has proved a costly mistake in developing countries that have attempted to implement it (Bird 1991)
There is no evidence to suggest that South Africa, with its small base of taxpayers and very few taxpayers with substantial wealth, would be able to generate meaningful revenue from a wealth tax. In attempting to address poverty and inequality, attention should rather be given to measures that will stimulate the economic growth and employment creation. This requires that available capital should be concentrated where it is most productive and can add the most value, which is mainly in the hands of entrepreneurs and investors. South Africa’s recent history suggests that transferring additional capital to the government through a wealth tax will tend to stifle these objectives.
Evidence from South Africa - the Davis Tax Committee
The background to this particular report by the Davis Tax Committee (DTC - 2018) was the realisation that existing wealth taxes in South Africa did not constitute significant revenue streams to government (except at municipal level) and that the high level of wealth inequality posed a threat to social stability and inclusive growth.
At the outset, the DTC Report provided a discussion on useful criteria for evaluating a wealth tax and also certain critical principles that must be considered when designing a well-functioning wealth tax system. Three main constraints associated with the process of designing a tax were highlighted:
Tax efficiency becomes challenging when the scope of introducing a net wealth tax not only generates distortions of people’s willingness to work, but also impacts choices linked to wealth accumulation and disposal which explicitly affect the tax rate
Administrative costs can be large when designing a system that levies taxes on wealth, in contrast to taxes on wealth transfer. Some forms of wealth are hard to measure and some forms are easy to hide or convert into asset classes that fall outside the defined base
Tax reform and its implementation inevitably produces both winners and losers. Losers may express discontent through capital repatriation or changing assets classes.
This was followed by an overview of the state of wealth taxes and wealth transfer taxes in several countries, in order to provide some notable lessons from which South Africa can draw experience. It was pointed out that several countries had abandoned the taxation of net wealth during the past two decades, including Denmark, Germany, Finland, Sweden, and India. A number of reasons were identified for the universal aversion towards wealth taxes, including the following:
High costs associated with classifying and measuring net assets and structuring the tax collection system
Difficulties in accounting for global assets
Negligible contributions to the total tax revenue
The absence of a substantial tax base (especially in developing countries like India)
Tax migration (driven by differential rates of wealth taxes and banking secrecy laws)
Various complexities surrounding tax administration and enforceability
In the DTC’s consideration of the South African case, it was pointed out that a wealth tax is merely one tool, with which to address the pressing problem of inequality. Other methods of redress include land reform and programmes on the expenditure side of the fiscal budget such as increased access to quality health and education and the provision of infrastructure as well as effective government leading to growth and employment. The report mentioned that wealth taxes already exist but that several difficulties and unintended consequences would need to be addressed prior to implementing further wealth taxes. On the issue of taxes on property transactions, the DTC argued that the current transfer duty was second best to a properly functioning national property tax. The reality, however, was that systems were not in place to roll out a national property tax. While some municipalities had up-to-date and reasonably uncontested Municipal Valuation Rolls, this was not the case for all parts of the country.
In conclusion, the DTC recognised that while a recurrent net wealth tax may be an admirable and desirable method to pursue the objectives of equity, more work was needed to ensure that the tax was well designed and would yield more revenue than it costs to administer.
The Colombian experiment
In a study to determine whether wealth taxation van work in developing countries, Londoño-Vélez (2019) conducted research into responses to wealth taxes in Colombia, utilising quasi-experimental variation introduced by tax reforms in 2010 and discontinuities in the wealth tax schedule.
Each bracket of net worth was assigned an average tax rate, creating jumps in tax liability at bracket cut-offs. For example, in 2010, a taxpayer reporting 999.999 million Colombian pesos (R3.87 million at the February 2022 Oanda exchange rate) in wealth would have been exempt from the wealth tax. In sharp contrast, a taxpayer reporting merely one additional peso would have been liable for 1% of all taxable net wealth, resulting in a tax bill of 10 million Colombian pesos (R38,692).
In the absence of responses to the wealth tax by individuals, reported wealth would be distributed smoothly around the bracket cut-off level. If, however, individual tax payers avoided the jump in tax liability, there would be so-called “bunching” in reported wealth just below this level. It follows that the degree of “bunching” indicates the responsiveness of reported wealth to the tax (Kleven and Waseem 2013).
The study found large and immediate responses to wealth taxation, providing clear evidence that wealthy individuals respond to the incentives and/or disincentives created by tax policy. In the study’s main analysis, the marginal “buncher” would have reported 21% more wealth in the absence of the wealth tax, resulting in revenue losses of up to one-fifth of the mechanical projected revenue.
Although the study by Londoño-Vélez found that enforcement capacity of a wealth tax could be strengthened by wider coverage of third-party reporting, this would also require systematic cross-validation of reported information and increased scrutiny of high net worth taxpayers – clearly a near impossible administrative task in most developing countries.
Any serious debate on the topic of wealth taxes should bear in mind that wealth is a stock concept that depends to a large extent on asset prices, which are uncertain and can fluctuate significantly throughout a particular fiscal year (Jakobsen et al. 2018). The study by Londoño-Vélez found that, in Colombia, there had been limited systematic cross-checking of items reported in the wealth tax returns using third-party reported information. As a result, it was possible for individuals to avoid taxes by reporting lower values of assets and inflating debt.
Economic & fiscal trade-offs
Virtually every government in the world recognises these arguments via some form of collective social protection provision. Ongoing debates are not about whether welfare policies should exist, but about how much provision there should be, and how it should be implemented.
