Chapter 8

Poverty and inequality in South Africa: Fiscal and social policy

issues

Learning outcomes

• Distinguish primary from secondary income distribution• Understand the redistributive impact of the budget on secondary

income distribution• Explain the calculation of a Gini coefficient• Identify the excess burden of a subsidy• Show how a subsidy could be welfare-enhancing if there are positive

externalities associated with consumption of certain goods (e.g. Food for the poor)

• Distinguish between the impact of a cash transfer and a subsidy in kind

• Show how social transfers may create a disincentive to work• Identify major trends in fiscal incidence in South Africa, particularly

with regard to social spending• Understand the redistributive impact of some major social policy

interventions in South Africa.

Poverty and inequality in South Africa & Southern AfricaCountry % Population Living Below International

Poverty Line (< $1 per day)

South Africa < 25%

Botswana 23%

Namibia 35%

Malawi 42%

The Gini coefficient• Measure of inequality• High coefficient indicates high inequality

The Lorenz curve

Primary vs secondary income

• Actual value of income received in cash or in kind

Primary income

• Primary income less direct taxation, plus value of government services

• Ys = Yp – Yd + G

Secondary income

The role of public finance in redistribution• Fiscal incidence• Balanced budget incidence• Government’s distributive role

– Rule maker– Controller of prices and wages– Market operator– Influence on long-term patterns of activities– Taxer – supplier of public goods & welfare services– Payer – of transfer incomes– (Potential) redistributor of assets.

The excess burden of a subsidy

Externalities and subsidies for public goods or services

The estimated racial incidence of social spending for selected years

Selected policy issues in South Africa

• School education• Health• Social security

– Occupational insurance– Social assistance– Means test of social pensions

• Social welfare services• Housing.

The effect of an income transfer on work effort

The impact of a housing subsidy

Thank you.