**1. The Impact of Fiscal Policy Instruments on Inequality and Poverty in South Africa**

For the instruments we have examined, fiscal policy makes a substantial contribution to reducing market income inequality and poverty in South Africa (table 8). Using income per capita as the welfare indicator, fiscal policy in 2011/12 reduced the market income Gini coefficient from 0.771 to 0.596—a decline of 171⁄2 gini points—when all taxes (PIT, payroll taxes, VAT, excise taxes, and the fuel levy) and transfers (including cash transfers, free basic services, and the monetized value of education and health) that we examined are taken into account. If one excludes the monetized value of education and health services, the gini coefficient still falls from from the initial level of 0.771 on market income to 0.695 post-taxes and cash transfers, a drop of some 7.9 gini points.<sup>58</sup>

|Table 8. South Africa: Povertyand|inequalityi<br>Market|ndicators a<br>Net|t each income|concept||
|---|---|---|---|---|---|
||income<br>(1)|market<br>income<br>(2)|Disposable<br>income<br>(3)|Post-fiscal<br>income<br>(4)|Final<br>income<br>(5)|
|||_(2) =(1)_<br>_-- Direct_<br>_taxes_|_(3)=(2)+C_<br>_ash transfers_|_(4)= (3)--_<br>_Indirect_<br>_taxes_|_5=4 +_<br>_In-kind_<br>_transfers_|
|Inequality indicators||||||
|Gini coefficient|0.771|0.75|0.694|0.695|0.596|
|Theil index|1.222|1.119|0.973|0.971|0.724|
|90/10|198.9|173.3|32.7|33.2|12.5|
|Headcount poverty indicators||||||
|National food poverty line<sup>1</sup>|40.8%|41.0%|23.4%|29.0%|–|
|Official consumption based (food poverty<br>line)|–|–|20.2%|–|–|
|National lower bound poverty line<sup>2</sup>|46.5%|46.7%|34.2%|39.6%|–|
|Official consumption based (lower bound)|–|–|32.2%|–|–|
|National upper bound poverty line<sup>3</sup>|52.3%|52.5%|45.1%|50.1%|–|
|US $1.25 PPP per day|34.4%|34.4%|11.7%|16.5%|–|
|US $2.50 PPP per day|46.2%|46.4%|33.4%|39.0%|–|
|US $4.0 PPPper day<br>Source: All data points based on own estimates based on IE|54.3%<br>S 2010/11.|54.6%|48.5%|53.1%|–|

1. The food poverty line was set at R. 210 per month in 2005/06 using March 2006 prices. Adjusted for inflation it was R. 321 per month in 2010/11.

2. The lower bound poverty line was set at R. 300 per month in 2005/06 using March 2006 prices. Adjusted for inflation it was R. 443 per month in 2010/11.

3. The upper bound poverty line was set at R. 431 per month in 2005/06 using March 2006 prices. Adjusted for inflation it was R. 620 per month in 2010/11.

The incidence of extreme poverty (measured as $1.25 per day) falls from 34.4 to 16.5 percent. This includes the combined effect of all taxes, cash transfers and free basic services.<sup>59</sup> It is also more common to see the incidence of poverty calculated with disposable income. If we do this, direct taxes and transfers reduce extreme income poverty by more than two-thirds: from 34.4 percent to 11.7 percent (table 8).<sup>60</sup> In monetary terms, the redistribution

> 58 Statistics SA, 2014a, shows that level of Gini including all forms of income and social grants (but excluding FBS) was 0.69 in 2011.

> 59 In line with international practice, we exclude the monetary value of education and health services in calculating the impact of fiscal policy on poverty rates because households are unlikely to be willing to pay as much as the government spends on these services and as a result do not view these services as part of their income.

> 60 <mark>A caveat is in order. For reasons explained in Bibi and Duclos (2010) and Lustig (2014), care should be taken in not attributing effects to individual interventions by just taking the difference between consecutive pairs of indicators. For example, taking the difference</mark>

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