How to pay for a Basic Income Grant

How can one pay for a Basic Income Grant (BIG)?

The short answer is that a TEAL (a Total Economic Activity Levy) would pay for a BIG. Later, the role of TEAL as a source for a BIG may be taken over by a Sovereign Wealth Fund, in part or in full, depending on the success of the SWF project (see SWF)

Let us explain how:

First what should a basic income grant be set at?

In the UK people who typically use food banks earn less than £320.00 (at R17/£ = R5440) per month and in the US they are thinking of $10 000 pa or about $800 BIG per month (at R13:50/$ = R10 800) while Finland are talking about €800 BIG per month (at R15.50 = R12 400), so the Direct Democracy Forum’s (DDF’s) suggestion of R5 000 BIG per month is quite modest when compared to other countries’ needs and suggestions. But let’s stick with R5 000 per month as a starting point.

What would the monthly and annual BIG bill be at R5 000 per month?

Our best guestimate is that the adult South African population is about 34,4m. That would mean a monthly BIG bill of R5 000 X 34.4m equals R172 Billion or an annual BIG of 12 times that amount (no thirteenth cheque) or R2.064 Trillion.

That’s frightening. Where on earth do we get R2.1 Trillion Rand a year, an amount rising along with the population as we go on in time? That is almost the value of the current GDP (our estimate at R2.8T for 2017).

The DDF reasons as follows.

If there is a relationship of 30 times the GDP to the amount of money flowing through the banking system (a relationship we observed in an earlier TEAL exercise in 2011) , a GDP of R2.8T would equate to R84T passing through the banking system, per year, We call that the TEA or Total Economic Activity. But each Rand of TEA represents a deposit into one bank account and a withdrawal from another bank account (we call this the doubling factor). So the TEALable amount is the TEA doubled, or R84T doubled to R168T.

Suddenly, 2.1 Trillion Rand seems quite small. In fact a 1.2% levy on the Tealable amount of R168T would deliver R2.1 Trillion. Not cheap but also not that expensive when you consider that the R2.1 Trillion will go back into the economy and effect the money velocity and the GDP (more about that later) and generally increase the size of the pie that we are all eating from.

Is a BIG just a thinly disguised wealth redistribution?  Does it not steal from the rich to give to the poor?  

This is not the topic of this post but for those who are thinking along those lines and do not at first see beyond the wealth redistribution element (yes, there is such an element) then we suggest you consider the effect on the economy of boosting the potential spend of the population by a net R1.5 T a year (remember the social welfare grant offset).  That has to boost the demand side of the economy enormously and provide the suply side of the economy with numerous wealth making opportunities, not just for the existing industrial and commercial powerhouses but also for the small trader and industrialists (the SMEs that everyone says should be the backbone of our economic revival) and individuals at large. In addition the socio-economic benefits for the population as a whole probably make it worthwhile.  But this is discussed more fully here and elsewhere in DDF’s current affairs posts,

Are there dangers? Yes, there are:

Will a BIG effect inflation?

Yes, it probably will, but that would need to be countered by 1) easing into a R5 000 BIG over time (say over 5 years) to ease the inflationary pressures on the economy, and 2)  dropping existing social welfare benefits (for example old age pensions) as the BIG matches or betters them (you won’t receive both an old age pension and a BIG together) and 3) increasing the GDP, in short increasing the supply of goods and services to match the increased availability of the R2.1T of BIG money.

Will a BIG effect the money supply and won’t that in itself be inflationary?

The answer to that is probably not a simple yes or no. Yes a BIG of R2.1 will effect the availability of money but not to the extent of R2.1 T.  Remember the social welfare offsets and that TEAL does not create money.  The economy may become more liquid.  A BIG will probably make existing money more accessible, particularly for the poor, and make money circulate more quickly and more often and that could be inflationary (see above on counter measures).  The No side to that is that TEAL does not in itself create money, print money or borrow money.  So the money supply per se should not be effected by a TEAL funded BIG, and that in itself should restrain inflationary tendencies.

Will a BIG of R2.1 Trillion lift the GDP to R4.9 Trillion?

