DG DEVCO Staff Seminar on Social Protection - from strategies to concrete approaches -

26 - 30 September 2016, Brussels

SESSION 8 Fiscal Incidence in South

Africa

Jon JELLEMA

Associate Director for Africa, Asia & Europe, CEQ Institute jon.jellema@ceqinstitute.org www.commitmentoequity.org

Two Main Questions

•  How do taxes and spending in South Africa redistribute income between the rich and poor?

•  What is the impact of taxes and spending on poverty and inequality in South Africa?

Basedon: Inchauste et al., (2015) “TheDistribu>onal Impact of Fiscal Policy in SouthAfrica.”CEQWorking PaperNo. 29. TulaneUniversity and the Center for Inter-American Policy andResearch.

Taxes

What taxes were assessed? 2010/11 Incidence

analysis (% of GDP)

Total General Government Revenue 30.9 17.5 Tax Revenue 27.1 17.5

Direct taxes 14.3 8.5 Personal income tax 8.5 8.5 Corporate income tax 5.6 … Other direct taxes 0.1 …

Indirect taxes 10.4 9 VAT 6.9 6.9 General fuel levy 1.3 1.3 Specific excise duties 0.9 0.8 International trade taxes 1 … Other indirect taxes 0.3 …

Other taxes 2.5 … Non-tax revenue 3.8 …

Sources: Stats SA - Financial statistics of consolidated general government, 22 November 2012 for totals. Line items under direct and indirect taxes from 2013 Budget Review, National Treasury

Direct taxes are absolutely progressive. 87% of direct taxes are collected from the top 10% of the distribution…

0.0

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1.0

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

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e/ta

x

Cumulative Proportion of the Population

South Africa Concentration Curves of Direct Taxes (share paid by market income deciles)

Direct taxes

Market Inc

45 Degree Line

Source: Own estimates for South Africa based on IES 2010/11.

…but less so than in other countries...

Sources: Armenia (Younger et al, 2014), Bolivia (Paz et al, 2014), Brazil (Higgins and Pereira, 2014), Ethiopia (Hill et al, 2014), Indonesia (Jellema et al 2014), Mexico (Scott, 2014), Peru (Jaramillo, 2014), Uruguay (Bucheli et al, 2014), and own estimates for South Africa based on IES 2010/11.

0.13

0.23

0.25

0.27

0.28

0.30

0.43

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

South Africa (2010)

Armenia (2011)

Uruguay (2009)

Brazil (2009)

Ethiopia (2011)

Mexico (2010)

Peru (2009)

Progressivity of South Africa’s Direct Tax System: The Kakwani Coefficient

In contrast, indirect taxes are slightly regressive on account of excise taxes

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

Cum

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ive

prop

ortio

n of

di

spos

able

inco

me/

tax

Cumulative proportion of the population

South Africa Concentration Curves of Indirect Taxes (share paid by disposable income deciles)

Disposable Income VAT Excise Tax

Fuel Levy 45 Degree Line

Source: Own estimates for South Africa based on IES 2010/11.

Overall, the tax system is globally progressive.

Sources: Own estimates for South Africa based on IES 2010/11.

0.0

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0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Cum

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Prop

ortio

n of

Tax

Cumulative Proportion of the Population

South Africa. Concentration Curves of All Taxes, 2010 (share of market income)

Market Inc

45 Degree Line

All taxes

How progressive is social spending in South Africa?

Government Spending: 2010

2010/11 Incidence analysis

(% of GDP) Total General Government Expenditure 34.8 14.9

Primary government spending 32.2 14.9 Social Spending 17.6 14.9

Total Cash Transfers 3.8 3.8 State old age pension 1.3 1.3 Child Support Grant 1.1 1.1 Disability grant 0.6 0.6 Other grants 0.6 0.6 Foster care grant 0.2 0.2

Other Transfers: Free Basic Services 0.5 0.5 In-kind transfers 12.6 11.1

Education 7 7 Health 4.1 4.1 Housing and urban 1.5 …

Other social spending 1.1 … Non-Social Spending (incl. public sector pensions) 14.6 …

Sources: Stats SA - Financial statistics of consolidated general government, 22 November 2012 for total. Line items under direct and indirect taxes from 2013 Budget Review, National Treasury. For Free Basic Services, data represents the amount transferred under the equitable share formula for 2010/11 to municipalities to compensate them for providing basic services to poor households, and was provided by the Financial and Fiscal Commission of South Africa.

Primary spending is large relative to other MICs

16% 18% 18% 24% 24% 26% 28% 28%

32% 33%

41% 41%

0% 5%

10% 15% 20% 25% 30% 35% 40% 45%

Primary Government Spending (Share of GDP)

Total cash transfers Education Health

Other social spending Non-social spending Total primary spending

Direct Transfers and Pensions

South Africa spends generously on direct transfers.

