SA still struggling with inequality, says study
SINCE the onset of the new democracy SA used its tax resources to expand social assistance and increase spending on education and health services, thereby reducing poverty.
Achieving greater income equality has, however, remained a challenge. Household consumption inequality, measured by the Gini coefficient, increased from 0.67 in 1993 to 0.69 in 2011, which is among the highest in the world. This potentially ranks SA as one of the most unequal countries among middle-income countries.
In November 2014 the World Bank released its “South Africa Economic Update. Fiscal Policy and Redistribution in an Unequal Society”. The update looks at the role of fiscal policy in addressing poverty and inequality in SA and sets out to answer two main questions, namely: (i) how do taxes and spending in SA redistribute income between the rich and poor? And, (ii) what is the impact of taxes and spending on the rates of poverty and inequality in SA?
The analysis concludes that SA is managing a sizeable reduction in poverty and inequality through its fiscal instruments compared to certain other countries. The update seeks to measure the impact of fiscal policy on inequality and poverty in SA compared to 12 middle-income countries. These countries include a set of comparable middle-income countries namely Armenia, Brazil, Bolivia, Costa Rica, El Salvador, Ethiopia, Guatemala, Indonesia, Mexico, Peru and Uruguay.
The update finds that the South African tax system is slightly progressive, while spending is highly progressive. In other words, taxes in SA are borne by the rich, and the tax resources are redirected to the poor. This country’s fiscal policy appreciably reduces poverty and income inequality, and represents the highest reductions in the emerging market countries under study. A tax is progressive if the cumulative share of a tax paid by the bottom income earners of the population is lower than its share in income. A transfer or spending programme is progressive if the cumulative share of the total spending on the transfer received by the bottom income earners of the population is higher than its share of market income.
The South African fiscal policy applies a mix of progressive direct taxes and slightly regressive indirect taxes which, if combined, results in a slightly progressive tax system. Direct taxes, including personal income and payroll taxes, are progressive as the rich pay a proportionally higher share of total direct tax compared to their share of income. As these taxes comprise a relatively high share of GDP, they decrease the income gap between the rich and the poor.
SA has a steeper personal income tax rate structure, which peaked at 40% compared to 27.5% in Brazil. Although direct taxes here are progressive they are less so than in other countries. Indirect taxes are slightly regressive. The study concludes that the regressivity at the lower income levels largely reflects the impact of excises, as value-added and fuel taxes are progressive. VAT, excises on alcohol and tobacco, and the fuel levy comprise 9% of GDP, or a third of SA’s tax base. VAT comprises about 25% of tax revenue. SA’s indirect tax burden as a percentage of disposable income is relatively even across the income distribution compared with other middle-income countries. In Brazil and Mexico the overall burden of indirect taxation rises more progressively with income than in SA.
SA’s fiscal policy achieves the largest reductions in poverty and inequality of the 12 countries studied. SA’s fiscal system elevates 3.6-million people from poverty — ie those living on less than $2.50 a day (purchasing power parity dollars) — which reduces the rate of extreme poverty by half.
The population living on $1.25 a day or less reduces from 34.4% to 16.5%, as a result of the impact of cash transfers and free basic services net of taxes. Income inequality is reduced from a situation where the income of the rich is more than 1,000 times higher than that of the poor to about 66 times higher. This decreases the Gini coefficient from 0.77, pre-taxes and social spending, to 0.59 post fiscal interventions.
However, inequality remains higher than all the other countries in the study before they apply fiscal policies. SA’s population living in poverty — 33.4% — is higher than in many other middle-income countries with similar levels of GNI per capita. The poverty rate, for example, is 11% in Brazil and 4% in Costa Rica.
SA, compared to middle-income counties, generates considerable tax revenues for potential redistribution. More than 50% of South Africans’ tax collections of 27.1% of GDP in 2010-11 came from direct taxes, including personal income tax, corporate income tax and payroll taxes in the form of unemployment insurance and the skill development levy.
The study also shows that this country relies more on personal income tax and less on indirect or consumption taxes than the other countries studied.
SA’s government spending of 32.2% of GDP in 2010-11, excluding interest payments, exceeds the average of middle-income country of 27.6% of GDP. SA’s government social spending (as a percentage of GDP) is higher than most of the countries studied.
SA also spends relatively more on education and less on health and direct cash transfers than countries such as Brazil, but has more direct cash transfers than Bolivia. SA spends more than 50% of its expenditure on social spending. During the past decade, the number of social grant beneficiaries almost doubled (from 8-million in 2003-04 to 15.8-million in 2013-14), reflecting the expansion of direct cash transfers to children and the elderly.
SA’s fiscal policy goes a long way towards achieving income redistribution but poverty and inequality in this country after taxes and spending remains too high. However, more needs to be done to improve the quality of service delivery although SA’s fiscal deficit, and debt limits the fiscal space to spend more to achieve even greater redistribution.
Addressing poverty and inequality in the future in a way consistent with fiscal sustainability will require higher and more inclusive economic growth. This would need to focus on job creation and narrowing the income gap between the rich and the poor and reinforce the effectiveness of fiscal policy.
World Bank update notes SA’s fiscal policy is on track for income redistribution, but more needs to be done SA relies more on personal income tax and less on indirect or consumption taxes than the other countries studied
Ferdie Schneider is head of tax at BDO South Africa.