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Fiscal policy and dimensions of inequality in South Africa: A time‐varying coefficient approach

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  • Jeanne Terblanche
  • Dawie van Lill
  • Hylton Hollander

Abstract

South Africa continues to face high inequality levels despite its progressive tax and extensive social protection systems. We compare the dynamic impact of fiscal policy on the distribution of incomes, wages and wealth in South Africa from 1993 to 2019. For this purpose, we use a time‐varying parameter vector autoregression to estimate the impact of direct tax revenue and total transfer spending on three distinct inequality datasets. The analysis of various dimensions of inequality is the main contribution of the paper as the literature typically focuses on income inequality. A second contribution lies in the incorporation of time‐varying effects, which enables the analysis of the changing relationship between fiscal policy and inequality. The results suggest that this relationship is indeed time‐varying and that the impact of direct taxes and transfers differs markedly across the inequality dimensions, both in terms of magnitude and sign. Overall, we find that both transfers and direct taxes have not significantly reduced income, wage or wealth inequality in South Africa.

Suggested Citation

  • Jeanne Terblanche & Dawie van Lill & Hylton Hollander, 2024. "Fiscal policy and dimensions of inequality in South Africa: A time‐varying coefficient approach," South African Journal of Economics, Economic Society of South Africa, vol. 92(1), pages 105-119, March.
    • Handle: RePEc:bla:sajeco:v:92:y:2024:i:1:p:105-119
    DOI: 10.1111/saje.12369
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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