Are social grants a threat to fiscal sustainability?

The recent global economic crisis once again demonstrated that macroeconomic shocks can cause large and unforeseen losses that are unevenly distributed across the population. As the social grants and security system is one key dimension of individual and social well-being in South Africa, its effectiveness and equity is essential for improving social welfare. But does this pose a risk to the country’s fiscal sustainability, ask Ramos Mabugu and Margaret Chitiga-Mabugu.

Social welfare can be regarded as risk sharing, as it has the potential to prevent a group or class of people from falling behind the mainstream and from being unable to participate in the market economy. In this way it presents an insurance against risk (i.e. sickness, unemployment, and so forth). Social spending can also enhance productivity and human capital through spending on education, health and nutrition. However, while risk sharing embedded in social grants is highly desirable, some risk-sharing arrangements may have an economic cost by undermining people’s incentives to work, save or invest. Indeed, many people have a negative perception of grants, believing that grants create dependency and perverse incentives.

Balancing fiscal and political sustainability

Any fiscal system has to strike a balance between fiscal and political sustainability. South Africa’s fiscal system can therefore not only be judged on its fiscal outcomes, but also on its constitutional obligation to further the progressive realisation of socioeconomic rights, especially in the case of children and the dignity of the elderly. The system has to deliver on both these outcomes, giving tangible expression to the transformative vision of the country’s constitution.

In an economic situation where funding has become very scarce, the question is whether the government is making the best use of its money to achieve poverty alleviation, social inclusion and stability. In this article we present new analysis on these issues based on systematic, economy-wide projections that offer a vantage point from which to weigh-in on evidence-based versus ideological reactions to social grants. We examine how various macroeconomic risks have been shared within the economy, and suggest reforms to improve risk-sharing and make it more economically efficient.

Concern about the sustainability of the social grant system is at this stage unfounded.
Social grant spending is an investment in human capital, underpinning future inclusive growth.

Key findings

The main insights into the magnitude of the impact associated with social grants in South Africa and the extent of fragility in terms of poverty levels and well-being are:

  • There is merit to the underlying concern about the lack of growth, need for more job creation and productivity enhancement expressed by many commentators, since these are the ultimate determinants of fiscal sustainability in any economy. Broadening the tax base through increased participation in employment and other sustainable livelihoods is absolutely critical.
  • However, our research indicates that concern about the sustainability of the social grant system is at this stage unfounded, as the grant system is currently not a threat to fiscal sustainability. The growth in social grants spending has been driven by (a) changes in policy (such as increases in age of eligibility and the value of the grant over time) and (b) growing take-up rates among eligible populations. Given no foreseeable policy changes and as the pool of non-registered but eligible beneficiaries declines, this growth is expected to stabilise and is unlikely to accelerate to the same extent in coming years. Discounting for inflation and taking into account the lower than anticipated population growth projections implied by the 2011 Census affirms this trend.
  • Despite the fairly widespread negative perceptions of grants, the findings from our systematic economic evaluations are encouraging. To evaluate this argument more robustly, our studies over the last three years have focused on the economic impact of the grant system, over and above its huge social value combating poverty among vulnerable groups such as children and the aged.

Social grants actually increase consumption of basics such as food and education. The direct effects of the change in grants have higher impacts on poverty and inequality than the indirect effects. This is consistent with the fact that grants form a large part of the income for households living in poverty. Improvements are found in the welfare of households in rural formal, tribal authority and urban informal areas. For households living in formal urban areas, poverty is hardly affected, but is reduced when the excluded children are included in the system. In addition, we found that the consumption and production of education and nutritious food products increases. All indications are that social grant spending is an investment in human capital, underpinning future inclusive growth.

  • There is no systematic evidence that child maintenance grants create dependency, since mothers receiving child grants are indeed empowered to access the labour market. A positive link was found between the grants and the probability of participating in the labour force. Furthermore, to the extent that the vast majority of the beneficiaries are vulnerable and not economically active people, such as the elderly, children and people with disabilities, labour market disincentive effects or dependency arguments may not be as relevant.
  • Previous studies have shown that social grants are exceptionally well targeted at the poorest of the poor. We found that in the absence of the child welfare grants, the impact of the global recession of 2008 on child poverty in South Africa would have been much more severe. The analysis shows that the impact of the economic crisis was not severe on children’s poverty headcount, but that material welfare declined across large parts of the distribution. The latter impact on welfare exacerbated poverty depth, moving the already poor further below the poverty line where they will now remain for much longer. This suggests that the major impact of the economic crisis was on the poorest, and that this is the most difficult to overcome.

There is no systematic evidence that child maintenance grants create dependency, since mothers receiving child grants are empowered to access the labour market.

The long-term view

The great danger confronting South Africa today is that longer-term fiscal imperatives could be used as reasons to limit necessary future growth in spending on social grants. Notwithstanding enormous sociopolitical pressures on the national budget after social grants reform, new analysis shows that the overall fiscal position is still stable.

At the economy-wide level, the results challenge the often-held view that these grants are squandered on non-productive consumption. Grants are not only consumption expenditure used to enhance intergenerational equity, but also promote productive efficiency and human capital. This suggests a compelling developmental state argument to preserve and protect current expenditure levels, even in fiscally austere conditions.

Our analysis leads to the recommendation that while fiscal prudence and consolidation are pursued in the medium term, social security spending should not be cut, especially in the wake of the prolonged global financial crisis, which

is still being felt today. This must be coupled with decisive responses to the crises in the public education and health systems, as well as effective job creation initiatives, to ensure that growing social grants do not unnecessarily become a permanent feature of the South African landscape. ■

Authors: Dr Ramos Mabugu, head of research and policy, Financial and Fiscal Commission; Professor Margaret Chitiga-Mabugu, executive director, Economic Performance and Development programme, HSRC.