Budget 2016 and social grants: how tightly stretched is our safety net?

24 February 2016
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(Quick note for readers: if you need a quick refresher on some basic concepts and trends in inflation, check out this post I did for the Daily Maverick. I’m going to assume familiarity with most of the ideas, but call me out if something isn’t clear or looks wrong.)

Social spending is a very controversial and divisive issue, and it’s only fair that I declare my feelings, beliefs and prejudices openly before we continue. I do this partly as a warning to the reader – so that you don’t demand a refund later on – and partly to try and keep the discussion as intellectually honest as I dare.

(I found, in the course of my fact-checking, that some of the truths I was fond of polishing were just long-held beliefs. The growth in spending on social grants was better than I had feared, for example. But we’ll get there now.)

I think that a social safety net is important, particularly in a country like South Africa, which has such a heavy burden of poverty and a history of entrenched wealth destruction. Ideally, our economy would create enough jobs and wealth that there would be few welfare recipients, but things are very far from ideal.

Anyway, that’s my position. I’m not here to make you think that grants are wonderful. I’m here to put forward three arguments:

– the cost of living is highest for the poorest households – the same households who are most dependent on social welfare,

– the growth in social spending has not kept pace with inflation, but it’s not far behind, and

– social spending is a smaller threat to fiscal stability than the interest we pay on our debt.

I’ve made the first argument before (check the abovementioned Maverick article if you need a quick refresher) so let’s recap. The first graph below shows the growth in the official consumer price index (CPI) from April 2008 until January 2016:

CPI growth for selected household quintiles, 2008-2016

CPI growth for selected household quintiles, 2008-2016

Using April 2008 as a base, the official CPI grew from 100 to 152,3. A standard basket of goods that would have cost R100 in April 2008 will now cost about R152,30, or some 52 per cent more. But we’ve also included some other ‘baskets’ that StatsSA measures – we’ve included the baskets for the poorest fifth of households (‘Very low income’), the next-poorest fifth (‘Low income’) and the richest fifth (‘Very high income’).

Since April 2008, the average price level has risen by about 52 per cent. The price level for the richest households has risen by about 50 per cent, but the price for the poorest households has risen by 62 per cent.

Poorer households have become poorer over the last eight years relative to the average household. It’s even more scary if we compare price increases for food:

CPI growth for food, 2008-2016

CPI growth for food, 2008-2016

Food prices have increased by over 65 per cent since April 2008, even higher than the average inflation rate for the poorest households. Spending on food accounts for more than a third of the total spending by poor households.

Over the last two years the growth in food prices has outstripped the inflation rate of the poorest households and the gap might widen further over 2016. This will place even more pressure on these households to cut back on buying food, with too many already struggling with hunger and malnutrition.

The graph below shows how the rand value of social grants has increased since the 2008 Budget through to the 2016 Budget. (Incidentally, I chose to base my CPI calculations to April because that’s the month when most grants increase.)

The rand value of social grants, 2008-2016

The rand value of social grants, 2008-2016

The largest grants, by rand value, are those targeted at older South Africans: old age, disability, and war veteran grants. These were about R950 in 2008 and have risen to just over R1 500 in 2016.

The smallest grant is the child support grant, rising from R215 in 2008 to R350 in 2016. Grant for grant, it’s a fraction of the old age grant. Due to the demographics and population distribution of South Africa, however, there are many more recipients of the child support grant. Total spending on child support is currently about R52-billion, comparable with the R59-billion spent on old age grants

Growth in the value of individual social grants has almost kept pace with inflation. I though that the gap would be a lot wider. The graph below shows the cumulative growth in selected social grants from 2008 to 2016:

Growth in the value of selected social grants, 2008-2016

Growth in the value of selected social grants, 2008-2016

The child support grant has grown by almost 63 per cent since 2008 and the old age grant has risen by 60 per cent. The foster care grant has only grown by 37 per cent, well below the various measures of inflation.

The graph below compares the growth in social grants with the increase in prices for the poorest households:

Growth in social grants vs. growth in inflation, 2008-2016

Growth in social grants vs. growth in inflation, 2008-2016

You can see  that the cumulative growth in the old age and child support grants has almost kept pace with the inflation rate for the poorest quintile, but it’s just short.

We can’t say too much about our findings at this point without better information but we can say one thing, and that is that, on average, the poorest households are slightly worse off now than they were in 2008.

Although the growth in social grant spending has been (slightly) higher than the inflation rate and the number of South Africans receiving grants has also increased, the amount we allocate to social grants isn’t growing out of control. Social welfare spending is one of the smaller risks to our fiscal stability – it’s certainly a smaller risk than the growing interest payments on our debt, as the graph below shows:

Social spending vs. debt servicing costs, as a percentage of GDP

Social spending vs. debt servicing costs, as a percentage of GDP

In 2008, social spending was equal to 3,3 per cent of GDP and debt servicing costs were just 2,3 per cent of GDP. Social spending increased through 2009 and 2010, peaking at 3,5 per cent of GDP. After that it stabilised at 3,4 per cent and has since fallen to 3,2 per cent of GDP, where it is forecast to remain over the medium term.

In contrast, the cost of paying interest on national government’s debt has risen to 3,5 per cent of GDP and it is forecast to climb to 3,6 per cent over the medium term.

Technically speaking, the ‘per cent of GDP’ metric doesn’t say whether a particular budget vote is increasing as a share of total spending, because government expenditure as a percentage of GDP can itself fluctuate over an economic cycle.

We can still compare the two categories of spending with each other and see quite clearly that we are spending more on servicing our debt than we are on our social safety net.

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2 thoughts on “Budget 2016 and social grants: how tightly stretched is our safety net?

    1. Admin Post author

      Hi Mthetheleli

      Glad to be of service! Were you debating for or against social grants, by the way?

      Reply

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