# **I. Introduction**

Since the end of apartheid, South Africa has made progress toward establishing a more equitable society. In particular, advances in areas such as electrification and access to education have increased equality of opportunities (World Bank, 2012). There has also been a sizeable reduction in the levels of poverty in recent years. Between 2006 and 2011, the proportion of the population living in poverty using the national poverty line fell from 57.2 to 45.5 percent.<sup>2</sup> Inequality of per capita household consumption has also declined during this period: the Gini coefficient fell from 0.67 to 0.65.<sup>3</sup> However, in spite of this progress, the Gini coefficient in South Africa is still higher than it was in 1993 and the country continues to be one of the most unequal in the world. The top 20 percent of the population accounted for 61.3 percent of national consumption, while the bottom 20 percent accounted for 4.3 percent in 2011.<sup>4</sup> As a comparator, in another highly unequal country, Brazil, the share of the top 20 percent in national consumption is 55.7 percent.<sup>5</sup> As a result of the high levels of inequality, South Africa also features higher poverty rates than other middle-income countries with similar per capita GDP. For example, measured with the international poverty line of US$2.50 per day, South Africa’s headcount ratio is 36 percent, while it is 11 percent in Brazil and 4 percent in Costa Rica.<sup>6</sup> In large part, progress towards greater income equality has proven elusive because of the enduring legacy of the apartheid system. This is true in spite of the fact that South Africa’s government has tried to attack the inequality inertia at its roots on several fronts, including most prominently through taxation and social spending. The 1996 Constitution’s Bill of Rights established citizens’ rights to health care, food, water, social security and assistance. It required the state to fulfill these rights progressively and to the best of its ability. Since the end of apartheid, the government has expanded social assistance programs and spends sizable resources, by the standards of middleincome countries, on health and education services. By 2013/14, total government spending amounted to 33.2 percent of GDP with more than half of it devoted to social spending. Indeed, thanks to social grants, everybody’s disposable income grew between 1995 and 2005; without the grants, two-fifths of the population would have seen its income decline in the first decade after apartheid. Indeed, van der Berg (2006) found that social spending had become increasingly progressive. More recently, Leibbrandt et al. (2010) estimated redistributive spending policies have undone about 40% of the increase in the market-income inequality (measured by the Gini coefficient), with the expansion of social cash transfers being particularly important. Meanwhile the tax system has generated considerable resources for redistribution with total general government revenue collections amounting to 29.2 percent of GDP in the same year. Moreover, Woolard et al. (2005) found that although the relative burden of taxation increased for the bottom 30 percent and the top decile between 1995 and 2000, when taken together taxes were progressive, effectively reducing the level of inequality between incomes before and after taxes.

The government’s commitment to greater equality remains strong. The _National Development Plan: Vision for 2030_ sets the ambitious goal of eliminating poverty and reducing inequality. It targets to cut the Gini coefficient to 0.60 by 2030 by raising employment and the share of income of the bottom 40 percent from 6 to 10 percent.<sup>7</sup> In 2014, with an overall fiscal deficit at about 4 percent of GDP and debt burden close to 40 percent of GDP, fiscal space has become more limited. In such an environment, the question becomes whether the government is making the best possible use of fiscal policy to achieve its goals of reducing poverty and inequality.

In this context, this paper aims to assess the distributional impact of some of the main tax and social spending programs by applying a state-of-the-art fiscal incidence analysis. In particular, the paper first aims to analyze whether the tax and spending programs assessed in this paper are progressive in South Africa. Second, the paper aims to quantify the impact these tax and spending programs have on inequality and poverty, and how effectively the taxes and transfers redistribute income between the rich and the poor. Our analysis has three unique features. First, with most other studies almost a decade old, this paper uses the most recent Income and Expenditure Survey

> 2 Statistics South Africa, 2014a, Table 3, using the national upper-bound poverty line of R.620 per month. 3 Statistics South Africa, 2014a, Table 5, expenditure per capita excluding taxes. 4 Ibid, 2014. 5 SEDLAC (Socioeconomic Database for Latin America and the Caribbean, CEDLAS at Universidad de La Plata and World Bank). 6 The poverty line is measured in purchasing power parity. The headcount ratios are for disposable income.

> 7 National Planning Commission, 2011, National Development Plan: Vision for 2030, page 3 and page 28.

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