In the design of social welfare policies, the discipline of economics should always be borne in mind, as a lack of fiscal resources may thwart the ambitions of a particular government to provide comprehensive welfare programmes to its citizens. Empirical evidence abounds that confirms a positive correlation between higher per capita incomes and more extensive systems of social protection. A detailed analysis of changes in poverty in a large sample of developing countries by Kraay (2004) showed that most of the variation in changes in poverty is due to economic growth, suggesting that policies and institutions that promote broad-based growth should be central to the formulation of welfare policies. One of the perennial challenges facing policy makers around the globe is the difficulty of this classical trade-off, namely knowing which comes first, wealth or welfare.
Scholarly research into the topic of a public welfare system that strives to strike a balance between sufficient incentives for seeking employment and the funding, via the taxation system, of adequate social protection measures for the poor has been in abundance since especially the latter part of the 20th century, when fiscal pressures and globalisation conspired to force a re-examination of the limits of the welfare state. The latter term is often bandied about without conceptual clarity – to the extent that is can even be defined as a slogan. The concept of ‘the welfare state’ has always been highly politicised, especially in post-industrial countries and its ambiguity is a trademark.
Unfortunately, the debate on the pros and cons of the welfare state is often disjointed, especially due to the perception created by socialist-orientated commentators who often falsely accuse conservative political leaders of wishing to ‘dismantle’ the welfare state. Against the background of the minimal changes over the past few decades in the design and range of public welfare programmes around the world, nothing could be further from the truth. The fact is that electorates in the post-industrial countries continue to support the levels of public spending on welfare that have become the norm in the post-World War II era, but a plateau has certainly been reached in terms of the fiscal commitment to welfare spending. The latter was necessitated by a combination of rising life expectancy, lower fertility rates and slower economic growth in many high-income countries and was exacerbated by the global financial crisis of 2008/09.
Although the causes of the financial crisis were complex, its roots can be traced to legislation passed by the US Congress two decades earlier to encourage financing for affordable housing – arguably an indirect form of welfare policy. Ultimately, the development of predatory lending targeting low-income home buyers in a relatively unregulated environment, led to the massive over-valuation of the financial instruments underpinning this market.
The development of mortgage-backed securities (MBS) and a web of financial derivatives linked to these securities eventually collapsed in value, leading to an international banking crisis and the bankruptcy of Lehman Brothers in September 2008. It led to the worst global recession since the Great Depression of the early 1930s, which had a profound impact on the ability of developing countries to pursue welfare policies.
Welfare & work – seeds of a new approach
In the US, several authoritative scholars of sociology, including Trattner (1989) and Gans (2010) have tended to over-emphasise ideological differences in the manner that the US government has approached the country’s welfare policy, often resorting to fairly emotional statements. Trattner (1989), for instance, accuses the so-called US welfare reform act of 1996 by Pres. Clinton’s administration as having removed the entitlement to welfare that was first enacted 60 years earlier during the Great Depression. He goes further by referring to Pres. Ronald Reagan’s tenure as a period of “…unremitting horror for the nation’s poor”, despite the fact that the Reagan-era was characterised by significantly higher growth and employment creation than the tenure of the previous head of state (who represented the Democratic Party).
After the first five years of the 1996 US welfare reforms, Moffitt (2002) reviewed the evidence and concluded, inter alia, that a large measure of success had been attained for one of the four goals listed in the new legislation, namely the encouragement of job preparation and work. The overriding single piece of evidence showing that progress has been made on the agenda of helping mothers on welfare work is the dramatic increase in employment rates among single mothers in the decade between 1990 and 1999.
Employment rates among single mothers, the group most affected by welfare reform, jumped markedly since 1994. Employment rates rose from 60 percent in 1994 to 72 percent in 1999, a very large increase by historical standards. Among single mothers who have never been married (the group with the lowest levels of education and some of the highest rates of welfare receipts) employment rates rose even more, from 47 percent to 65 percent over the same period (Moffitt 2002).
According to Moffitt’s evidence-based research, it is clear that the American public regards work by welfare recipients as a defining goal of state and federal welfare laws, the pursuit of which deserves the highest priority in social welfare policy. Work among welfare recipients is widely regarded as part of the social contract, i.e. a quid pro quo for the provision of income support, as well as a source of self-esteem and self-reliance among single mothers. This in turn is thought to increase the mothers’ chances for long-term economic improvement for themselves and their children.
Three realties for the future
Despite the omnipresence of differences in the design of a state’s welfare function, three realities that should guide future deliberations on this topic are:
Firstly, the fact that the divide between so-called conservative and liberal political parties is not so great as to prevent an approach that combines substantial expenditure on public welfare programmes with a large measure of pragmatism, especially in the crucial area of fiscal stability.
Secondly, workfare has become a more prominent policy option than welfare per se. This approach has a three-pronged attractiveness to policy makers: The private sector gains from an expansion of the workforce, the enhancement of human capital and the likelihood of reduced social conflict, all of which exert a positive impact on productivity and profitability. Citizens benefit from training, more widely accessible job opportunities and better rewards, whilst governments have a relatively low-cost option available to the difficulties they face in maintaining fiscal support for social services as inequalities persist.
A third issue is the emergence of the fourth industrial revolution, which is giving rise to the dominance of highly skilled services professions, especially in information technology. These experts are internationally mobile and can exercise wide-ranging choices regarding their preferred domicilium citandi et executandi for purposes of taxation. In a post-industrial world economic order, governments will not have as much leeway as in the past when preparing national budgets – generous welfare systems have to be funded by taxpayers and may threaten a state’s ability to fund its primary functions, namely public order, health and education.
It is these realities that have become a key theme in the discussions and research on the transformation of the welfare state, particularly in Europe. Esping-Andersen (2000), has been at the forefront of stressing the need for an overhaul of redistribution policies and social rights as urgent priorities, in order for a closer alignment to evolving realities, especially longevity, knowledge-based economies and the fiscal sustainability of welfare states.
