While social benefits increase in absolute and relative terms, so does inequality. South Africa is uneven while many live in poverty. No one should doubt that.
However, the solution to this is not a universal basic income grant. Nor is the solution to get the government to create a social security tax that will add to the 10th highest tax burden in the world.
In the late 1990s, the government expanded grants for old age and instituted a grant for children. Social protection expanded from 6.7% of GDP in 2001 to 10.1% in 2015, according to the International Labor Organization (ILO). The number of people receiving grants increased from 2.7 million in 2001 to 18.4 million today. General public spending increased from approximately 32% of GDP to 42% of GDP.
SA already has one of the largest social welfare programs in the developing world.
International definitions of social protection include public spending on health, child and family assistance, and government-funded pensions. All of this excludes private pensions and healthcare spending.
Of some 90 emerging markets (EM), South Africa currently has the highest inequality (not all countries want to calculate inequality). The public has been told that hundreds of times … but some things that we have not been told put a very different solution in mind.
First, international figures on social protection show that out of more than 100 emerging markets, South Africa spends 15th of its GDP on social protection. Outside of the rich world, South Africa covers the 19th largest number of people with public spending, out of 110 developing countries with data.
But compared to EMs in 2017 in social protection, South Africa covers the third highest percentage of its children (76.6) with payments in this EM universe. The country also covers the 27th largest share of its retirees in the emerging markets universe by government; By adding private pensions, this number expands to 113% of the population of pension age, as some can claim both private and government old-age grants.
We cover the thirteenth largest number of unemployed, the fifteenth largest percentage of disabled (even though SA is a large disabled population), and the 46th highest percentage of people who are injured while on duty.
In general, our government covers the highest fifteenth part of the vulnerable population of all developing countries.
Interestingly, the ILO does not include private pensions and health insurance in these figures. So the spending and the numbers here are really indicative that the money is going to the vulnerable population.
The ILO also does not include free water and electricity in its analysis, but that is also a cost for the fiscus.
South Africa has doubled spending on social protection in two decades, but the country is more unequal today than ever.
With the expansion of social protection over the last decade and the increase in public spending both in absolute and relative terms, there is a great mystery here that we must have explained.
Why did inequality rise from a Gini of 58 (still horrible) in 2001 to an impressive Gini of 67 in 2017? Our Gini got worse. That? We double our real spending on the vulnerable and multiply their number by seven. Are more people covered by social protection with more money and yet South Africa became more unequal?
There must be something else at stake here.
Is this due to large salary differences?
People are quick to point out that earnings from work are also uneven, but out of 94 developing countries with more than half a million people, South Africa is in the most equitable quarter of these 107 countries according to ILO data.
So the idea that most of our inequality comes from differential earnings from work is also misplaced, at least in the relative sense.
In short, the country’s labor income is much more equitable than people generally believe compared to other emerging markets and one or two developed countries.
I would argue that in the formal sector when calculated on the actual pay scales that companies pay, as PwC regularly evaluates, Gini’s earnings are certainly less bad than many commentators believe.
With the most progressive income tax system in the world according to Oxfam, the Gini after taxes for the formal sector is probably one of the lowest in the developing world. Also, during this 20-year period, most of the income tax cuts targeted lower-wage workers who increased their income, which should have contributed to a more equitable after-tax income.
SA also limited retirement savings and health insurance deductions, as well as vehicle deductions.
Simply put, wages after income tax should have gotten more equitable, but inequality still increased. The government increased in size and spending as a percentage of GDP. Furthermore, the civil servant today probably represents about 40% of the top decile of employees.
If it is not wages or social spending, what is the great cause of inequality?
People do not understand that something else is happening that is the main cause of poverty and inequality and that is unemployment. This is particularly true in the case of female unemployment in a country with a predominantly female-headed household.
Figures from the ILO and the World Bank show that the correlation is close to 70% between the global ranking of the adult employment rate and the ranking of inequality.
There are data from 104 countries with data on the employment rate of women and inequality. These countries were selected in which women are not discouraged from working for religious reasons, ie mainly Eastern Orthodox and Muslim countries.
No country that has more than 55% of employed adult women has a Gini greater than 50, which is halfway between total inequality and absolute equality. General data shows that when women make up more than 55% of the total workforce, the average Gini falls to around 40 for developing countries, while in countries like South Africa, where less than 40% of adult women work , the Gini is approaching 47.
Similar trends are at play with the proportion of men who work, but the correlation is less.
However, South Africa is a country with the fewest working adults and that tells me that the biggest cause of inequality is the lack of income from work.
Social grants can never make up the income shortfall.
The lowest legal salary is already over R3 750 per month, and we are talking about a fraction of that for UBIG. Today, more South Africans receive social grants than work. Add another 10 or more million and we will have two people with grants for every person who works.
But wait, it gets worse. The private sector is the main creator of value in most countries. The number of PAYE workers in the private sector would be far less than the roughly seven million indicated by Treasury data. Eliminate loss-making state entities and you get closer to the actual number of private sector PAYE taxpayers
True private sector taxpayers total only about five million, as the government overall provides about two million PAYE taxpayers. Today those five million provide an income to 20 million people, of which the first two million obtain an average income 31% higher than those who work in the private sector.
That is what is not sustainable and many companies are disappointed by the constant need for more money as they struggle to make ends meet. UBIG will add around 10 million or even 12 million, bringing the ratio of individual private sector PAYE payers to those dependent on the money provided six to one.
Personal income tax accounts for 40% of all South African tax revenue, so by looking at this source, know that it can no longer be taxed.
Therefore, the UBIG will demand a higher tax burden, which is already one of the highest tenths in the world. Increasing this to say the highest seventh will result in fewer entrepreneurs and professionals wanting to stay in the country. The younger professionals will leave and the older ones will not be replaced.
If the last two decades tell us something, it is that more spending will not make things more equal.
We need to generate income from employment. Those jobs must come from profit and trust, not more government positions and certainly not another 10 million people with government social payments.
Create an environment for job and money creators to thrive and stop costly fantasies where everyone can be the same if we spend more.
It’s crazy to think that spending more will solve the problem if you haven’t done it for the last 20 years.
Listen to the SAfm Market Update interview with Johan Gouws, Sasfin Wealth’s head of advisory, about the mandatory pension scheme proposal below (or read the transcript):
Mike Schüssler is the owner of Economists.co.za