Fiscal policy and dimensions of inequality in South Africa: A time-varying coefficient approach

Jeanne Terblanche (), Dawie Van Lill () and Hylton Hollander
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Jeanne Terblanche: Department of Economics, Stellenbosch University
Dawie Van Lill: Department of Economics, Stellenbosch University

No 05/2023, Working Papers from Stellenbosch University, Department of Economics

Abstract: South Africa continues to face high inequality levels despite its progressive tax and extensive social protection systems. We compare the dynamic impact of fiscal policy on the distribution of incomes, wages, and wealth in South Africa from 1993 to 2019. For this purpose, we use a time varying parameter vector autoregression to estimate the impact of direct tax revenue and total transfer spending on three distinct inequality datasets. The analysis of various dimensions of inequality is the main contribution of the paper as the literature typically focuses on income inequality. A second contribution lies in the incorporation of time varying effects which enables the analysis of the changing relationship between fiscal policy and inequality. The results suggest that this relationship is indeed time-varying and that the impact of direct taxes and transfers differs markedly across the inequality dimensions, both in terms of magnitude and sign. Overall, we find that both transfers and direct taxes have not significantly reduced income, wage or wealth inequality in South Africa.

Keywords: income inequality; wage inequality; wealth inequality; fiscal policy; TVP-VAR (search for similar items in EconPapers)
JEL-codes: C32 D31 E62 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-afr
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