Edward Van Zyl
SA’s TAX and government spending policies do the most to redistribute wealth from the rich to the poor compared to other middle-income countries, says a new World Bank study. Yet SA remains the most unequal society among them.
The South African leg of the study, titled Fiscal Policy, Inequality and the Poor in the Developing World, which was presented at a World Bank/ Treasury workshop in Pretoria on Wednesday, shows the enormous deficit left by apartheid that SA must still overcome.
It also suggests that while fiscal policies have done a lot for the poor, these have come close to their limits in reducing inequality. For SA to become more equal, more jobs and better incomes are needed.
The study sets out to answer two questions: how well do taxes and spending redistribute income from the rich to the poor, and what is the effect of these on poverty and inequality? In SA, the results are startling. Out of a set of 16 middle-income countries to which the same methodology was applied, SA’s fiscal policy leads to the largest reductions in poverty and inequality.
Direct taxes are broadly redistributive with the top 10% of the population paying 84% of the taxes, the World Bank found.
SA’s Gini co-efficient — the measure between 1 and 0, in which 1 reflects total inequality and 0 complete equality — is at 0.771 before the effects of taxation are taken into account. After direct taxes, the Gini drops to 0.75.
When direct cash transfers, such as welfare grants and free basic services, are added to income the Gini drops to 0.694. "Transfers in kind" — such as education and health, further reduce inequality to a Gini measure of 0.596.
Poverty also declines substantially. Before taxation and cash transfers, 46.5% of the population are in poverty or live on less than $2.50 a day, or R443 a month in 2010 prices. Direct taxes change this only marginally, but when cash transfers are included, poverty levels drop to 34.2%. Indirect taxes — such as VAT and excise taxes — raise this to a net effect of a poverty level of 39.6%.
A methodology called the "Commitment to Equity" developed by US economics professor Nora Lustig at Tulane University, allows a comparison across countries. While this is usually difficult, the methodology provides a standard set of definitions, which ensures apples are compared with apples.
Prof Lustig says that the result for SA in reducing inequality is way ahead of the next best performer. SA’s Gini co-efficient drops 0.08 points compared to Chile, with about a 0.04 improvement and then Brazil, where after taxation and social welfare transfers the Gini improves 0.35 points.
Yet, SA’s Gini coefficient after fiscal transfers is still much higher than other middle-income countries before fiscal transfers. In Mexico, for instance, the Gini co-efficient prior to fiscal transfers is 0.439, a similar level to Brazil’s.
The poverty headcount also drops more in SA — 12 percentage points — compared to Brazil, where it drops four percentage points and in Uruguay, where the decline is 3.8 percentage points.
The authors of the South African leg of the study — Gabriela Inchauste and Ingrid Woolard — suggest that SA’s success in reducing inequality stems from cash transfers being large relative to the incomes of the poor and being well-targeted at the most vulnerable.
However, says Prof Lustig, the limits of redistribution through the fiscal system are nearing their ceiling. Job creation and raising wages through increased productivity are imperative if inequality is to be further reduced. "While SA is doing a lot it starts from such a dire situation that doing a lot has still not got it to where it wants to be."