Assessing the impact of social income grants on inequality and economic growth in South Africa

Senabe, Thato

Assessing the impact of social income grants on inequality and economic growth in South Africa

Thesis / Dissertation

2026

Publisher

University of Cape Town

Department

Graduate School of Business (GSB)

Faculty

Faculty of Commerce

Abstract

Researchers and policymakers have long debated the relationship between social grants and economic growth, and social grants and income inequality, alongside the interplay among these three factors. This study thus used a Vector Error Correction (VEC) model to evaluate these relationships in South Africa from 2002 to 2023. The VECM results find a positive long-term relationship between social grants and economic growth, but a negative long-term relationship between social grants, income inequality, and economic growth. The Block Granger causality results, however, find no significant causal associations between economic growth and income inequality. Moreover, the variance decomposition analysis reveals that shocks to GDP growth primarily affect GDP growth itself, while shocks to social grant growth account for a small but increasing portion of the variation in GDP growth over time. The impulse response analysis reveals that a shock to social grants has a significant, positive, and long-lasting impact on GDP growth. The causality results indicate a positive long-term relationship between social grants and economic growth, and a negative long-term relationship between social grants and inequality. The policy implications of these results are that South African policymakers should maintain social grants as a policy intervention to ensure continued inequality mitigation and/or reduction over time, increase government expenditure in key, labour-intensive industries to stimulate growth given its statistical significance, and consider the establishment of an expanded social grant/cash transfer framework, reminiscent of Brazil's Bolsa Familia programme, which will facilitate inequality reduction/mitigation and promote more equitable economic growth in the long term.