Research by Handler (2009) confirms the broad-based existence of a new approach towards the state’s role in welfare, especially in Europe, where the erstwhile passive implementation has been substituted by more active labour market policies or workfare. In this process, a number of important characteristics have come to the fore. These include the following:
Stricter rules have been applied to eligibility, mainly via means testing
Conditionality has become more prevalent, especially in the areas of human capital formation and health screening
Workfare has become virtually synonymous with active labour market policies, mostly designed to encourage people to enter the labour market
In principle, near-universal support exists for state-organised welfare institutions and programmes. The debate on the extent of state intervention and priorities for welfare-state reform nevertheless remains lively, especially due to the regular occurrence in many countries of economic austerity, fiscal constraints, and changes to the labour market and demographic structures. It is not surprising, therefore, that a shift has occurred in the design of socio-economic policies over the past two decades, especially in Europe. According to Taylor-Gooby (2018), this involves a reduction in state intervention, tight constraints on government spending, expanded use of markets and of private sector services, and stronger emphasis on work incentives in social security.
Workfare – towards a new social contract
The essence of the new welfare regime unfolding in many parts of the world is that beneficiaries now have obligations as well as rights. In return for benefits, beneficiaries must seek work or participate in work-related activities, including education and training. The latter represented one of the key tenets of the 1996 welfare reforms in the US. According to Taylor-Gooby (2001), the principle underpinning the new-found emphasis on benefit conditionality is that paid work continues to represent the most legitimising basis for entitlement.
The issue of legitimacy raised by Taylor-Gooby and other researchers has become highly relevant in advanced economies. Workfare is increasingly being embraced as a sensible and socially responsible welfare policy option, not merely from the perspective of macroeconomic stabilisation objectives and containing the costs of state welfare, but also due to an evolving consensus on striking a balance between individual responsibilities and individual rights in society.
Attention is increasingly shifting from debates about the level and reach of welfare expenditure to questions about the desirability and usefulness of particular welfare programmes. As a result, the principles of selectivity and targeting within social assistance are now being restored as desirable features of an overall public welfare programme. The new wisdom incorporates the view that traditional cash benefits fail to support a proportion of recipients in becoming self-sufficient. Policy makers in the advanced economies began to turn to new policies which seek to improve the skills and capabilities of jobless people who have been unable to find work, as well as reforms aimed at reducing disincentives to take on work.
In analysing the recent welfare reform experiences of a number of advanced economies, Lødemel (2005) points out that Norway, for example (a country that does not have a welfare crisis), has adopted workfare. After a lengthy period of expansion of the welfare state, both the mainstream conservative and liberal political parties agreed that extensive rights to generous state welfare benefits were threatening the ability of people to become self-sufficient and that individual responsibilities and obligations are more important than individual rights. Several other advanced economies have also made progress in reforming their welfare policies towards the introduction of a new type of social contract between the state and able-bodied people in need of welfare – one that obliges social assistance recipients to work as part of the assistance contract.
In research that was confined to high income countries in the northern hemisphere, Esping-Andersen (2000) noted some implicit advantages of workfare policies that are also highly relevant to upper-middle income countries. Referring to what is termed low-end service jobs, the attraction of supplementing social grants by active labour market policies are clear: They provide easy-entry jobs for relatively young people, low-skilled workers, and women returning to the labour market.
Such services, which could be facilitated within the ambit of public works programmes could fulfil a positive function if the period of low earnings and relatively unrewarding work is temporary. Such jobs could provide a bridge into the labour market and supplement income. Esping-Andersen warns against assessing the costs and benefits of low-end jobs on the basis of snapshot notions of equality for all, here and now. The only reasonable frame of reference should be the entire span of working life.
Some evidence
Ever since the turn of the century, a new approach to welfare policy has become prominent in social policy debates. It can be defined as the enhancement of human capital via training and the mobilisation of people into paid work. Ensuring fairer access to opportunities should ideally be part of this process. From a political perspective, the aims of a shift towards workfare programmes are tantalising and include prospects for greater fiscal stability, increased self-sufficiency of beneficiaries, the prevention of social exclusion and an increase in employment. Some evidence of its impact is briefly discussed.
1. Lødemel (2005) – Europe
A comprehensive evaluation of the effects of workfare policies in European countries by Lødemel (2005) confirmed the positive employment effects of workfare programmes. Importantly from a fiscal perspective, it also resulted in increased earnings after participation in such programmes, thereby broadening the tax base. Another positive outcome is the lowering of barriers to entry into the formal sectors of the economy, especially when participants also engage in other active labour market programmes.
As a general rule, participants with placements in private sector jobs stand a better chance of entering regular employment than those in the public sector. The research also indicates that being activated in workfare programmes encourages younger people to enhance their educational attainment.
2. Taylor-Gooby et al (2015) – Europe
The According to research by Taylor-Gooby et al (2015), the general move towards ‘new welfare’ gathered momentum during the past two decades, given extra impetus by the 2007–09 recession and subsequent stagnation. While employment rates rose during the prosperous years before the crisis, there was no commensurate reduction in poverty. Over the same period the share of economic growth returned to labour fell, labour markets were increasingly de-regulated and inequality increased. This raises the question of whether new welfare's economic goals (higher employment, improved human capital) and social goals (better job quality and incomes) may come into conflict.
In 2015, an assessment of the impact of social policies based on the principles of workfare in 17 European countries over the period 2001 to 2007 was conducted by Peter Taylor-Gooby and two associates. It showed that new welfare was much more successful at achieving higher employment than at reducing poverty, even during prosperity, but that the approach pays insufficient attention to structural factors, such as the falling wage share, and to institutional issues, such as labour market deregulation. These issues can, however be adequately addressed by complementary polices such as closer cooperation between employer bodies and government in the design of training programmes aimed at the skills requirements of the private sector, where the bulk of employment resides.
