New Revenues Can Offset Africa’s Rising Income Inequality

Subcontinent, one of world’s fastest growing regions, marred by inequality

Sub-Saharan Africa’s revenue-to-GDP ratio low compared with rest of world

IMF can help by offering Africa policy models that succeeded elsewhere

The “Fiscal Policy and Income Inequality in Sub-Saharan Africa” seminar explored practical areas where taxation and public investment can contribute to greater incomes for all. The October 10 seminar was held on the sidelines of the 2014 IMF–World Bank Annual Meetings in Washington, D.C.

Sub-Saharan Africa’s remarkable growth over the past two decades has not translated into shared prosperity. The subcontinent remains marred by inequality, despite being one of the world’s fastest growing regions.

To be sure, income inequality has caught the attention of policymakers for some time, and momentum is building to develop innovative strategies to fight it. Making growth inclusive was one of the central themes of the Africa Rising conference held in Mozambique in May 2014. It was also discussed in depth in the April 2014 edition of the Regional Economic Outlook. In addition, an IMF staff report published earlier in 2014 found that fiscal policy is the primary tool for governments to affect income distribution.

Focus first on boosting revenue

Governments should first ensure that they raise enough revenue, the seminar heard. “In sub-Saharan Africa, the revenue-to-GDP ratio is still relatively low compared to other parts of the world,” said Antoinette Sayeh, Director of the IMF’s African Department. “You cannot have the fiscal space to spend on things that will help reduce inequality if you do not have enough revenue,” she added.

This can be achieved by implementing progressive taxation, for example by substituting consumption-based taxes with levies on income or property. Additional revenue could come from the removal of across-the-board tax breaks such as generalized fuel subsidies, which tend to benefit the well-off far more than the poor. Where appropriate, these need to be replaced with targeted alternatives, such as conditional cash transfers, Sayeh said.

For Martin Ravallion, a professor at Georgetown University who has done extensive research on poverty and inequality, African governments should make smart investments in broader economic enablers that do not cause a conflict between promoting growth and fighting inequality. These include spending on health and education, as well as making the legal system accessible to...