South Africa's ruling party is being forced to confront a problem that has bedevilled the country since apartheid ended 28 years ago: how to reduce record gross inequality and poverty that hurts the Black majority more than the white minority.

While the issue has never gone away, it has come to a head after the Covid-19 pandemic destroyed jobs and livelihoods.

Unemployment hit a record of nearly 35% last year and anger at the worsening economy has spilled into violent protests and rioting, including last summer when more than 300 people were killed and hundreds of businesses destroyed in the unrest.

The African National Congress (ANC) party is increasingly alarmed at its waning popularity among voters, and a leadership contest is only months away, adding to pressure on President Cyril Ramaphosa to improve the lives of ordinary South Africans.

His preference is to give more free money to the poor. The government introduced a social relief grant in 2020 to support those worst hit by the pandemic, and is debating whether to increase handouts and make them permanent.

Ramaphosa's stance pits him against sceptics including his own finance minister, Enoch Godongwana, who fear that a proposed permanent basic income grant could be ruinously costly.

Opponents of more generous handouts also say they act as a disincentive to people looking for work and divert resources from basic services like electricity, water and schools.

For some South Africans, the small social relief grant of R350 a month offered to those who were unemployed and did not receive any other form of grant was a godsend, even if it could not solve their problems longer term.

Sunnyboy Moseboa, 53, lives in Diepkloof, one of the poorer parts of the Johannesburg township of Soweto. He set up a stall selling grilled cow feet, using the grant to cover expenses like power to keep his product fresh.

Unmarried and without children, he had been dependent on handouts from his family. Now, his business nets him on average R2 000 , after years of failed job searches and enterprises.

"It's small, but the R350 helped," he told Reuters outside his house assembled from discarded wooden planks, glass panels and iron sheets. "Sometimes I have cash flow problems. There are times when there's no food for me to eat."

Having extended the grant another year in his February state of the nation address, at a cost of R44-billion, Ramaphosa is considering making it permanent and increasing it for 10-million beneficiaries - a sixth of the country.

Inequality campaigners see it as a global test case, as robots replace jobs and some countries look into providing unearned income as a solution. Many economists are unconvinced.

"We face a real danger of ... limit(ing) ... job creation potential by increasing the system of social grants," some of Ramaphosa's advisers wrote in a leaked February report, seen by Reuters.

'SOCIAL PROTECTION'

After apartheid ended in 1994, the ANC introduced policies aimed at job creation and private sector growth that they hoped would reassure white nationals and international investors and prevent them flooding out of the country.

But it also spent heavily on improving benefits for people who were discriminated against under white rule, including building millions of subsidised homes for the poor.

Despite the huge spend - at 3.3% South Africa spends nearly three times the global median on social assistance as a share of its GDP, according to the World Bank - unemployment is at a record and, on some measures, inequality has got worse.

Economic growth slowed over the last decade as the country struggled with policy uncertainty, political turmoil, an energy crisis and allegations of state corruption under former president Jacob Zuma – who has denied any wrongdoing.

This has piled more pressure on Ramaphosa, both within the ANC and on the streets, where hundreds have protested in recent months to demand the government limit the number of foreign workers in the country and safeguard jobs for South Africa.

Some analysts say that expanding social protection would be a vote-winner for the ANC, which last year suffered its worst result in local elections since taking power.

Voter support for the ANC dipped below 50% for the first time, raising the possibility that it could lose power for the first time since 1994.

Finance Minister Godongwana noted in his budget speech that the social relief grant had expanded an "already extensive social safety net," now covering half the population.

But Alex van den Heever, a social security expert at University of the Witwatersrand in Johannesburg, said the system was stingier than it looked and was less pro-poor when you offset it against tax breaks on private pension income, which funnel 1.7% of GDP back to the top 10% of earners.

Accusations of corruption and mismanagement have also dogged South Africa's welfare programmes, resulting in long backlogs and shoddily-built homes, and preventing help from reaching many of those in need.

Defenders of basic income propose at least doubling the Covid-19 grant to hit the food poverty line.

In downtown Soweto, the unemployed queue from as early as 2 am to get their grants, forming snaking lines - a stark reminder of how persistent South Africa's poverty is.

Among them is Thandi Shabangu, 53, who has four children. Before the grant she did odd domestic jobs and now uses the money from both to buy snacks and sell them at a kiosk.

"The grant helped me to start my business ... with today's, I will buy more stock," she said.

Ramaphosa had such people in mind when he said in his address that some used grant money to start businesses, rejecting the theory that they encourage idleness.

Sceptics still worry about the cost.

"Affordability is going to be a serious problem, with our debt levels," said Patrick Buthelezi, an economist at South Africa's Sanlam Investments. The Treasury will spend nearly R250-billion on grants in the financial year starting in April, up from about R225-billion in the previous year.

But Shaeera Kalla, from activist group #PayTheGrants, said that with political will, South Africa could make the money back in taxes on the wealthy, such as VAT on luxury items.