3. Report on the State of Social Safety Nets (2018) – global
The World Bank’s 2018 Report on the State of Social Safety Nets pays scant attention to the ability of public works programmes (PWPs) to reduce poverty, mainly because of a dearth of information that included monetary values. The report nevertheless provides significant detail on the types of PWPs implemented by developing countries, as well as the number of people that have benefited from these programmes.
Table 2.1 depicts the number of beneficiaries of PWPs in upper-middle income countries per thousand of their populations, once again confirming South Africa’s high international ranking for progress with combating poverty via social protection policies. When taking countries in lower income categories into account, it becomes obvious that PWPs possess the ability to benefit large numbers of unemployed people via employment creation, albeit mostly at much lower wages than in the formal sectors of the economy.
The numbers of beneficiaries from PWPs are quite impressive. For reference years that mostly fall between 2011 and 2016, more than 97 million people benefited from PWPs, all of whom received remuneration for working on a variety of projects related to infrastructure. It should be noted that India was responsible for more than 75 million of these beneficiaries, but it is nevertheless clear from the data in table 2.1 that PWPs play an important complementary role in the design of social protection policies.
According to the Department of Public Works and Infrastructure (DPWI), the Expanded Public Works Programme (EPWP) created more than one million work opportunities in the 2021/22 financial year, of which 41% were jobs for the youth i.e. 18 - 35 years of age.
4. McCord (2005) – South Africa & Malawi
A study conducted for the Public Works Research Project of SALDRU, at the School of Economics in the University of Cape Town (McCord 2005), examined the role of public works programmes (PWPs) in South Africa and Malawi as a social protection instrument (with the aim to reduce poverty and vulnerability).
It found that one of the advantages of PWPs is their ability to simultaneously create public goods and provide employment for those unable to find alternative employment. From a political perspective, the attraction of public works over alternative social protection initiatives is based on the following:
First and foremost, PWPs create employment at remuneration levels that are not subject to personal income tax, resulting in a high degree of progressivity
Beneficiaries invariably represent the bottom income quintile and their work effort is rewarded, which avoids to a large extent the perceived dependency effects of direct income transfers
No trade-off exists between productive investment in infrastructure and expenditure on welfare as public works provide social assistance and create assets.
5. Escudero (2018) – Peru
A workfare programme known as Construyendo Perú was implemented in Peru from 2007 to 2011, with the objective to support unemployed people confronted with poverty. In estimating the medium- to long-term effects of this programme, Escudero (2018) utilised regression discontinuity design (RDD). Her study was part of a series of research projects undertaken by the International Labour Organisation (ILO) aimed at assessing the effectiveness of active labour market programmes in Latin America and the Caribbean.
This methodology is a quasi-experimental pre/post-test design that aims to determine the causal effects of interventions by assigning a cut-off or threshold above or below which an intervention is assigned. By comparing observations lying closely on either side of the threshold, it is possible to estimate the average treatment effect in environments in which randomisation is unfeasible. Recent study comparisons of randomised controlled trials (RCTs) and RDDs have empirically demonstrated the internal validity of this methodology (Chaplin, et al. 2018).
The paper concluded that the workfare programme helped raise employment and reduced inactivity for certain groups of beneficiaries but at the cost of locking participants into lower quality jobs, especially in the informal sectors. Specifically, the programme increased the probability of women, poorly educated participants and the overall population of being employed and attached to the labour market. The lack of positive employment effects for certain groups, especially more highly educated men, may be related to deadweight losses (i.e. participants would have found a job in the absence of the workfare programme), as most participants were already engaged in a remunerated activity before the programme started.
The research also found that the workfare programme increased the probability of participants securing employment in the informal sectors of the economy. These effects were statistically significant for both men and women. The effects seem to be related to the impact of the programme on the status of employment - i.e. increasing the probability of participants working for their own accounts, whilst decreasing the probability of working as waged employees. In other words, the programme increases the odds of participants working in occupations aligned closely to informal sector activities.
An important observation from this research is the impact of the choices of public investment projects underpinning the workfare intervention. According to Escudero (2018), changes in political priorities and availability of resources in 2009 appear to have driven a pronounced move from infrastructure projects to services sector projects by the public sector between the first and last two years of the programme’s implementation, with detrimental effects on the programme’s results.
The paper also found that in addition to the challenges posed by the selection and characteristics of public investment projects, the programme suffered from multiple participation and over-representation of particular groups, which serve as an indication of the need for enhanced enforcement of targeting rules and eligibility criteria in general.
6. Cruces et al (2017) & World Bank (2022) – Bolivia
Bolivia’s economic crisis during the past quarter of the 20th Century is well-documented. It was caused by a combination of economic mismanagement, wasteful public sector investment and negative external factors such as high global inflation. The country’s national income was declining, hyper-inflation set in and no new local or foreign capital was invested in the economy.
President Victor Paz Estenssoro came into office in August 1985 and had the vision to immediately embark on a structural adjustment programme, despite the knowledge that such a policy would only deliver dividends after a substantial measure of fiscal and monetary stability had been reinstated – which would take several years. Although inflation was brought under control almost immediately and the economy started growing again in 1987, unemployment in the mining sector rose and poverty worsened.
In an attempt to cushion the adverse short-term effects of structural adjustment, Bolivia launched the Emergency Social Fund (ESF) late in 1986. The ESF was designed as a Socio-economic Development Fund (SEDF), with the mandate to create jobs by funding a variety of public works projects and by raising the level of social services in those parts of the country where poverty and unemployment was the most prevalent. Although an SEDF is by no means designed as a centrepiece of social protection policy, it can play an invaluable role in a workfare-type of approach that fits the mould of active labour market policies (ALMPs), as is evident from the characteristics listed in table 2.2.
