Gini coefficient

Do government spending and taxation really reduce inequality, or do we need more thorough measurements? A response to the World Bank researchers

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Patrick Bond on 10 February 2016

World Bank staff and consultants claim that South Africa’s progressive taxation and pro-poor social spending reduce the Gini inequality coefficient from 0.77 to 0.59. But their data and methodology are deficient: their research ignores large areas of government spending and taxation that may significantly increase inequality. Thus their conclusion that fiscal policy is redistributive is overhasty and unfounded – whilst it is prone to be used, or misused, to promote a budget-cutting political agenda.

How much is inequality reduced by progressive taxation and government spending?

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Ingrid Woolard, Rebecca Metz, Gabriela Inchauste, Nora Lustig, Mashekwa Maboshe, Catriona Purfield on 28 October 2015

Through progressive taxation and pro-poor social spending, the SA fiscal system reduces income inequality significantly. The extent of this reduction is larger than in twelve comparable middle-income countries measured similarly. Nevertheless, ‘final’ income (i.e. income after major taxes, government transfers and spending) remains more unequal than in comparator countries. While the fiscal system has an important role to play in reducing inequality, interventions to improve the distribution of wages, salaries and capital income are needed.

Redistribution is part of the toolkit to promote growth

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Andrew Donaldson on 7 October 2014

A recent IMF study of several countries provides robust evidence that a high level of income inequality weakens the prospects of sustained economic growth and reduces the duration of growth spells. Redistributive steps, by contrast, do not have a noticeable negative effect on growth. Therefore, a reduction in inequality that is achieved through redistributive steps could have a net pro-growth effect. The policy challenge for South Africa is to find the best policy mix to achieve that.