0.4% 0.4% 0.7% 1.0%

1.3% 2.0% 2.0% 2.3% 2.5%

3.3% 3.7%

4.2%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

Shar

e of

GD

P

Public Social Assistance in the form of Cash Transfers (share of GDP)

Source: For Latin America see: Lustig and Pessino, 2014; Paz et al, 2014, Higgins and Pereira, 2014; Scott, 2014; Jaramillo, 2014, Bucheli et al, 2014; Lustig et al, 2014. Preliminary results for Armenia (Younger et al, 2014) Ethiopia (Hill et al, 2014), Jordan (Serajuddin et al, 2014), Sri Lanka (Arunatilake et al, 2014), and own estimates for South Africa based on IES 2010/11.

Direct cash transfers as a whole are strongly progressive…

0%

10%

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30%

40%

50%

60%

70%

80%

90%

100%

0 1 2 3 4 5 6 7 8 9 10

Cum

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Inco

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ding

Cumulative proportion of the population by market income deciles

Direct Cash Transfers by Category Concentration Curves for Transfers and Lorenz Curve for

Market Income

Lorenz for Market Income Direct Transfers Old -age pension Child support grant Disability grant Population Shares

Sources: Own estimates for South Africa based on IES 2010/11.

Cash transfers are huge relative to the market incomes of the poor…

Source: Own estimates based on IES 2010/2011.

0%

200%

400%

600%

800%

1000%

1200%

Poorest decile

2 3 4 5 6 7 8 9 Richest decile

Shar

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mar

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ncom

e

South Africa. Incidence of Direct Cash Transfers (share of market income by decile)

Old -age pension Child support grant Disability grant

Child care dependency grant Child foster care Grant-in-aid

Other grants

…much more so than other MICs.

Sources: Argentina (Lustig and Pessino, 2014), Armenia (Younger et al, 2014); Brazil (Higgins and Pereira, 2014), Mexico (Scott, 2014), Uruguay (Bucheli et al, 2014), and own estimates for South Africa based on IES 2010/11.

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

0%

200%

400%

600%

800%

1000%

1200%

Argentina (2009)

Armenia (2011)

Brazil (2009)

Mexico (2010)

South Africa (2010)

Uruguay (2009)

Incidence of Direct Cash Transfers (share of market income deciles)

Poorest decile Richest decile Share of GDP (right axis)

Free Basic Services

The incidence of FBS depends on its delivery method,…

•  Municipalities use different criteria for deciding on indigent households. Given that we can not directly identify the value of free basic services, we model two extremes:

•  Benchmark scenario: –  assumes all household connected to the national electricity grid equally

benefitted from the inverted block tariffs and received an equal share of government subsidies for free basic services.

–  FBS are treated as an indirect subsidy.

•  Sensitivity scenario: –  assumes that the subsidy for free basic services is allocated equally among

indigent households who are connected to the electricity grid. –  household is indigent if market income< R18,000 per year –  FBS are treated as direct transfers since municipalities that target FBS typically

deliver these through rebates.

If FBS were targeted nationwide, there would be clear advantages for the poor, as they would be more

progressive

Source: Own estimates based on IES (2010/11).

0%

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30%

40%

50%

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80%

90%

100%

0 1 2 3 4 5 6 7 8 9 10

Cum

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Inco

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Spen

ding

Cumulative proportion of the population by market income deciles

Concentration Curves for Free Basic Services

Lorenz for Market Income

FBS as a transfer

FBS as a subsidy

Population Shares

In-kind transfers on health and education

Public education and health spending are large compared to the market incomes of the poor,…

Source: Own estimates using IES, 2010/11 and NIDS 2008w1.

0%

100%

200%

300%

400%

500%

600%

700%

800%

Poorest decile

2 3 4 5 6 7 8 9 Richest decile

Shar

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ncom

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South Africa. Incidence of Education and Health Spending (share of market income deciles)

Education Health

…more so than in other MICs. This is true for education….

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

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9.0%

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500%

600%

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800%

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P

Inci

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a sh

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of M

arke

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ome

Incidence of Education Spending relative to its size (share of benefits by market income deciles; spending as a share of GDP)

Poorest decile Richest decile Share of GDP (right axis)

Source: For Latin America see: Lustig and Pessino, 2014; Paz et al, 2014, Higgins and Pereira, 2014; Scott, 2014; Jaramillo, 2014, Bucheli et al, 2014; Lustig et al, 2014. Preliminary results for Armenia (Younger et al, 2014) Ethiopia (Hill et al, 2014), Jordan (Serajuddin et al, 2014), Sri Lanka (Arunatilake et al, 2014), and own estimates for South Africa based on IES 2010/11.