The ESF was very much result-oriented. It had as a target to spend US$180 million in three years, of which Bolivia only contributed US$8 million. Management believed that if the World Bank became interested in the project, other donors would follow easily. This was achieved and the World Bank was ultimately prepared to be flexible, e.g. by allowing the ESF to negotiate directly with contractors for projects up to US$250,000.
The Fund’s major objective was to finance labour-intensive infrastructural and social projects with the minimum of red-tape. The ESF reported directly to the president and was given a free hand to seek funding from foreign governments and international agencies.
The responsibility for hiring contractors and overseeing the execution of projects was left to the organisations receiving funds from the ESF. The ESF itself was built up and turned into an efficient organisation in a very short period of time. Its basic operation was simple & effective, as depicted by the diagram.
The World Bank also managed to get projects appraised, negotiated and sent to its Board of directors for approval in about two months, instead of the normal 12 to 18 months period. By 1988, nearly US$60 million had been pledged to the ESF by the Bolivian government, the World Bank and donors such as United Nations Development Programme (UNDP), Switzerland, West Germany, Great Britain, Canada, The Netherlands and the United States. Italy, Sweden and the Organisation of Petroleum Exporting Countries (OPEC) provided assistance at a later stage.
Between 1988 and 1991, a substantial body of evaluations were conducted on the Bolivian Emergency Social Fund (ESF), with a view to assessing how well it worked. Table 2.3 depicts the average technical quality rating of the public works that were undertaken under the ESF, by location and by project type. These ratings were conducted for a sample of 186 different projects by independent engineers.
As pointed out by Grosh (1992), the ESF managed to appraise, finance, and monitor the implementation of thousands of small development projects. This was no mean feat given the prevailing public sector climate in Bolivia, where, typically, only about 50 percent of planned public investments came to fruition. The division of labour between the programming, evaluation and supervision departments and the good collaboration between them is considered one of the reasons of ESF's success.
Bolivia’s ESF has attracted a great deal of both national and international attention, and several programmes bearing similarities to the ESF have been set up in other developing countries. Proponents of an SEDF cite its demand-based approach, its efficiency and transparency, and its rapid results as a clear-cut rationale for consideration as a policy to complement social protection policies via public works and active labour market policies.
In the evaluation of the macroeconomic impact of the Bolivian ESF, it is important to note the positive longer-term effects, as emphasised by research conducted by Cruces et al (2017). During the ensuing years and especially since 2000, Bolivia experienced positive economic growth and improved all of the country’s labour market indicators.
Despite the global recession caused by the financial crisis of 2008/09, Bolivia’s economy managed to sustain positive growth during this unfortunate episode. Over the past two decades, unemployment has declined, educational levels improved and all the indicators of poverty and inequality decreased substantially (World Bank Aspire 2022).
Although criticism has been voiced against the programme's ability to provide permanent poverty alleviation, the objective of an SEDF is to simultaneously improve infrastructure and social service delivery and to create unemployment for relatively low-skilled workers, who invariably emanate from the poorest segments of society. Criticism of and SEDF’s institutional position outside the public sector is unwarranted, as this aspect involves less bureaucracy and remains subject to sound corporate governance oversight, including that of the various global sponsoring countries and a Board that includes government representatives.
The need for a diversified approach – factor market reform
It is important to recognise the shortcomings of welfare policies that are designed to provide some security of income to the poor. Grants, whether conditional or not, represent the core element of such strategies. As important as these policies are, even when well targeted, they do not suffice for addressing the problem of unemployment. Cash transfers certainly assist poor individuals and families that are already in poverty and at serious risk, as proven by a plethora of international research, but they are invariably based on income redistribution, which mitigates to a varying degree a country’s economic growth potential.
In the absence of a welfare system that is aligned to a pragmatic growth and development strategy, long-term poverty reduction will remain elusive. In order to reverse the cycle of poverty that characterises many poor communities, a broad-based strategy is required that ensures the sustainability of the fiscal resources required for immediate poverty reduction (such as cash grants) as well as policies designed to enhance the income generation potential of poor people.
The latter should ideally consist of long-term investments in human capital, especially health, education and training. An adequate level and quality of public social expenditures in these critically important areas are widely regarded as essential elements of a long-term poverty reduction programme. The World Bank (2000) has developed a so-called trilogy of policies which are necessary for reducing poverty, namely security, opportunity and empowerment.
Investment in human capital is a key element of such a strategy, as it can be designed to straddle the provision of some security to the poor (via conditional grants) and creating better opportunities for the poor via enhanced participation in the economic growth process. According to Wodon & Velez (2001), Pro-growth reforms in urban and rural factor markets can help in improving earnings and employment opportunities for those who are less skilled, thereby resulting in poverty reduction.
In a review of several studies on the socio-economic impact of social welfare in South Africa, Woolard & Leibbrandt (2013) showed that the existing grant system seems to be promoting desirable education and health behaviours, even though these grants are unconditional.
Their research makes the point, however, that the ultimate return to these positive human capital outcomes should be an ability to become a productive citizen, which suggests that a more virtuous interaction with the labour market should be considered in future deliberations around welfare policy in South Africa.
Factor market policies have the added advantage of being able to generate more immediate beneficial impacts and examples of such policies can be found in many developing countries, especially in South America. A variety of socio-economic programmes to augment cash transfers have been implemented with a large measure of success in Mexico (Aguila et al 2012). They include:
Opciones Productivas (options for productivity), which allows individuals in the marginalised regions to develop productive projects and opportunities for self-employment, which assists in the generation of additional income and the well-being of their households. It also provides access to financial services, such as saving and lending.
