+27 (0) 21 887 5678 | admin@econex.co.za

Econex Blog

Home/Econex Blog/The Davis Tax Committee on funding NHI: Spending requirements are large, and trade-offs are unavoidable

The Davis Tax Committee on funding NHI: Spending requirements are large, and trade-offs are unavoidable

By Dr Paula Armstrong & Elize Rich

Yesterday, the Davis Tax Committee (DTC) released its report on financing of the proposed National Health Insurance (NHI) for South Africa. The DTC was established in 2013 by the Minister of Finance with the mandate of investigating the role of the tax system in promoting inclusive economic growth, employment creation, fiscal sustainability and development. On 1 September 2016, the DTC called for written submissions on the funding of proposals set out in the NHI White Paper (at that stage, the latest version of the White Paper was the version published in December of 2015). The report presents the recommendations of the DTC with regard to financing the NHI.

The report explains that a wide range of cost estimates have been put forward for the NHI, and various assumptions around the precise product offering and efficiency estimates drive these cost estimates. Until there is greater clarity around these parameters, “it is premature to be prescriptive on funding mechanisms.“[1] The report also notes the importance of accurate and realistic growth rates in determining a more realistic estimate of funding requirements. In this vein, the general finding of the report is that in the current economic climate, and in its current format, the NHI is unlikely to be feasible.

A key factor in assessing the extent to which funds that currently flow to the private healthcare sector will be directed to the NHI is the extent to which private sector users with medical aid will simply switch to the public sector. The report explains that this depends on many variables and regulations around medical schemes, administrators, health insurance and general regulation around healthcare. Switching to the public sector or NHI depends crucially on the perception of the quality of healthcare under NHI and the private sector, and what this perception means for consumer behaviour. The White Paper assumes that private sector users will happily redirect private sector healthcare spending to the NHI, but the report points out that medical scheme coverage and health insurance amongst private sector users is largely in place to cover catastrophic healthcare expenditure incidents, rather than primary healthcare expenditure.

The report is sensible about the distribution of tax revenue sources, highlighting the importance of including broad based taxes (such as VAT and consumption taxes) as funding mechanisms because smaller increases over this class of taxes would be required to meet funding requirements. The regressivity in the distribution of the tax burden of such taxes (arising from the fact that they are not linked to any measure of income) is justified on the grounds that the benefit of NHI is universal. The report states explicitly that “VAT should not be ruled out as a funding source.”[2] However, the combination of tax instruments used to generate revenue should be progressive. The increases in VAT or personal income tax to fund the NHI would need to be substantial, and it is likely that an additional social security tax would need to be levied. The 2017 version of the White Paper indicates a preference for relying on a surcharge on taxable income and a payroll tax to generate revenue, rather than any scenario relying on increases in VAT – Scenario B.[3]

The report emphasises the need to consider carefully South Africa’s current economic climate in designing any fiscal policy to fund the NHI. “Any revenues raised to fund the NHI should not be earmarked” as this risks the NHI being underfunded, and the DTC propose the establishment of a fiscal rule linking any spending on NHI to available fiscal resources.[4] Critically, the report states that “[the] magnitudes of the proposed NHI fiscal requirement are so large that they might require trade-offs with other laudable NDP programmes as expansion of access to post school education or social security reform.”[5] This reflects the stance of the Medium Term Budget Policy Statement. In the fiscal risk report, the MTBPS explains that “[in] the absence of higher economic growth, several of government’s current policy commitments will need to be revisited because their cost implications appear to exceed available resources.”[6]

Against the background of the extensive research that Econex has conducted on the financing of the NHI in the past, we welcome the findings of the report. It echoes the caution to consider carefully the assumptions informing estimates of cost and the funding shortfall, and provides a sober reality check on the country’s economic situation. There are significant socioeconomic demands on the fiscus at the moment. How government navigates the path of allocating scarce resources between different expenditure programmes will require a fair amount of political skill and economic savvy.

[1] Davis Tax Committee. 2017. Financing a national health insurance for South Africa. p 43. Available: http://www.taxcom.org.za/docs/20171113%20Financing%20a%20NHI%20for%20SA%20-%20on%20website.pdf

[2] ibid. p 44.

[3] Department of Health. 2017. National Health Insurance for South Africa: Towards universal health coverage. White Paper. p 47. Available: http://www.health.gov.za/index.php/component/phocadownload/category/383

[4] ibid. p 43.

[5] ibid. p 44.

[6] National Treasury. 2017. Medium Term Budget Policy Statement 20. p 57. Available: http://www.treasury.gov.za/documents/MTBPS/2017/mtbps/FullMTBPS.pdf

Author/s: Dr Paula Armstrong & Elize Rich

Nothing in this publication should be construed as advice from any employee of Econex and should be seen as general summaries of developments or principles of interest that may not apply to specific circumstances.

2017-11-14T11:26:53+00:00November 14th, 2017|