South Africa is characterised by high levels of unemployment, poverty and inequality. Poverty and inequality are on a continuous ascending trajectory. South Africa and other Southern African resource-rich countries, such as Namibia and Angola, have not significantly reduced wealth gaps, poverty, and unemployment.
South Africa achieved some progress immediately after independence in 1994, mainly through expanded social services to reach most of the population, deliberately neglected under apartheid rule. However, one can argue that there was no systematic transformation of economic structures, especially to correct the capital distribution flaws of the apartheid era. As a result, the typical African exclave economy persists even today.
The exclave economy is typically characterised by a relatively small and well-resourced formal sector that operates in isolation from a poverty-stricken informal economy and a communal subsistence economy. The sharp inequality in land ownership also contributes to perpetuating the historically high levels of income inequality. Lack of access to key productive assets, such as skills and land, slows progress towards a more equitable income distribution.
As of 2022, 18.2 million people in South Africa lived in extreme poverty, with the poverty threshold at 1.90 U.S. dollars daily (Galal, 2022). Moreover, over 123,000 people were pushed into poverty in comparison to 2021. The headcount was forecasted to increase in the coming years.
By 2025, around 18.5 million South Africans are projected to live on a maximum of 1.90 U.S. dollars daily. More than three million South Africans lack “access to a basic water supply”, and more than 14 million lack access to safe sanitation. About 40% of the labour force is unemployed or underemployed (Galal, 2022). Poverty levels have increased and become more pronounced in urban areas, amongst female-headed households and the youth. This picture asks for more government intervention in redressing the problem of inequality.
Eccentrically, according to the World Bank Group (2014), South Africa is having more success than its other peer middle-income countries such as Brazil, Botswana, Mauritius, Namibia, Seychelles and Tunisia in using fiscal policy to tackle inequality and poverty. Despite the strides made by fiscal policy, because the income gap was so high, the inequality level after fiscal policy is still much higher than it is in most other countries in the world.
The poorest in South Africa benefit from social spending programs. According to United National Development Programme about 70% of outlays on social grants and 54% of spending on education and health go to the poorest half of the population in South Africa. Cash grants and free basic services lift the incomes of some 3.6 million individuals above $2.50 a day (PPP). The extreme poverty rate, measured as the share of the population living on $1.25 per day or less, is cut by half from 34.4 to 16.5%. The child support grant and old age pension greatly impact poverty (World Bank Group, 2014).
Fiscal policy is progressive and works to reduce inequality. By taxing the income of the rich proportionally more than the poor and using social spending to boost the incomes of the poorest, fiscal policy narrows the income gap between the rich and poor. Before taxes and social spending, the income of the richest 10% in South Africa is more than 1000 times bigger than the poorest 10% (UNDP, 2014). After taxes and social spending, this gap falls so that the income of the richest 10% becomes 66 times bigger than the poorest 10%. This corresponds to a reduction in the Gini coefficient on income from 0.77 before taxes and social spending to 0.59 after the impact of fiscal intervention (World Bank Group, 2014).
Fiscal policy already goes a long way toward achieving redistribution in South Africa. South Africa is already one of the countries with higher tax rates and an efficient tax system, and it collects more tax revenue relative to GDP than most middle-income countries in the world. Considering that in South Africa, only the top 10% of the population are high-income earners and bear almost all the tax burden, increasing income redistribution may bring more negatives than positives.
Increased taxation may result in tax evasion and increased tax-avoiding activities. This may even lead to moral hazard issues and shifting tax incidences. Countries with high tax rates are less attractive to investors and may lead to capital flight. There is a trade-off to taxpayers: the higher the tax rate, the less the incentive to invest or work more. This will result in tax inefficiencies, leading to low investments and increased unemployment, worsening the problem taxes were meant to address: the problem of deepening poverty and extreme inequality.
Arguably, continued and increased cash grants may lead to dependency syndrome, where grant recipients become less motivated to get employment. As a result, poverty is passed from generation to generation. The need to condition the grants may be imperative. The conditions should encourage a long-term eradication of poverty and permanently reduce inequality. In some cases, increased redistribution, especially of cash grants, simply encourages consumption of demerits, worsening inequality.
Overcoming the challenges of poverty and inequality in a world where fiscal resources are more constrained calls for more inclusive and faster economic growth, better jobs, and greater efficiency in public services. Against the backdrop of a high fiscal deficit and rising public debt burden in South Africa, it is essential that the government uses its existing resources effectively in the fight against poverty and inequality. That may be achieved with more targeted redistribution (Siebrits 2019).
More inclusive economic growth and better jobs will be required to complement fiscal policy if South Africa is to overcome its high levels of poverty and inequality. Improving access and availability of private sector jobs and access to productive assets such as land will help equalize opportunities. A proactive approach and a strong policy focus on education to minimize the lower and higher skills worker’s income divergence, may be useful in redistributing future incomes thereby positively impacting inequality. In other words, alternative policies are needed to complement fiscal policy so that the country can continue to reduce economic inequality. Black Economic Empowerment (BEE) and land reform policies which aim to facilitate broader participation in the economy by black people, especially to redress inequalities created by apartheid, are essential in curbing generational poverty.
In conclusion, redistributing more income may not be sustainable in the long run as disincentives are associated with that, and the distribution level is already high in contrast to other middle-income countries. Alternatively, a blend of redistribution and a set of policy measures that foster equality of opportunity and address the highly skewed distribution of productive assets, which are critical to reducing the persistently high inequality in the country, may be more feasible. Moreover, there is a need for enhancement of the country’s capacity to respond to increasing climate shocks, such as the Kwa-Zulu natal floods and economic shocks (oil price increases), that generally affect the poor more severely. Enhancing the efficiency and effectiveness of social spending and improving the targeting of key social protection programs to redirect resources towards the most vulnerable for more sustainable and efficient fiscal redistribution, is key for accelerating reduction of inequality in South Africa.
References
1. Galal. S. (2022, Sept 09). Number of people living in extreme poverty in South Africa 2016-2025. Statista. https://www.statista.com/statistics/1263290/number-of-people-living-in-extreme-poverty-in-south-africa/
2. United Nations Developmental Projects. (UNDP). 2014. The impacts of social and economic inequality on economic development in South Africa. Online Available https://www.undp.org/sites/g/files/zskgke326/files/migration/za/UNDP-Inequality-South-Africa.pdf
3. World Bank Group. (2014). South Africa economic update: fiscal policy and redistribution in an unequal society (English). South Africa economic update; issue no. 6 Washington, D.C.