Another programme provides beneficiaries in rural areas with transitory employment opportunities and training if it is required
Mexican craftsmanship is supported by an agency that manages four different programmes to market crafts, organise contests, train craftspeople, and finance the production of crafts
Tu Casa (your house) is an initiative that aims to reduce families’ vulnerability by increasing their wealth, combining own savings with subsidies for housing acquisition or improvement
A fifth programme focuses on rural and indigenous communities, providing families with subsidies to construct, buy, or improve a home.
Measures designed to enhance the functioning of factor markets should ideally form an integral part of a developing country’s welfare policies. While investments in human capital tend to have an impact on poverty only in the longer run (for example, when healthy and better-educated children reach adulthood), factor market policies may have more immediate beneficial impacts.
Chapter 3: The Broader Context to Social Grants
Trends in social benefits received
In South Africa social grants form part of a broader system of social protection that includes social security funds – such as the Unemployment Insurance Fund and the Compensation Fund – where households are both contributors and beneficiaries. Figure 3.1 (top) shows the scale of the gross social benefits received as a share of gross household disposable income. The gross social benefits received were equivalent to 12 percent of gross household disposable income in 1995.
This rose to over 14 percent in 1998 and then declined steadily to around 10 percent over the following decade. In the wake of the Global Financial Crisis of 2008/9 it trended higher to exceed 17 percent in 2015, then generally stabilised over the subsequent four years. The increase in benefits received during the first year of the COVID-19 pandemic saw the ratio rise sharply – from 16.6 percent in 2019 to 22.3 percent in 2020. In 2021, social benefits received were equivalent to 19.6 percent of the gross disposable income of households.
Figure 3.1 (bottom) indicates net social benefits received (i.e. gross benefits received less contributions paid) as a share of gross household disposable income. It is apparent that, with a few exceptions, South African households were generally net contributors to social benefits (i.e. contributed more than they received back in benefits) between 1995 and 2008.
However, since 2009 a progressively greater share of household disposable income has been subsidised from outside the social benefit system (mainly the tax system), or through reductions in the accumulated surpluses of the social security funds.
Figure 3.2 shows the value of these net transfers from/to households. Whereas South African households paid R20 billion more in social contributions than they received back as benefits in 2008, by 2015 they were receiving net benefits equivalent to R131 billion and in 2020 this rose to R344 billion.
Figure 3.3 shows the relative trends in various metrics related to social benefits. Between 1995 and 2021 the nominal value of social benefits received increased by 1,475 percent (an average of 10.8 percent per annum).
By contrast, the gross disposable income of households rose by 869 percent (8.4 percent per annum), primary income generated by households[1] increased by 775 per cent (8.4 percent a year), social contributions paid were up 714 percent (8.1 percent a year) and consumer prices increased by 321 percent (5.5 percent a year).
The start of the accelerated growth of social contributions received coincides with the Global Economic Crisis of 2008/9 as well as the adoption of the concept of a developmental state.
The extent of poverty in South Africa
The 2030 Agenda for Sustainable Development adopted by all United Nations member states in 2015 identifies 17 Sustainable Development Goals (SDGs) that “recognise that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests”.
In relation to the objective of eliminating poverty, the SDGs set the following goal targets:
By 2030, reduce at least by half the proportion of men, women and children of all ages living in poverty in all its dimensions according to national definitions.
Implement nationally appropriate social protection systems and measures for all, including floors, and by 2030 achieve substantial coverage of the poor and the vulnerable.
By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms of property, inheritance, natural resources, appropriate new technology and financial services, including microfinance.
By 2030, build the resilience of the poor and those in vulnerable situations and reduce their exposure and vulnerability to climate-related extreme events and other economic, social and environmental shocks and disasters.
Ensure significant mobilisation of resources from a variety of sources, including through enhanced development cooperation, in order to provide adequate and predictable means for developing countries, in particular least developed countries, to implement programmes and policies to end poverty in all its dimensions.
Create sound policy frameworks at the national, regional and international levels, based on pro-poor and gender-sensitive development strategies, to support accelerated investment in poverty eradication actions.
Different poverty lines are used when attempting to measure poverty. Statistics South Africa employed the internationally recognised cost-of-basic-needs approach to produce three poverty lines, namely the Food Poverty Line (FPL), the Lower-Bound Poverty Line (LBPL), and the Upper-Bound Poverty Line (UBPL). These lines capture different degrees of poverty and allow the country to measure and monitor poverty at different levels. There are also internationally-used measures of both extreme and less-extreme poverty. The five different poverty lines included in this analysis are defined as follows:
Food Poverty Line (FPL). The FPL is the rand value below which individuals are unable to purchase or consume enough food to supply them with the minimum per-capita-per-day energy requirement for adequate health.
Lower Bound Poverty Line (LBPL). The LBPL is derived using the FPL as a base, but also includes a non-food component. Individuals at the LBPL do not have command over enough resources to purchase or consume both adequate food and non-food items and are therefore forced to sacrifice food to obtain essential non-food items.
Upper Bound Poverty Line (UBPL). The UBPL is also derived using the FPL as a base, and also includes a non-food component. Individuals at the UBPL can purchase adequate levels of both food and non-food items.
Daily income of less than the equivalent of PPP$1.90/per person/day. The global threshold of extreme poverty is set by the World Bank at 1.90 international (PPP) dollars per capita per day. Over 900 million people globally were estimated to have lived under this line in 2012, and over 700 million in 2015.
Daily income of less than the equivalent of PPP$3.20/person/day. A less extreme international definition of poverty refers to people living on incomes less than the equivalent to 3.20 international (PPP) dollars per capita per day.
The National Development Plan seeks to see the full population living above the LBPL by 2030[2].
