Working Paper 886

The study investigates the potential welfare effect of basic income support in reducing poverty and inequality in South Africa. Using the 2017 labour force survey and a benefit incidence analysis, we consider three basic income support scenarios:

i) universal income support for those aged between 18 and 59;
ii) only those who are unemployed receive the benefit; and
iii) only unemployed individuals in extremely poor households defined by the food poverty line receive the benefit.

Results show that basic income support can reduce poverty and inequality. However, the specific effects of the basic income support will depend on the targeting scenario considered. The universal basic income support is more costly and has higher leakage, with more benefits going to the non-poor. However, this universal support has the biggest overall impact on poverty and inequality reduction because more South Africans receive income support under this scenario. Meanwhile, targeting only the unemployed and the impoverished makes the basic income support more pro-poor and progressive, as well as mitigating the leakage of the benefit to the non-poor. This scenario would however require that an appropriate targeting mechanism is in place.

Keywords: Capital inflows, Sovereign Debt, International Lending Channel, Misallocation