South Africa's fiscal policies lifted 3.6-million people out of poverty in 2010/11, a World Bank report has found.

The South African Economic Update, released on Tuesday, found South Africa's fiscal policies are cutting the rates of poverty and inequality, and that tax and social benefits are effectively redistributing income from rich to poor.

"We find that fiscal policy is very progressive in South Africa, it benefits the poor more than the rich," World Bank lead economist for South Africa Catriona Purfield told reporters in Pretoria.

"We find that because of fiscal policy, large reductions are made in poverty and inequality. In fact they are the largest reductions due to fiscal policies in our sample of 12 countries."

The other 11 middle-income sample countries were Armenia, Bolivia, Brazil, Costa Rica, El Salvador, Ethiopia, Guatemala, Indonesia, Mexico, Peru, and Uruguay.

Purfield said the report showed South Africa's tax system was slightly progressive, in that the rich paid a higher share than the poor in income tax and value added tax.

She said social spending such as child support and disability grants, old age pensions, and free basic services, lifted the lowest income to about R2 800 in 2010/11.

"Because of those cash transfers... and free basic services, the poverty rate after receiving those falls to 39% [from 46.2%]," Purfield said.

"That is a reduction of 3.6-million people. You have lifted them above the poverty line thanks to your effective use of fiscal policy."

She said the use of policy also lowered the Gini co-efficient on income which measures inequality.

However, even with a progressive tax system, inequality in South Africa was still higher than the other 11 countries in the sample. This was because it was one of the most unequal countries in the world.

"Even though South Africa has a very effective use of its fiscal tools, the original problems in income inequality are so high that South Africa is going to need other things to help it address the problem of inequality," Purfield said.

"You need to complement fiscal policy with higher [and] more inclusive growth that essentially generates jobs, especially at the lower end of the distribution."

In its economic outlook for the country, the report's forecast for real Gross Domestic Product (GDP) growth was revised downward to 1.4% for 2014, and 2.5% for 2015, from 2.7% and 3.4% in the previous update.

Statistic South Africa said in August that GDP grew by 0.6% in the second quarter of the year. This was compared to a 0.6% decrease in the first quarter of the year.

The GDP is the total value of goods and services produced in an economy in a certain time period.

South Africa would have been considered to be in a recession had there been two consecutive quarters of negative growth.

Purfield said the reason for the downward revisions was the impact the five-month strike in the platinum mining sector had at the beginning of the year.

Constraints and shortages in electricity supply also affected production and exports.

According to the report there would be a slow and gradual return to modest economic growth over the medium-term.

External risks to the outlook included tightening of the US' monetary policies, a slowdown in China's economy, which would affect exports, and the Ebola crisis.

According to forecasts for next year labour relations in South Africa would "normalise" and additional power capacity become available.

"If this does not happen we will have a continued negative [impact]...on investor confidence... which over time will impact the growth potential and will also make the fiscal targets more difficult to meet."