Politics and economics are set to collide over welfare payments in the world’s most unequal nation.

The first clue over which will prevail may come in South African President Cyril Ramaphosa’s state-of-the-nation address on Thursday.

Record unemployment and deepening poverty has fueled calls for the government to move toward a basic income grant, which would be the biggest of its kind globally, or to at least extend a temporary stipend of 350 rand ($23) a month paid to the unemployed during the pandemic permanent at that level or slightly higher. That measure added 10.3-million people to the welfare net.

The debate has pitted Ramaphosa, who has said a basic income grant is a possibility and has raised the idea several times, against Finance Minister Enoch Godongwana, who’s seeking to return government finances -- hard hit by a decade of overspending, mismanagement and corruption -- to a sustainable path.

For Ramaphosa expanding what’s already a large welfare state is attractive because it could bolster support for the ruling party after its share of the vote sank below 50% for the first time in last year’s municipal elections. For Godongwana it’s unpalatable and he has said the money would be better spent on creating jobs and investing in water, power and other infrastructure.

“Ramaphosa is staking his political future on the permanence of this grant,” Michael Sachs, former head of the National Treasury’s budget office and head of a commission that makes recommendations to government on financial and fiscal matters, said in an interview.

The argument for additional support for the poor is strong. More than a third of the workforce is jobless. A week of looting and arson that killed 354 people across two provinces in July has been attributed to increasing desperation.

Yet South Africa already spends 3.3% of gross domestic product on welfare, mostly in the form of child support and pensions. That’s more than most countries and will amount to R222-billion in the year through February. Before the Covid-19 stipend more than 18 million people, or almost a third of the population, were on welfare.

Even Ramaphosa’s own economic advisers are divided. Eleven members of the Presidential Economic Advisory Council put their names to a leaked report that said a basic income grant would be a “policy error” that would crowd out spending on health, education and infrastructure. The taxes that would be needed to pay for it would stunt growth, they said.

DIVIDED ADVISERS
“We can’t afford continuous additions to the welfare net in our country,” said Cas Coovadia, chief executive officer of Business Unity South Africa, the country’s biggest business organization. “Our economy is not growing and is rated as sub-investment grade.”

Four members of the council wrote a dissenting report that argued for such a grant.

Not paying one “is basically a threat to our social fabric and we might see another July moment if we do not act decisively now,” Zimbali Mncube, a researcher at the Institute for Economic Justice, said in reference to last year’s violence.

Sachs, and other economists, predict Ramaphosa will extend the support to the unemployed, and that could be seen a precursor to more generous support at a later stage. The 350-rand payment is set at just a quarter of the monthly income the national statistics agency says is needed to escape poverty.

Extending the Covid-19 stipend alone for a year would cost R35-billion, according to BNP Paribas. While the government can probably afford to do so as high commodity prices are putting revenue on course to exceed estimates, a permanent basic income grant could prove unsustainable.

In November, Godongwana pledged to address the deterioration in state finances, regain South Africa’s investment-grade credit ratings and said funding for grants beyond March would depend on revenue. He’s due to announce updated spending plans in the Feb. 23 budget.

What Bloomberg Economics Says...

“Should South Africa extend the Covid-19 grant by another year? Yes, the pandemic is far from over. Should we make it permanent? Yes, if the goal is poverty reduction, but this comes at a cost that requires additional fiscal and policy trade-offs. The government’s track record on the latter calls for caution.”

-- Boingotlo Gasealahwe, Africa Economist

Unemployed youth interviewed in townships north of Pretoria, the capital, said even the R350 payment helped them pay for transport to seek work, bolstering the argument that the payments could ultimately boost employment.

Merely extending the monthly stipend in it’s current form won’t be enough, said Colin Coleman, co-chairperson of South Africa’s Youth Employment Service and former head of Goldman Sachs in sub-Saharan Africa. To have an impact it should be more than doubled and at the same time economic reforms should be pushed through, he said

“This is not just about social consumption,” he said. “It’s good for the poor, it’s good for the unemployed; it’s going to save lives and prevent hunger and it’s going to be massive for stimulating investment, jobs and growth.”