The (un)sustainability of the South African welfare state

In political terms South Africa can best be described as a social democracy with the typical characteristics of the welfare state. Social spending now accounts for approximately 60% of total government expenditure, including an extensive set of cash transfer payments in the form of social grants.

State provision of education, health services, low-income housing, social old-age pensions, and disability grants has been part of South African public economics for many years, and State provision of circumscribed social services is apparently accepted in principle by South African civil society as an expression of social solidarity. What is rather at stake is the quality of the services delivered and whether they offer value for money.

However, what has become controversial is the extensive system of social grants paid to millions of individuals. The deterioration in government finances in the past four years has raised awareness of the risk to the fiscal sustainability of this programme.

For example, it is often mentioned that the number of beneficiaries of government grants (currently 16,5 million) now exceeds the number of personal income tax payers (4,5 million) by a wide margin.

The total cost of social grants in the current fiscal year is expected to amount to approximately R120 billion, including about R6 billion in administrative expenses. This is equal to 10,4% of budgeted consolidated government expenditure, or 3,5% of GDP, which is relatively high for South Africa’s stage of development.

The National Treasury’s projection that expenditure on social grants will grow by 7,5% per annum in the next three fiscal years, with the number of recipients increasing by 2,2% per annum, appears credible.

Because social grant payments are financed from the general revenue pool, their sustainability in the medium term is therefore embedded in the sustainability of government expenditure in general. The growth in expenditure on social grants over the past four years in particular has contributed to the increased structural budget deficit. A big problem is that it constrains capital expenditure.

Jac Laubscher of Sanlam of Sanlam believes that an increase in the tax burden of between 1% and 2% of GDP to lower the structural deficit in any case appears to be on the cards. This should be sufficient to also take care of the sustainability of social grant payments in the medium term.

But of course one need to distinguish between short-term and long-term sustainability and it is perhaps the latter that needs our attention more.

It will serve South Africa well to take note of other countries’ experiences in this regard – Europe serves as a good example of how the unsustainability of an ambitious system of social protection can creep up almost unnoticed on the fiscus. The lesson is that one should in the first place not allow social security to develop into a non-sustainable situation.

The ANC generates much of its votes from economically disadvantaged communities which rely on social grants for survival. Therefore it is not flawed thinking to believe that the ANC could use promises of increased social grant expenditure to draw votes in upcoming elections.

There is a real danger of over-promising in the short term that could lead to major financial issues in the long term. Politically, this is a real tightrope situation in which the government needs to balance social expenditure with what it can afford.