Distributional Impact of Fiscal Policy in South Africa

This paper estimated the distributional impact of the main elements of general government taxation and spending in South Africa, applying fiscal incidence analysis to the 2010/11 IES (Stats SA 2012b). On the tax side, it analyzed the incidence of 64.5 percent of total tax revenue, including PIT, VAT, excise taxes on alcohol and tobacco, and the general fuel levy. On the expenditure side, it analyzed the incidence of 43 percent of general government expenditures, focused on social spending including direct cash transfers, free basic services, and health and education spending.The results show that South Africa uses its fiscal instruments to significantly reduce market income inequality and poverty through a progressive tax system and highly progressive social spending. The rich in South Africa bear the brunt of taxes that we examined, and the government redirects these resources to the poorest in society to raise their incomes. Only the top three deciles of the income distribution pay more in taxes than they receive in transfers. As a result, the fiscal system lifts some 3.6 million individuals out of poverty. Despite the large fiscal redistribution, however, South Africa remains one of the most unequal countries in the world. More can and should be done to improve the quality of education and health service delivery.