Figure 3.4 shows the monetary values associated with these different poverty lines. The UBPL increased from R834 per person per month in 2012 to an estimated R1,347 per person per month in 2021. By contrast, the equivalent rand value of the international PPP$1.90/day[3] rose from R295 per person per month to R412 over the same period.
Figure 3.5 indicates the average annual changes in the monetary (rand) values associated with the different poverty lines. These are contrasted with the corresponding average changes in overall consumer prices as well as average food inflation. It is noteworthy that the Food Poverty Line (FPL) increased at a faster rate (6.1% p.a.) than the other poverty lines – due largely to the fact that CPI food inflation was higher than All Items inflation.
The average annual changes in the international measures (PPP$1.90 and PPP$3.20 per day) were the same at 3.8 percent. This suggests that – on average – annual inflation in South Africa was 3.8 percent higher than the weighted average for other countries over this period.
Estimating the number of poor people in South Africa
There are a number of challenges associated with estimating the number of poor people in South Africa according to the different poverty lines. The most significant of these is that comprehensive analysis of the incomes and expenditures of individuals residing in South Africa is done infrequently as part of the Census. While this is supplemented by smaller sample surveys such as the General Household Survey the focus is typically on the income and expenditure of households rather than individuals.
Households are defined in the System of National Accounts (SNA) as “a small group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and services collectively, mainly housing and food."[4]It is therefore assumed that all the members of a household have the same poverty status: if the collective income of the household is below the corresponding poverty line, all members of the household are classed as poor.
However, incomes and expenditures are typically measured at the household level, while poverty lines are defined at the individual levels and household sizes can vary greatly[5]. To convert from households to individuals it is therefore necessary to know the average household size for each income or expenditure category.
The approach adopted in this study is as follows:
1. The annual expenditure range per expenditure decile published in the Consumer Price Index was used. Annual values were extrapolated for the years in which new CPI weights were not calculated. The 2020 and 2021 values were estimated using the corresponding CPI inflation for each expenditure decile and the overall change in total household spending. This generates a range of possible household expenditure per decile over time – as shown in Table 3.1.
2. The average number of people per household per expenditure decile was then estimated using data contained the General Household Survey[6]. This was then used to calculate the average expenditure per person per month over time – as reflected in Table 3.2.
3. The monetary values of each poverty line were then compared with the corresponding lower, upper and mid-range expenditure values for each decile. If the value of a particular poverty line in a particular year was somewhere between the expenditure values for the second and third decile, then the number of people estimated to be poor would be two times the relevant population decile (one tenth of the population estimates for that year) plus the ratio of the difference between the poverty line value and the lower-limit of the expenditure decile and the difference between the lower- and upper-limit of the expenditure decile multiplied by the number of people in the population decile. The resulting “headcount” estimates for each of the poverty lines are shown in figures 5 to 9.
Figure 3.6 shows the resulting estimated number of people that would be classed as poor in relation to the Food Poverty Line (FPL). In 2021, the number of people that had insufficient income to meet their essential food intake requirements to ensure adequate health ranged from 9.9 million (associated with the upper-limit of the expenditure decile) to 14.9 million (associated with the lower-limit of the expenditure decile), with a mid-range of 12.4 million people.
The number of “food poor” people initially declined between 2012 and 2015 – with the mid-range falling from 13.8 million to 9 million. However, since 2015 the number has increased steadily – accelerating in 2020 to 12.4 million.
Figure 3.7 indicates the estimated number of people that are poor based on the Lower Bound Poverty Line (LBPL). In 2021, estimates range from 14.5 million to 21.2 million with a mid-range value of 17.8 million.
As with the FPL, the number of people classed as poor using the LBPL dropped quite sharply between 2012 and 2015 – from a mid-range of 18.5 million to 13.5 million. Since 2015, 4.3 million additional people have been classed as poor according to this poverty line.
Figure 3.8 shows the number of people classed as poor according to the Upper Bound Poverty Line (UBPL). In 2021 estimates ranged from 23.8 million to 26.5 million, with a mid-range value of 25.1 million. In the case of this poverty line, the number of people classed as poor using the mid-range declined from 23.6 million in 2012 to 20.2 million in 2016 but increased by 4.9 million people in subsequent years (from 2016 to 2021).
The number of people classed as poor according to the international definition of having incomes less than the equivalent of PPP$1.90/day is shown in Figure 3.9. It indicates 2021 estimates that range from 6.5 million (associated with the upper-limit of the expenditure decile) to 11.2 million (associated with the lower-limit of the expenditure decile).
The mid-range estimate declined from 11.7 million in 2012 to 7.3 million in 2016 and then rose to 9.2 million in 2020 before declining to 8.9 million in 2021[7].
Figure 3.10 shows the estimated number of people classed as poor according to the international PPP$3.20/day poverty line. Estimates range from 11.1 million to 16.6 million in 2021 – with a mid-range of 13.8 million. The mid-range values declined from 17.8 million in 2012 to 11.7 million in 2015 and 2016, and then increased steadily to 14.4 million in 2020[8].
When these estimates are expressed as a share of South Africa’s population – as reflected in Table 3.3 and Figure 3.11 - the prevalence of poverty is put into context. Using the mid-range estimates the share of the population classed as poor according to the Upper Bound Poverty Line decreased from 45 percent to 38 percent between 2012 and 2015, but subsequently increased back up to 42 percent in 2020 and 2021.
The other poverty lines followed similar trends, with the share of the population that is “food poor” dropping from 26 percent in 2012 to 16 percent in 2015 and then increasing back to 21 percent in 2020 and 2021.
