My region’s countries collect just a fifth of what they should in tax, says Oxfam’s Anthony Kamande. We need those lost billions to tackle extreme inequality and mend our public finances
Out of the blue over Christmas, while I was visiting my home village some 200km from Nairobi, a helicopter landed. This was extraordinary: my village only got electricity in 2017 and an event like this had never happened before. (Even now, as most of the village lives on less than $1 a day, only a handful of households can afford electricity). The helicopter carried the body of a rich woman from Nairobi who wished to be buried in the village of her ancestors. As I saw the reaction of the locals, I was once again struck by the scale of inequality in my country, where the extreme wealth of a few exists side by side with the subsistence survival of the many. That extreme inequality is not confined to Kenya – but spread across the whole of East Africa.
This week, Oxfam and Development Finance International (DFI) set out the scale of the economic divide across the region in a new report. Here, I highlight some of our findings and recommendations.
A history of inequality – with half the people in extreme poverty
Despite impressive economic growth over the past two decades, most in the region have not benefited. The bottom half of the population owns a paltry 0.5% of wealth, based on data from World Inequality Database; the richest 1% owns 29%, 57 times more than that owned by the bottom 50%. Similarly, half of the region’s population – 189 million people – live in extreme poverty, according to World Bank data.
However, there have also been positive developments in recent years: some countries have made remarkable progress in protecting the most vulnerable. Since 2016, Rwanda has invested heavily in social safety nets through its Vision 2030 Umurenge Programme (VUP). Kenya has expanded its flagship Inua Jamii Cash Transfer Programme, a social safety net for the most vulnerable population, including universal cash transfer to the elderly aged 70 years and above.
The devastating impact of COVID-19 and an inadequate response
East African countries were unprepared for the pandemic. Investment in health, education and social protection were dismal. About 58% of the region’s population has no primary healthcare coverage, while 8% of people (on average, weighted by population) spend more than 10% of their budget on healthcare, impoverishing millions. Just 9% of the elderly are accessing a pension, compared to over 90% in high-income countries.
‘If countries in the region increased their tax revenue by just 1% of GDP, they could raise health budgets by more than two-thirds’
COVID-19 laid bare and exacerbated this already extreme inequality, severely impacting the poorest.
The pandemic had a devastating impact on the workers in the region. Over 10 million jobs were lost in 2020 and millions forced into poverty. And given that women-dominated sectors experienced the severest contraction, gender inequality increased, too. Before the pandemic, the level of precarious employment was extremely high, with only about 20% of the labour force protected by labour rights, making them vulnerable. Wage inequality is also very high; the top 10% of wage earners capture 60% of the entire labour income.
The response of governments was minimal and inadequate. Kenya even moved to cut taxes on the highest earners. On average, the region spent 2.7% of GDP to alleviate the economic impact of the pandemic on vulnerable households and businesses. Unfortunately, most of these measures have now been rolled back in most countries.
In August last year countries did get a significant boost after the approval of the Special Drawing Rights by the IMF, receiving a combined $4.6 bn, or 1.2% of GDP. But the pandemic continues to wreak havoc. In particular, rich country hoarding of vaccines has meant that very low vaccination rates, compounded by the emergence of more transmissible variants are hampering a quick recovery. An appalling 4% of the region’s population was fully vaccinated against COVID-19 by mid-January 2022, leaving most to face this deadly disease without any protection.
The lost tax billions that could change lives
So what can governments do to tackle this extreme inequality? Well, poor spending on health and social protection in the region is in part due to low tax revenues. On average, countries collect just 19% of what they should in tax. The region is losing an estimated $2.1bn (about 0.5% of the region’s 2021 GDP) to tax evasion and avoidance alone by multinationals and the wealthiest annually, enough to increase the health budget by a third. Many countries thus rely chiefly on regressive taxes, such as VAT imposed on the basic foodstuffs consumed by the poor.
Increasing tax revenue could play a big role in reducing inequality and poverty. If countries in the region increased their tax revenue by just 1% of GDP, they would get enough money to raise their health budgets by more than two-thirds.
The burden of debt and looming austerity
That tax revenue could also be used to lighten the burden of debt that is also hampering recovery. The pandemic has escalated the debt situation: between 2019 and 2021, public debt is estimated to have increased by 11 percentage points on average, across the countries in the region. Servicing this debt is preventing governments in the region from investing in tackling poverty. Countries in the region are spending 36% of the tax revenue on debt servicing on average, five times more than they spend on health.
To reduce the ballooning debt and fiscal deficit, five countries in the region plan to cut their national budgets by $4.7 bn annually, enough to quadruple their healthcare budgets. This will have negative impacts on the poor who will have to dig deeper into their pockets to access critical services like health and education.
Time to seal loopholes and tax the wealthy
Investment in quality and affordable healthcare, education and social protection are needed to build a fairer future. Governments need to shore up public coffers, primarily through domestic sources to scale up investment in the critical social sectors. Tax collection should be made progressive by sealing tax loopholes and taxing wealth. Take Kenya for example. Annual wealth tax at a rate of 2% and 3% on the wealth above $5 million and $50 million respectively could raise $0.9 billion, enough to reduce households out-of-pocket health spending by 85%. Additionally, capital income should be taxed at a higher rate than labour income.
Combating corruption and showing greater accountability for the utilisation of public funds must be a priority. Governments should regularly make available financial reports in a format that ordinary citizens can digest.
Now is the time for East African governments to rise to the task and work for the good of the 99% of us, not just the 1%; an East Africa that focuses on hospitals and schools, not helicopters and sports cars.
Author
Read the full report,The Inequality Crisis in East Africa: Fighting austerity and the pandemic. This blog is also published on the Equals site, where you can find more blogs and podcasts about inequality.
Want more on this topic? Read Anthony’s blog about how the global super-rich flourished in the pandemic here, which was part of a series on inequality we published for last month’s online Davos gathering. You can find the full report Oxfam published for Davos, Inequality Kills, here.