The Economic Implications of South Africa’s Proposed Basic Income Grant

What it means for South Africa's forex brokers and beyond
The Economic Implications of South Africa’s Proposed Basic Income Grant
Image courtesy of Flickr.

In a recent discussion initiated by the Department of Social Development of South Africa, there was mention of introducing a basic income grant for every South African citizen of working age. 

Being a somewhat theoretical offspring of the recent COVID-19 Social Relief of Distress (SRD) grant, the Department says the people will continue experiencing economic hardships long after SRD funds diminish. Therefore, the South African government may intervene and provide help to its impoverished citizens, with the aid coming from increasing taxes for working people. 

Will South Africa Implement a Basic Income Grant?

The debate over the importance of a centralized government has always been relevant in the public sector. Even before the introduction of political ideologies and a systematized layout of a government, humanity has always tried to figure out whether the involvement of the state in their lives was fundamentally good or bad.

And at the dawn of the new political era of the world, somewhere around the XIX century, the two ideologies – socialism and classical liberalism – clashed to set boundaries of the ruling government.

On the one hand, there were socialist thinkers who believed human beings are inherently broken and flawed — and therefore need proper guidance from the state. They prioritized massive government involvement in regulating businesses and entrepreneurs, imposing significant taxes on all financially working entities (individuals and the collective alike), and providing a basic income to everyone.

In some respects, this is what the South African Department of Social Development is pushing for: raising taxes to provide a basic income to all citizens.

On the other hand, there were classical liberals who regarded governments as, well,  evil entities. They were strongly opposed to the idea of letting the state into people’s private lives or letting it take away their earned property.

The same case of ideological dichotomy can be made for South Africa, where the above-mentioned Department is trying to increase taxes for both corporations and individuals. This could have a devastating effect on the country’s leading industries.

Consider forex trading as an example. The global forex market features an estimated daily turnover of $5.1 trillion.

South African forex brokers facilitate trading for nearly 200,000 forex traders based in South Africa alone. The continent of Africa is estimated to include a total of 1.3 million forex traders. Many of which leverage South Africa-based forex trading platforms due to the jurisdiction’s reputation of offering regulatory safety and low fees.

Yet if taxes increase, the end result will be higher fees for traders. If trading can be facilitated cheaper elsewhere, traders are likely to leave South African brokers behind.

Of course, this isn’t specific to the forex market. The ripple effect could impact virtually every industry based in South Africa.

Is COVID-19 SRD Enough for South Africans?

In May 2020, the South African government introduced the new temporary welfare policy that was designed to help people get through the trying period of the novel Coronavirus pandemic. COVID-19 caused the stock market to crash, with investments and retirement funds sunk to the lowest points .

Obviously, a lot of people lost jobs amid the massive surge in lockdowns. According to the latest statistics, the unemployment rate in the country has skyrocketed to 30%, the highest it’s been since 2003.

To help alleviate destructive effects the pandemic had over people’s finances, the South African Department of Social Distress created a temporary safety net of R350 per month, neatly dubbed Covid-19 Social Relief of Distress (SRD) grant. The usual operational time for the SRD is three months, though some can extend the funds for another three months based on their needs.

At the end of June, the National Executive Committee (NEC) of the ruling ANC (African National Congress) party held an online meeting. Topics of discussion included various courses of action they could take to battle the COVID-19 pandemic. One topic of discussion included the introduction of a universal basic income grant to help unemployed people. 

A short time later, on July 6, the Department of Social Development presented the case of why the current income support under the SRD grant isn’t enough for the unemployed South Africans and how the new basic income grant could address this problem for the citizens between the ages of 18-59 with no job or other income support. 

Interestingly enough, this isn’t the first time a universal basic income has emerged in the public space in South Africa. In 2002, the “Reports of the Taylor Committee into a social security system for South Africa” made a pretty extensive argument as to why this new welfare policy was necessary to enact across the country. Talks turned out to be short-lived, however. 

Pros and Cons of a South African Basic Income

Now, it’s beyond any doubt that the outbreak of COVID-19 has devastated economies across the globe, leaving people without jobs and income. Virtually every country in the world has experienced an economic downturn with differing intensities.

When it comes to providing a temporary compensation package to those left without jobs, one can make a pretty strong case. On a microeconomic level, where people actually fight for every-day survival, monetary compensation can actually make a difference.

However, introducing universal basic income is a completely different beast. And if that’s justified by the argument that COVID-19-stricken people need more government assistance, the issue becomes even more complicated. 

The best scenario for South Africa — government intervention, or the lack thereof — is yet to be known. Soon enough though, we’re likely to see one of the two unfold.

What do you think about South Africa’s proposed basic income grant? Let us know in the comments section below.