South Africa’s social protection response to poverty
The preceding analysis focused on both the level and dynamics of South Africa’s poverty problem. The policy response has largely been to expand social protection through increases in the number of people receiving social grants and higher-than-inflation increases in their value. However, the social wage – defined as publicly provided services that replace or subsidise day-to-day expenses such as housing, education and amenities, and thereby reduce the cost of living to recipient households – extends beyond income transfers.
Figure 3.12 indicates trends in the nominal and real value of the social wage (as quantified by National Treasury) on a per capita basis. Nominally, it increased from almost R12,700 to close to R17,900 between fiscal 2015/16 and 2021/22 (an average annual increase of 5.9 percent) and is budgeted to rise further to over R18,400 in 2022/23. In real terms it increased by 1.1 percent a year between 2015/16 and 2021/22 but is projected to decline significantly over the medium term (i.e. till 2024/25). In reality, many of the services and transfers that make up the social wage are target at, or largely used by, lower income households. The per capita social wage for those recipients is therefore likely to be substantially higher than shown in Figure 12.
Figure 3.13 shows that the total nominal value of social grants disbursed increased from R57 billion to R190 billion between 2007 and 2020 – a 9 percent a year average increase. In 2021 it declined to R188 billion.
Figure 3.14 shows the corresponding trends in the number of grants disbursed. These increased from 12.4 million in 2007/8 to 18.4 million in 2020/21. In 2020/21 70 percent of these were Child Support Grants, 20 percent were Old Age and War Veterans Grants, 5 percent were Disability Grants. The remaining 5 percent were split between Foster Child Grants, Grants in Aid and Care Dependency Grants.
The total number of grant beneficiaries is shown in Figure 15 (left hand graph). This differs from the number of grants shown in Figure 14 because some beneficiaries receive more than one grant. There is also a difference between the total number of adult and child support grant beneficiaries and the total number of discrete beneficiaries since some recipients of grants to support children also receive adult support grants.
In 2021 there were 7.6 million beneficiaries of grants aimed at supporting children and 5 million beneficiaries of grants for adults, but only 11.4 million discrete beneficiaries – suggesting that around 1.2 million beneficiaries received both adult and child support grants.
Figure 3.15 (right hand graph) shows that in 2014 each beneficiary received almost 1.5 grants and that this increased in 1.64 grants per beneficiary in 2017. In 2021 it had declined to 1.62 grants per beneficiary. The graph also shows the average value of the grants received by each discrete beneficiary. This rose from R853 per month in 2014 to R1,413 per month in 2020. It declined to R1,370 per beneficiary per month in 2021.
Table 3.4 shows how the average value of each of the grants disbursed (calculated by dividing the total value of disbursements by the number of grants disbursed) has changed over time. Old Age Grants increased from R852/month in 2007/8 to R1,814/month in 2020/21 while Child Support Grants rose from R200/month to R549/month over the same period.
The limitations of South Africa’s social protection response to poverty
It is evident from the preceding analysis that South Africa has increased and expanded its social protection system significantly over the past decade and more. However, despite these efforts, the number of people that can be categorised as poor has increased steadily since 2015 – no matter what measure of poverty is used. This deterioration coincides with a persistent deterioration in the economic performance of the country, which resulted in a progressive decline in the real GDP per capita – a crude measure of average incomes before taxes and transfers.
As Figure 3.16 indicates, between 2012 and 2015, the food poverty headcount declined by 35 percent. Over the same period the real value of social protection spending per capita rose by 6 percent, but real GDP per capita only rose by 1 percent. Between 2015 and 2021 the food poverty headcount increased by 37 percent while real social protection spending per capita increased by a further 9 percent and real GDP per capita decreased by over 6 percent. This suggests that – apart from any fiscal affordability and sustainability considerations - devoting progressively higher proportions of government revenues to social protection transfers will not, by itself, succeed in reducing poverty unless it is accompanied by a broadly supportive environment in which the rate of growth in real GDP exceeds the rate of increase in the population by a healthy margin.
It is therefore difficult to divorce the debate over the extent and structure of South Africa’s social protection system from the trade-offs that arise from alternative uses of those fiscal resources. To the extent that well-considered and efficiently-implemented public sector programmes succeed in supporting an increase in the capacity of the economy to grow at higher rates, the pressure on the social protection system will be reduced – allowing it to be targeted more effectively at those most in need.
[1] Comprising compensation of employees and net interest, dividends and rental incomes.
[3] The definitional requirement that international (purchasing power parity dollars) are used rather than US dollars often seems to be overlooked and makes a significant difference to the values of respective international poverty lines. For example, while PPP$1.90/person/per day translates into an average monthly value of R412/person/month in 2021, the average market exchange rates that prevailed against the US dollar in 2021 would have required a monthly income of R854 – more than double the purchasing power parity equivalent. Similarly, an average income of R695 per person per month is required for the PPP$3.20/day measure in 2021, but this increases to R1,438 per person per month if prevailing US dollar exchange rates are used.
[4] Principles and Recommendations for Population and Housing Censuses, Revision 1. United Nations, New York, 1998, Series M, No. 67, Rev. 1, paras. 2.61-2.62
[5] The General Household Survey accommodates household sizes ranging from 1 to 46 people
[6] There was a typically a relatively low response rate to questions regarding income. It was assumed that the unresponsive portion of the sample was spread across the population in proportion to actual response rates.
[7] These estimates differ significantly from those published in the Sustainable Development Report 2022. According to this 25.86 percent of South Africa’s population in 2012 had incomes below the PPP$1.90/day equivalent. This translates into a headcount of 13.1 million. The 2021 estimate is 26.87 percent or 16.2 million people which is over 80 percent higher than the mid-range estimate shown in Figure 9.
[8] The mid-range estimate in 2021 of 13.8 million is 38 percent lower than the estimate contained in the Sustainable Development Report 2022 (37.3 percent of the population – which equates to 22.4 million people)