NHI could mean uncomfortable trade-offs, Davis Tax Committee warns

Health minister, Aaron Motsoaledi

The committee, headed by Judge Denis Davis, released six reports on various aspects of tax administration.

"The magnitudes of the proposed NHI fiscal requirement are so large that they might require trade-offs with other laudable NDP (National Development Plan) programmes such as expansion of access to post-school education or social security reform," said the report dealing with NHI.

The report is based on an analysis of the first NHI White Paper, published for comment in December 2015, as it was signed off several months before health minister Aaron Motsoaledi released a revised White Paper in June.

However, the two White Papers have virtually identical financing proposals.

The Davis committee expressed concern about the degree of uncertainty surrounding how the NHI will be implemented and operated, saying more details were needed to understand its resource requirements.

It consequently stopped short of making firm recommendations about how to finance NHI, saying to do so would be premature.

However, it said substantial increases in VAT or personal income tax, possibly along with a new social security tax, would be required to fund NHI.

Revenue raised to fund NHI should not be earmarked, as that risked under-funding, it said.

The committee sounded a note of caution over the revenue shortfalls projected in the White Paper, which it said were extremely sensitive to assumptions about economic growth and could substantially underestimate the funding gap for NHI if the economy faltered.

The 2011 White Paper estimated the revenue shortfall would be R71.9bn in 2010 prices by 2025-26 if the economy grew at 3.5%, and R108bn if economic growth slowed to 2%.

More recent real growth forecasts published by Econex arrived at a revenue shortfall of R111bn in 2010 prices by 2015-26.

"Given the large amounts at stake, it would be critical to mange the fiscal risk by linking expenditure outlays to available fiscal resources. Credible cost scenarios play a pivotal role and their absence could compromise the goals of NHI," it said.

"There should ideally be a fiscal rule to link NHI spending with the availability of fiscal resources," it said.

The White Paper says increased personal income tax, higher VAT, a surcharge on taxable income, and a reduction in the medical tax credits are all possible tax mechanisms for funding NHI.

The committee noted that the per-capita value of the medical tax credits - which are claimed by taxpayers who belong to medical schemes on behalf of themselves and their dependents - was similar to the government's per-capita spending on public healthcare.

It said the financing base for NHI should be as broad as possible and the cumulative effect of the combination of tax instruments should be progressive.

It conceded that increased VAT might be a regressive measure, because it would disproportionately affect poorer people, but said this would be offset by the progressive nature of expenditure on NHI.