…and health.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0% 50%

100% 150% 200% 250% 300% 350% 400% 450% 500%

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Inci

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ome

Incidence of Health Spending relative to its size (share of benefits by market income deciles; spending as a share of GDP)

Poorest decile Richest decile Share of GDP (right axis)

Source: For Latin America see: Lustig and Pessino, 2014; Paz et al, 2014, Higgins and Pereira, 2014; Scott, 2014; Jaramillo, 2014, Bucheli et al, 2014; Lustig et al, 2014. Preliminary results for Armenia (Younger et al, 2014) Ethiopia (Hill et al, 2014), Jordan (Serajuddin et al, 2014), Sri Lanka (Arunatilake et al, 2014), and own estimates for South Africa based on IES 2010/11.

Primary and secondary education spending disproportionally benefits those at the bottom of

the distribution…

Source: Own estimates using IES, 2010/11.

0%

10%

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40%

50%

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90%

100%

0 1 2 3 4 5 6 7 8 9 10

Cum

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Cumulative proportion of the population by market income deciles

Lorenz for Market Income

Pre-school

Primary School

Secondary School

College education

Adult education

University education

In-kind Education

Population Shares

…but no so for post-secondary education

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

Preschool Primary Secondary Post secondary training

Adult training centres

University

South Africa (% of target population through secondary school)

y < 1.25 1.25 < y < 2.5 2.5 < y < 4 4 < y < 10 10 < y < 50 y > 50

Source: Own estimates using IES, 2010/11.

In contrast, health spending is more progressively distributed than education…

Source: Own estimates using IES (2010/11) and NIDS (2008w1).

0%

2%

4%

6%

8%

10%

12%

Poorest decile

2 3 4 5 6 7 8 9 Richest decile

South Africa. Concentration Shares of Health Spending (share of benefits concentrated in each Market Income Decile)

Health spending is also progressive in absolute terms..

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100%

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Cumulative proportion of the population by market income deciles

Concentration of Health Spending and Lorenz Curve for Market Income

Lorenz for Market Income In-kind Education In-kind Health Population Shares

Source: Own estimates using IES, 2010/11 and NIDS 2008w1.

With health utilization more evenly distributed across socioeconomic groups than in other MICs

Source:Armenia(Youngeretal,2014),Bolivia(Pazetal,2014),Brazil(HigginsandPereira,2014),Ethiopia(Woldehannaetal,2014);andIndonesia(Jellemaetal,2014).ForSouthAfrica,ownes>matesbasedonIES2010/2011.

0%

10%

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30%

40%

50%

60%

70%

80%

90%

100%

Armenia Bolivia Brazil Ethiopia Indonesia South Africa

Shar

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get P

opul

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Health Share of Individuals in Beneficiary Households by Income Group

y<1.25 1.25<y<2.5 2.5<y<4 4<y<10 10<y<50 y > 50

Social spending as a whole is strongly progressive

0.77

0.50

0.16

0.01

0.00

(0.11)

(0.12)

(0.15)

(0.17)

(0.19)

(0.19)

(0.25)

(0.32)

(0.34)

(0.37)

(0.39)

(0.60) (0.40) (0.20) - 0.20 0.40 0.60 0.80 1.00

Market income Gini

Tertiary Education Spending

Free basic services (as indirect subsidies)

Other grants

Health Spending

Pre-school education

Secondary School Education

Grant-in-aid

Old age pension

Pre and Primary education

Primary education

Disability grant

Foster Care grant

Child support grant

Care dependency

Free basic services (as transfers)

South Africa. Concentration coefficients for Spending

Source: Own estimates using IES, 2010/11.

What is the net impact of taxes and government transfers on inequality

and poverty?

30

Inequality falls substantially with Government interventions,…

0.771 0.75 0.694 0.695

0.596

0.25

0.35

0.45

0.55

0.65

0.75

0.85

Market Income Net Market Income

Disposable Income

Post-Fiscal Income

Final Income

The Gini Coefficient before and after Taxes, Transfers and Free Services, Education and Health Falls by over one-fifth

- direct taxes

+ transfers & FBS

- VAT, Fuel, excise

+ Educ, +Health

…more so than in other middle-income countries…

Source: Armenia(Youngeretal,2014);Bolivia(Pazetal,2014);Brazil(HigginsandPereira,2014);Ethiopia(Woldehannaetal,2014);Indonesia(Jellemaetal2014);Mexico(Sco^,2014);Peru(Jaramillo,2014);Uruguay(Buchelietal,2014);Lus>g(2014)basedonCostaRica(Saumaetal,2014),ElSalvador(BenekedeSanfeliuetal,2014),andGuatemala(Cabreraetal,2014);andownes>matesforSouthAfricabasedonIES2010/11.

