Grants have benefits, but they don’t stimulate economic growth

20 April 2023

One of the more beguiling and dangerous ideas to have seized the imagination of policy makers (and policy entrepreneurs) is that SA’s world-class system of social grants could also stimulate economic growth. This is not the case.

Shifting income from one group of people to another can result in more equal incomes, but the idea that it will also kick-start the economy in the circumstances in which SA finds itself, is wholly misguided.

In a country as unequal as ours, redistribution through grants has enormous merits and it is unquestionably good for those who receive its benefits. But those benefits have to be paid for, which imposes costs on the economy that have to be paid for somewhere else. There is no such thing as a free lunch.

Yet the idea that grants are also growth policies now has traction. An important example can be found in President Cyril Ramaphosa’s newsletter of March 27, headlined “Stimulating growth from the bottom up”. In it, he celebrated that over 18-million people receive grants in SA, and argued that apart from reducing poverty this has numerous additional positive effects.

Thus, for example, the president argues that the social relief of distress (SRD) grant increased recipients’ likelihood of finding work. Citing new research, he writes that “the SRD grant increased the probability of recipients’ search for jobs and gaining employment”.

Indeed, one of the conclusions of the research to which the president referred was that unemployed recipients of the SRD grant were somewhat more likely to have a job three months after they received their first R350 than were unemployed people who did not receive the grant.

But to imply that the SRD grant increased employment is, for a number of reasons, misleading. The impact of the grant on the likelihood of being employed was small — about three percentage points according to the researchers. The effect was also short-lived: SRD-recipients were no more likely to be employed a year after receipt of the grant than non-recipients.

These qualifications to the president’s account of the researchers’ findings are important as they undermine the broader point he was trying to make in his claim that “social grants act as a stimulus for the economy as a whole, increase spending in townships and rural areas, and improve employment outcomes”.

This is wishful thinking. In this regard, ask yourself whether it is likely that if everyone who qualified for one had received an SRD grant, would employment rates be three percentage points higher than they are? Almost certainly not. Not only was the effect of the grant on employment of SRD-recipients small and short-lived, but our guess is that the positive effect on recipients depended on the fact that there were non-recipients.

It is probable that recipients of the SRD grant were able to take advantage of opportunities that existed because they had ready access to money. If that is the case, then their improved probability of finding employment is in some senses at the expense of non-recipients, who were rendered less likely to find employment. SRD recipients were getting jobs non-recipients were not getting, because SRD recipients could get to them faster.

This is not to condemn the SRD grant and its effects for being inequitable. However, if our argument is right it means the president ought not to conclude on the basis of this research that if everyone received the SRD grant, everyone would also be more likely to find employment.

If the grant gave recipients an advantage in finding work over non-recipients, then if everyone were a recipient there would be no such advantage and no apparent increase in employment of grant recipients. Overall, the number of people in employment would not change.

The president’s tendency to wishful thinking is also evident when talking about the programme he launched that has seen a total of about 750,000 young people working in schools for three-month stretches over the past few years. He writes: “Over 72% of participants said that having gained their first work experience, the programme helped them to gain a foothold in the labour market.”

There is much to be said about this programme and its potential merits, but has there ever been a less demanding measure of success for a mass employment programme than that it “helped [beneficiaries] to gain a foothold in the labour market”? What does that even mean?

The president is right when he says social grants “increase spending in townships and rural areas”, and it is true that the grants are good for businesses that operate in poor areas, urban and rural. By increasing poor households’ disposable incomes, grants shift consumer spending to places where poor consumers live.

There is a huge difference, though, between saying grants are good for businesses and employment in poor areas and saying, as the president does, that they “act as a stimulus for the economy as a whole.” This claim might be true if the shift in demand to poor households did not have to be paid for by higher taxes or higher interest rates, both of which reduce demand in the economy as a whole.

The essential truth is that grants, which are an effective and important method for redistributing income, are not simultaneously a method for stimulating the economy as a whole. The idea that expanding SA’s grants will spur growth is a dangerous fantasy that has become deeply embedded in some quarters of the debate about fiscal and economic policy.

Grants are good policy in SA and are by far the most effective anti-poverty programme we have. However, they won’t grow the economy and, given the dire fiscal straits in which we find ourselves, expanding them without cutting spending elsewhere will reduce growth and accelerate inflation rather than stimulate growth. Indeed, if reducing poverty and stimulating growth were as easy as writing cheques to poor people, you’d have to wonder why no other society has stumbled onto this approach before.

In the context of vast poverty and sky-high inequality, we have built an enormously effective, well-targeted system for redistributing income, about which we should be proud. But, instead of exaggerating the benefits of our grant system and invoking magical thinking about how this leads to growth, we need to be realistic.

We need to look to other aspects of our redistributive state to ensure we are helping people to move off grants: improve the quality of our education and public transport, and adopt a housing policy that moves people closer to economic opportunity. Most importantly, we need to take the hard decisions to help develop a far more effective growth and employment strategy that creates more firms, more jobs and includes many more of our population.

A relatively small economy in which the vast majority are poor or nearly poor will never be able to redistribute enough income to achieve the socioeconomic outcomes we all want and SA desperately needs. For that we need economic growth. And it is growth that government is worst at delivering.

Until that changes, pretending that redistribution through grants is growth will be no more than spin.

Article published by the Business Day

• Bernstein is head of the Centre for Development & Enterprise.