Survey recommends SA govt tax the rich, help the poor

The Organisation for Economic Co-operation and Development (OECD) today presented the latest Economic Survey of South Africa, offering a rather bleak outlook on the economic state and forecasted growth for the country.

The survey examines the impact of Covid-19 on South Africa’s economy and society, and proposes reforms to overcome long-running structural weaknesses and raise living standards.

It considers South Africa’s exposure to risks to the global outlook from the war in Ukraine.

According to the study, the Covid‑19 crisis has weakened an already fragile economy. South Africa’s growth underperformed during the past decade, in that GDP per capita was already lower in 2019 than in 2008.

Unemployment challenges

The study revealed that unemployment remains high, at around 35%, and youth unemployment even exceeds 50%.

The OECD said the South African labour market is particularly weak, contributing to wide income inequality, leading to losses of human capital and potential growth.

Unemployment is strikingly high and persistent when compared to other emerging market economies, while the employment to population ratio is among the lowest.

The picture is even more challenging for young people, who face an unemployment rate of 57%, 30% of whom are not in education, employment or training.

In the meantime, spending pressures are mounting to close the financing gap in health, infrastructure and higher education.

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Health

At present, South Africa spends around 8.1% of GDP on health, half from the public sector and the other half from the private health sector, which covers only 16% of the population.

The government intends to roll out progressively a national health insurance (NHI) system, offering a large basket of health benefits including primary care, emergency and hospital-based services.

As the national health insurance system is deployed, the medical tax credit rebates and deductions could be reduced progressively to finance the NHI (OECD Economic Survey, 2020a).

The OECD advised that reducing tax deductions and allowances and taxing fringe benefits more adequately would restore the progressivity of the PIT system and contribute to inequality reduction.

Infrastructure

The OECD announced that to improve productivity, public investment needs to become more effective, notably by strengthening the selection process for large infrastructure projects.

A deficit of high-quality infrastructure, namely electricity, transport and telecommunications infrastructure, regulatory barriers and severe skills shortages remain major weaknesses, preventing further productivity gains.

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The OECD has confirmed that investment in public infrastructure has been inefficient. Investment in the road network and its maintenance, for instance, seem close to the OECD average.

However, road fatalities are still the highest, pointing to inefficiencies in those investments. About 80% of roads are still unpaved and more than 50% of unpaved roads, between 20-30% of paved roads, are either in poor or very poor condition.

A high public debt burden and increasing financing costs mean that inefficiencies in the public infrastructure investment process must be addressed.

Higher education

Educational outcomes in South Africa are poor. The latest TIMSS survey, in 2019, shows that teenagers’ math and science performance remain well below the OECD average and below emerging countries. The impact of education quality on economic growth is large.

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The study found that the country has a limited number of post-secondary institutions, and they tend to be spatially concentrated in a few cities. Overall, the number of subsidised seats in public universities, which welcome 85% of students, is insufficient to cater for the demand of families and employers.

University infrastructure was not tailored to host massive cohorts. Although the establishment of two new universities has recently been announced, current cuts in infrastructure spending to balance universities’ budget make these openings unlikely in the years to come.

OECD’s recommendations: spend more efficiently, increase taxes

Isabell Koske from the OECD advised that to finance the above listed needs while putting public finances on a more sustainable path, which is key to restore confidence, spending efficiency should improve and be accompanied with increased government tax revenues.

In addition, the OECD suggested that the tax system could contribute further to reducing income and wealth inequalities.

“The tax-benefit system needs to be redesigned to create fiscal space in the years to come to finance growth-enhancing reforms and to reduce inequalities. The challenge is to generate additional revenues without generating inefficiencies or exacerbating inequality. Income taxes represent around half of total tax revenues, but are levied on small tax bases, partly reflecting the unequal distribution of income.

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“Only the value-added tax has a relatively broad basis combined with a moderate tax rate. There is some scope to raise revenues further while reducing existing tax distortions, notably by broadening the base of corporate and personal income taxes, as well as consumption taxes,” the study read.

In conclusion Koske said that in the longer term, reviving productivity growth is key to lift living standards. Boosting productivity involves improving transport (road, port and rail) infrastructure, providing more stable electricity generation, fostering the quality of telecommunication networks, broadening access to higher education, as well as improving the business environment more generally.