No, probably not: 1) the BIG will substitute for existing social welfare grants, so there will be an offset factor, and 2) any increased demand trend will probably be met by a trend to import more, not produce more (remember we are in a post industrial phase in South Africa and are more a nation of consumers than producers, and I squarely blame the ANC for that).

So how do we move the supply trend to produce more and import less?

This will need a concerted and coordinated effort of the private and public sectors to boost production, maybe even engaging in targeted programs of import substitution and production benefaction, particularly by engaging as many of the BIG recipients as possible to invest as much of their BIG in production capacity, either of their own or through the JSE by investing in corporations which can expand their capacity to compete for the expanding markets for their goods and services, and of course, investments by the Sovereign Wealth Fund in South Africa’s production capacity.

Would a DDF administration have an overarching socio-economic-industrial strategy?

Yes, there would have to be such a strategy. In short, all the damage that successive ANC governments have done and in particular the damage the most recent (2014-19) ANC government has done, would have to be reversed. This is a tall order but when South Africans can stop hating one-another and when even the poorest of the poor has a stake in the economy and has some security and hope for the future, we believe that a united and determined South Africa can do just that, and in fact must do it, because the alternative is an ever downward spiral toward abject misery for most of our population.

So that is how a Total Economic Activity Levy will pay for a Basic Income Grant.

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Sovereign Wealth Fund

Wikipedia defines Sovereign Wealth Funds as follows:

A sovereign wealth fund (SWF) is a state-owned investment fund investing in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds. Sovereign wealth funds invest globally.

As of 2013, although there were 15 Sovereign Wealth Funds in Africa (see here), none of those 15 wealth funds are in South Africa.  We think that is disgracefull.  The Direct Democracy Forum (DDF) intend changing that.

It has been said that you cannot have a sovereign wealth fund when you have Sovereign Debt, that these are the opposite sides of the same coin.  It might equally correctly be said of many huge corporations that you cannot have debt and hold assets, that they are also opposite sides of the same coin.  Yet that is the way most businesses operate.  They borrow money and invest in income earning assets and activities, and none think the worse of them for doing so.

OK – a sovereign nation is not the same as a corporation but the same principles can apply, and in fact, be applied in reverse, so that the establishment of a sovereign wealth fund is a perfectly legitimate endeavour even when the nation is awash in debt.

South Africa has a sort of Sovereign Wealth Fund in the Public Investment Corporation (PIC) but its principle client (by almost 90%) is the Government Employees Pension Fund (GEPF).  Government owns the PIC and is represented in the PIC by the Minister of Finance. The PIC web site says of the PIC: “Established in 1911, the Public Investment Corporation (SOC) Limited is one of the largest investment managers in Africa today, managing assets of over R1.6 trillion and still growing.”

Wouldn’t it be nice to say that of a South African Sovereign Wealth Fund?

What the DDF will initiate is a true sovereign wealth fund, but not accountable to government, instead accountable to its shareholders, the adult citizens of South Africa, who will each hold one non-negotiable share in the fund.  The share will only be redeemable on death, when its net worth will be paid out to the deceased’s estate, and the share will go back into the pool of unallocated shares and will be issued to the next South African who attains adulthood.  This SWF will be under the protection of Chapter 9 of the South African constitution

The fund will account to the nation monthly and board members will be elected, probably annually and probably on a regional basis.  In effect, every adult South African will become a shareholder in SA Limited, and will become a share watcher and financial expert along with the best.

They will also start caring about how their actions effect the share value of SA Limited and, we suggest, become model citizens and have zero tolerance for those who damage South Africa, and by extension, damage SA Limited and its share value and its ability to pay dividends and support and pay for the Basic Income Grant (BIG), which we suggest, should be one of SA Limited’s principle functions.  In addition to all the traditional sources of funding for SWFs (see here for a brief view of SWF funding), SA’s SWF will be the recipient of every fine and penalty levied in the land and, if we have sin taxes, of every sin tax in the land.

The DDF believe that a Sovereign Wealth Fund as outlined above will be a much better investment than the National Lottery (Lotto).  What do you think?