OECD Economic Surveys SOUTH AFRICA

1 OECD Economic Surveys SOUTH AFRICA . JULY 2015. OVERVIEW. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. Executive summary Main findings Key recommendations OECD 2015 1. Main findings Since 1994 SOUTH AFRICA has made great progress in reducing absolute poverty by rolling out social grants for pensioners, the disabled and children.

2 Access to education, housing, water, electricity and other services has been greatly broadened. As a result, well-being has increased substantially. A sound macroeconomic framework with a stable fiscal position, inflation targeting, a floating exchange rate and largely unimpeded international capital flows underpinned this progress and has earned SOUTH AFRICA the confidence of financial markets. Notwithstanding the successful transition to a democratic system with strong institutions, the legacy of apartheid is still felt by many SOUTH Africans. Inactivity is widespread, settlement structures are too remote from Economic centres and severe infrastructure bottlenecks prevent Economic activity from delivering the benefits of globalisation to all.

3 Moreover, domestic barriers to firms entering markets are still high, in particular for black entrepreneurs despite policies to foster black Economic empowerment. The National Development Plan provides an ambitious framework for stronger, more inclusive growth. Growth has not been inclusive due to insufficient employment growth A key factor behind the high income inequality is the low employment rate, especially of black SOUTH Africans. The National Development Plan also identifies the need to increase Economic growth and expand employment. Job creation is held back by regulatory entry barriers for new suppliers, who could offer better and cheaper services, and by the legal extension of collectively agreed wages, contributing to an insider/outsider divide.

4 Wage formation is complicated by confrontational industrial action. Large numbers of low-skilled job seekers reside where employment opportunities are limited. The lack of a centralised infrastructure for providing active labour market policies means that delivery of existing programmes is fragmented. There is also no national minimum wage, although collective bargaining agreements and sectoral regulations establish widely varying wage floors across much of the economy. Reforms are under way to tackle infrastructure bottlenecks and support SMEs The government has identified SMEs as key to bolstering growth and employment but SMEs face high regulatory burdens, and the pattern of social housing hinders business opportunities.

5 Publicly owned network industries, especially electricity but also some transport sectors, have ongoing capacity problems and are characterised by cross-subsidies, insufficient oversight by regulators and limited access of independent service providers to the infrastructure. The government is making large investments to rectify capacity problems; electricity shortages have been particularly damaging for the economy. New public management techniques promise to improve spending efficiency. Public ownership of companies is still significant, even in markets that could be opened for competition. This occupies scarce administrative capacity on all levels of government and is a potential source of inefficiency.

6 The tax base is narrow and revenues are too small to meet future spending needs A well balanced and administered tax system underpins a sound fiscal position and finances a high degree of redistribution. However, the public sector will face considerable resource needs in the years ahead to expand social and Economic infrastructure. Meeting these needs will require increased revenues, but this must be equitable and not penalise growth. Taxes on personal and corporate income represent half of all tax revenues, but are levied on narrow tax bases. While goods and services taxes are an important source of revenue and are relatively efficient, largely due to the VAT regime, the zero-rates and exemptions are not well-targeted as the associated tax savings disproportionately accrue to better-off households.

7 Carbon emissions are barely taxed but a broad carbon tax is to be introduced in 2016. OECD 2015 2. Key recommendations The overarching priorities for strong, sustainable and inclusive growth in SOUTH AFRICA are: Focus policy implementation on the objectives in the National Development Plan. Remove obstacles for job creation. Invest in social and Economic infrastructure. Tackle infrastructure bottlenecks and improve business regulation to support job creation Choose infrastructure investments with the highest social returns to facilitate prioritisation and cost control. Improve employment opportunities by expanding affordable public transport, including integrating minibuses into the public transport system, and building new, denser settlements closer to Economic centres.

8 In network industries, complete the introduction of independent regulators and charge them with ensuring non-discriminatory third-party access. Secure additional electricity generation capacity by accelerating the independent power producer programme and facilitating private co-generation. Support SMEs by increasing the use of regulatory impact analysis in order to reduce the regulatory burden, eliminating entry barriers and promoting competition. Systematically identify and eliminate competition-hampering regulation. Privatise state-owned companies, such as telecoms, that are in markets with a sufficient degree of competition. Enhance the responsiveness of the labour market for more inclusive growth Establish a public employment service as a one-stop shop for job seekers to lower the cost of job search and hiring costs for employers, which would improve the matching of workers to jobs.

9 Increase the role of mediation and arbitration to make wage negotiations less confrontational. Broaden tax bases to help finance requirements for stronger and sustainable growth Broaden personal and corporate income tax bases by reducing deductions, credits and allowances. Increase tax rates on higher incomes. Broaden the VAT base and strengthen VAT compliance. Proceed with the introduction of a carbon tax. OECD 2015 3. OECD 2015 4. ASSESSMENT AND RECOMMENDATIONS. Social progress over the past 20 years has been impressive A stronger recovery was held back by strikes and power cuts Macroeconomic policies are stabilising inflation and public debt Promoting inclusive growth by improving the labour market More effective infrastructure and business regulation to lay the foundations for higher growth How can the tax system help to meet revenue-raising challenges?

10 OECD 2015 5. Social progress over the past 20 years has been impressive Since the early 1990s, SOUTH AFRICA has gone through a democratic transition with the development of broad-based consultation in the policy formation process, a sound macroeconomic policy framework, and strong institutions to protect the rule of the law. Social progress has been achieved with redistributive grants and wide access to key public services, notably education, health, housing, water, sanitation and electricity. These services account for 60% of government spending (Statistics SOUTH AFRICA , 2014). Notwithstanding these successes, real GDP growth, at from 2000 to 2014, has been weak by emerging-market standards, employment has not risen fast enough to absorb the strongly expanding labour supply and reap the demographic dividend, and unemployment has been chronically high (Figure 1, Panel A).