By Donasius Pathera:
Africa faces challenges in tax capacity, with a mere 20 percent tax collection ability of gross domestic product (GDP) and 17 percent tax revenue to GDP ratio, trailing behind other regions.
Inefficiencies in tax policy and collection contribute to this, but addressing these issues could potentially increase tax revenue by 3 percent of GDP.
The debate on the distributional impact of fiscal policies in Africa has intensified due to high income inequality.
Despite Africa’s high income inequality, there is limited empirical work on how fiscal and distributive policies impact inequalities.
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Income inequality remains high in sub- Saharan Africa, with diverse views on its levels and dimensions.
Extreme inequality is associated with social, economic, and political issues, hindering long-term development.
There is a need to emphasise the importance of fiscal policies in addressing inequality.
For this to be well analysed, this paper explores how tax progressivity, well-targeted transfers, and quality public expenditure can contribute to reducing inequality in Africa.
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It highlights the need for innovative ideas to achieve SDG 1 and SDG 10, as Africa’s high level of inequality poses a challenge to ‘leaving no one behind’ by 2030.
Additionally, fiscal policy is seen as a means to raise resources for social spending, supporting the poor and marginalised. However, the study notes that despite increasing tax revenue and grants, levels remain low in Africa compared to developed countries.
Institutions play a vital role in expanding fiscal space, and the Open Budget Index (OBI) provides insights into the quality of budgetary processes. Countries with high OBI rankings tend to have larger fiscal space, indicating the importance of addressing institutional issues related to tax administration to expand tax revenues.
The study recommends reviewing issues like fraud, tax evasion, and discretionary tax waivers, along with addressing challenges posed by tax holidays for foreign firms.
Many African countries have witnessed an increase in the net Gini coefficient at a faster rate than the market Gini coefficient, indicating a decline in the distributional impact of fiscal policy.
Among the 47 countries with available data, 29 have experienced a decrease in the effectiveness of their fiscal policies (Odusola, 2015).
Enhanced fiscal policy effectiveness not only improves economic efficiency but also broadens distributional coverage.
Fiscal policies influence poverty and inequality through taxes, transfers, and public expenditure.
Progressive taxes play a crucial role in redistributing resources from the rich to marginalized groups, particularly through direct taxes on income, wealth, and inheritance.
Well-targeted public spending on education, vocational training, and basic health services serves as a means to reduce income inequality.
For example, investments in girls’ and women’s education can address intergenerational poverty, while vocational skills training can accelerate the reduction in income inequality.
The transmission channels between fiscal policies and inequality reduction involve progressive taxes, well-targeted transfers, and pro-poor quality expenditures.
A redistribution of the total tax burden towards the rich, combined with progressive spending, can substantially reduce poverty and inequality. Even in predominantly regressive fiscal systems, utilising regressively mobilized resources for progressive spending, such as supporting education, health, and transfers to the poor, can generate a progressive distribution.
Experiences from China and Thailand demonstrate the impact of fiscal instruments on income distribution. In China, fiscal policies, particularly taxes and government expenditures, have contrasting effects on inequality.
Thailand’s redistributive policies, focusing on rural areas and social protection for the poor, significantly contributed to reducing inequality.
Lessons from these examples highlight the importance of fiscal policies in influencing income distribution and addressing poverty.
The study emphasises the importance of the composition of taxes, public spending, and labor market institutions in explaining income disparities across regions.
Well- formulated and implemented fiscal policies can serve as potent tools to directly and indirectly combat income inequality in Africa.
Pro-equity fiscal policies have a direct impact on reducing income inequality and simultaneously address other drivers of income inequality.
These policies aim to increase access to quality education, health, and housing services, narrow wage gaps, strengthen tax administration capacity, and promote a participatory, transparent, and accountable budgetary process.
African governments must prioritize integrating progressive fiscal policies into their national development strategies, including national development plans and annual budgets.
Pursuing growth with equity should become a primary objective, emphasising job-rich, skills-enhanced, and human capital-driven growth that reinforces long-term growth, shared prosperity, and social cohesion, ultimately creating more fiscal space.