-0.20

-0.18

-0.16

-0.14

-0.12

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

Change in Gini: Disposable vs Market Income (in Gini points)

…but inequality is still higher after fiscal policy than inequality prior to fiscal policy in other countries

0.579

0.771

0.694

0.596

0.25

0.35

0.45

0.55

0.65

0.75

Market Income Net Market Income Disposable Income Post-Fiscal Income Final Income

Gini Coefficient for Each Income Concept

Armenia (2011) Brazil (2009)

Indonesia (2012) Jordan (2010)

Mexico (2010)

Peru (2009)

South Africa (2010) Sri Lanka (2009) Uruguay (2009)

0.439

- direct taxes + transfers

& FBS

- VAT, - Fuel

- Excise

+ Educ, +Health

Poverty also declines substantially…

34

+ direct transfers

- Indirect taxes

+ indirect subsidies

- direct taxes

40.8% 41.0%

23.4%

29.0%

20.2%

46.5% 46.7%

34.2%

39.6%

32.2%

52.3% 52.5%

45.1% 50.1%

0%

10%

20%

30%

40%

50%

60%

Market Income Net Market Income Disposable Income Post-fiscal Income

National food poverty line1

Official consumption based (food poverty line)

National lower bound poverty line 2

Official consumption based (lower bound)

National upper bound poverty line3

With the effect on poverty larger than other middle income countries.

35 + direct transfers

- Indirect taxes

+ indirect subsidies

- direct taxes

46.2 46.4

33.4

39

0

10

20

30

40

50

60

70

MarketIncome NetMarketIncome

DisposableIncome

Post-FiscalIncome

Percen

t

PovertyHeadcountat$2.50perday(PPP)

Armenia

Bolivia

Brazil

Indonesia

Jordan

Mexico

Peru

SouthAfrica

SriLanka

Uruguay

Direct cash transfers are highly effective at redistributing fiscal resources towards the poor...

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0 -13%

-11%

-9%

-7%

-5%

-3%

-1%

Argentina (2009)

Brazil (2009) Indonesia (2012)

Mexico (2010)

Peru (2009) South Africa (2010)

Uruguay (2009)

Effe

ctiv

enes

s Ind

icat

or

Cha

nge

in U

S$2.

50-a

-day

Pov

erty

Hea

dcou

nt Poverty Reducing Effectiveness

Change in Poverty Rate Effectiveness Indicator

Source:Argen>na(Lus>gandPessino,2014);Brazil(HigginsandPereira,2014);Indonesia(Jellemaetal),Mexico(Sco^,2014);Peru(Jaramillo,2014),Uruguay(Buchelietal,2014);andInchauste,Lus>g,Maboshe,PurfieldandWoolard(2014)forSouthAfricabasedonIES2010/11.

…and in reducing inequality.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6 -0.06

-0.05

-0.04

-0.03

-0.02

-0.01

0.00

Effe

ctiv

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s Ind

icat

or

Cha

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in G

ini

Inequality-reducing Effectiveness

Change in Gini from Direct Transfers Effectiveness Indicator

Source:Argen>na(Lus>gandPessino,2014);Brazil(HigginsandPereira,2014);Indonesia(Jellemaetal),Mexico(Sco^,2014);Peru(Jaramillo,2014),Uruguay(Buchelietal,2014);andInchauste,Lus>g,Maboshe,PurfieldandWoolard(2014)forSouthAfricabasedonIES2010/11.

Conclusions •  South Africa uses its fiscal instruments to effectively reduce market income poverty

and inequality through a slightly progressive tax system and highly progressive social spending

•  On the tax side, fiscal policy relies on a mix of progressive direct taxes such personal income taxes, slightly regressive indirect/consumption taxes that when combined generate a slightly progressive tax system.

•  On the spending side of fiscal policy, social spending is not only progressive, but it also contributes to large reductions in poverty and inequality.

•  In fact, South Africa performs very well when compared with other middle income countries: it achieves the most “redistribution” compared to the other middle income countries in the CEQ analysis.

Conclusions (2) •  However, there are concerns about the quality of such spending which begs the

question could more be done to improve the quality of such services so to allow education and health spending to maximize their potential in reducing poverty and inequality.

•  Although fiscal policy is going a long way towards achieving redistribution, the level of inequality and poverty in South Africa after taxes and spending remains unacceptably high.

•  Addressing the twin challenges of poverty and inequality going forward in a way that is consistent with fiscal sustainability requires higher and more inclusive economic growth. This would be particularly important in addressing the need for jobs and higher incomes, especially at the lower end of the income distribution, helping narrow the gap in incomes between the rich and the poor and reinforce the effectiveness of fiscal policy.

Questions for additional analysis…

•  Potential further targeting of free basic services •  Distributional impacts of proposed health

insurance, given sources of funding considered •  Fiscal space for further redistributive policies •  Potential labor disincentive effects of transfers •  Equity – efficiency tradeoffs •  Inter-generational mobility and implications for

transfers in future - Quality of education