Davis Tax Committee warns NHI may spark e-toll style resistance

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E-TollUncertainty around how South Africa’s National Health Insurance will work is cause for concern, says a report by the Davis Tax Committee. And if government fails to consult adequately, it 'may well create resistance to change … much like the e-tolls'

Fin24 reports that this is according to a new report by the Davis Tax Committee (DTC), which emphasised the need for proper consultation before the health insurance scheme is implemented. The DTC report, which focuses on the financing of the NHI, warned in its concluding remarks that "inadequate engagement at the early stages of NHI may well create resistance to change in the latter stages of implementation – much like the e-tolls”.

The report says the nine-person committee, chaired by Judge Dennis Davis, was set up in July 2013 to assess South Africa’s tax policy framework and submit recommendations to the finance minister. It noted that its tax policy proposals are subject to consultative processes, and the usual Parliamentary oversight if taken up by the finance minister.

The report says the government's White Paper on the NHI previously said it would require R256bn in annual funding at 2010 prices. By 2025, the committee noted, a funding shortfall of R72bn is expected at an assumed average growth rate of 3.5%. “The additional cost per annum could, however, be substantially more than this.”

The DTC reported that a real economic growth rate of just 2% would result in a shortfall as large as R108bn by 2025.

The report says South Africa’s growth rate is currently projected to be below 1% for 2017, indicating that the funding shortfall is likely understated. “The proposed NHI, in its current format, is unlikely to be sustainable unless there is sustained economic growth,” the committee said.

The committee noted that given the magnitude of the funding requirement of the NHI, it would require “trade-offs” with other National Development Plan programmes, like social security reforms and tertiary education. More realistic costing and a more detailed framework for its implementation is needed, the DTC highlighted. It also stressed the importance of consultation on its funding as well as an independent assessment.

“The pace of implementation must be consistent with the fiscal resource envelope – detailed implementation plans should be sensitive to human, infrastructure and financial resource constraints,” the committee said. This will ensure risks are “appropriately managed” and that policy objectives of the NHI are not compromised. “There should ideally be a fiscal rule to link NHI spending with the availability of fiscal resources,” the report says the DTC emphasised.

Other recommendations by the DTC show that a combination of tax instruments should be used to fund it. NHI will result in additional public expenditure, which should be financed by tax instruments which are “sufficiently buoyant” to yield a structural increase in revenues, the report indicated. “Given that the NHI introduces a universal benefit, it is appropriate that its financing base be as broad as possible,” the committee said.

The combination of the different tax instruments should be “progressive”. This means that VAT should not be ruled out as a funding source, even if it may be regressive, it will be offset by the “progressivity” of the expenditure side.

The report says most member countries of the Organisation for Economic Co-operation and Development (OECD) rely on personal income tax and social security taxes to fund Universal Health Care. “Social security taxes would have to be introduced at high levels to fund the proposed NHI. Social security taxes cannot be the sole funding instrument in South Africa since, generally, benefits are linked to contributions. This would not be feasible in South Africa since a high proportion of the population is not in regular formal employment.”

A surcharge on Personal Income Tax (PIT) may be preferred to an increase in payroll tax. This is because it is based on income sources beyond labour income, and captures those who are self-employed and is less likely to negatively affect employment. Increasing payroll tax could knock job creation, and lead to informal and unprotected employment, the committee explained.

Excise taxes on alcohol, tobacco or sugar-based beverages are not expected to provide the significant provided by NHI, the committee added. “Given the considerable size of projected funding shortfalls, substantial increases in VAT or PIT and/or the introduction of a new social security tax would be required to fund the NHI.”

The committee also suggested cost-sharing among patients to help manage health-care demand for non-essential services. The poor should be exempt from these out-of-pocket payments. “User charges may also cover services not catered for in the NHI benefit package.”

In the report the DTC also unpacked the rationale behind the NHI. The health fund is designed to provide universal access to quality and affordable personal health services to South Africans based on their needs, irrespective of their socio-economic status. The fund is to be publicly financed and administered to provide a “uniform package” of personal health services to South Africans.

The fund, according to the report, is expected to enter into contracts with both public and private hospitals, specialists, public clinics and private GP practices to deliver health services free of charge to all citizens and legal residents. “Because the intention is that access to health care would be available for free at the point of service, the objective of the NHI in the long term is to ensure that access to health care is determined by an individual’s need, not their financial status and to ensure that everyone has some measure of financial risk protection against catastrophic health events,” the report read.

It would be compulsory for all South Africans to belong to the NHI, and make prepayment to a special fund based on their ability to pay. "The main reason for the NHI put forward by the White Paper lies in the need to eliminate the huge disparities between access to health care services in the public and private sectors,” according to the report.

The report says the DTC noted that there are a number of factors in the NHI and its implementation which would impact decisions around its financing. The DTC believes a discussion on the funding principles is necessary, alongside an independent assessment.

 

The committee released six reports on various aspects of tax administration, including one on NHI. According to Business Day, the report is based on an analysis of the government’s first NHI White Paper, which was published for comment in December 2015 and signed off several months before Health Minister Aaron Motsoaledi released a revised White Paper in June. However, the two white papers contain virtually identical proposals for financing.

The committee expressed concern about the lack of clarity on how NHI would be implemented and operated, saying more details were needed to understand its resource requirements. It consequently stopped short of making firm recommendations on ways of financing NHI, saying to do so would be premature.

The committee sounded a note of caution on the revenue shortfalls projected in the White Paper, which it said were extremely sensitive to assumptions about economic growth.

Econex economist Paula Armstrong said that the report provided a thorough and rational analysis of the NHI landscape. “It doesn’t provide precise detail on how the tax system should be used to generate the revenue required, but this is understandable, given the lack of clarity around NHI.”

Fin24 report Davis Tax Committee report Business Day report

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