A recently released report commissioned by organised business has outlined the massive tax increases that will be required to fund National Health Insurance (NHI) – revenue that will somehow have to be generated despite low economic growth and rising unemployment.
The Department of Health, in its 2017 White Paper on NHI and the NHI Bill, flagged sources such as value-added tax (VAT), personal income tax (PIT), and a payroll tax for raising additional funding, and in a presentation in December 2022, the department said it would need to raise an additional R200 billion a year to fund NHI.
The R200bn is in addition to the public funds that could already be allocated to the NHI Fund, the report by FTI Consulting said.
For context, R200bn is equal to 12.8% of South Africa’s current gross tax revenue, or 36.1% of PIT, or 62.4% of corporate income tax, or 51.2% of VAT.
FTI said no details are available about the NHI benefit package, the cost of the NHI, or how these funds will be raised, so it focused on the R200bn “only as an illustrative value”.
The report said that to raise R200bn in the current fiscally constrained environment, and assuming the number of taxpayers remains constant, will require:
- a VAT increase from 15% to 21.5%; or
- an across-the-board increase of 31% in the rates of PIT; or
- a payroll tax of about R1 565 a month on those employed in the formal, non-agricultural sector.
The report said increasing the VAT rate to 21.5% would have massive ramifications for the poor and the economy as was demonstrated in 2018 when the VAT rate was increased by one percentage point.
A 31% increase in PIT will result in reduced spending, which will reduce companies’ income and ultimately lead to job losses, which will lower the PIT collected. “This may take a year or two to ripple through the economy, but with such a significant change, it will happen fairly quickly, not just within a month or two like the change in behaviour following a VAT increase,” FIT said.
Regarding the option to collect R200bn as a payroll tax, the report said if all working persons (formal and informal) contribute, the tax is about R1 072 a month. If only those employed in the formal, non-agricultural sector contribute, it is about R1 565 a month.
The Minister of Health will not have the authority to raise taxes once the NHI Bill is signed into law. Raising taxes requires a Money Bill, which is the domain of National Treasury, which will take account of fiscal constraints, including the pressure for other social security projects, FTI said.
Tax increases will have a knock-on effect
The report notes that although taxes could be increased to generate the required funds, it is important to consider that each adjustment to a specific tax rate will impact on the number of taxpayers and their spending behaviour.
“The Laffer curve shows the relationship between tax rates and tax revenue, whereby beyond the inflection point increasing the tax rate will result in less taxes being collected. Hence, while the maths allows one to increase the tax rate to arrive at R200bn (keeping the number of taxpayers the same, etc.), the nuance regarding the knock-on effects and unintended consequences of the tax increases is also important to consider.
“In all, though, the point still stands that funding the R200bn is going to require massive changes to tax policy which the fiscus cannot necessarily accommodate,” FTI said.
The South African Revenue Service reports that the number of taxpayers has decreased between 2018 and 2021. Based on data published in the entity’s Tax Statistics 2022 Highlights document, the total number of taxpayers assessed declined from close to 5.9 million in 2018 to 5.5 million in 2021.
According to Ernst & Young chief economist Angelika Goliger, the 5.2 million individuals who made up the PIT in 2020 represented about 9% of the South African population. This 9% of the population contributed 40% of South Africa’s total tax revenue in 2020.
“South Africa’s tax burden falls on a diminishing tax base, limiting the capacity to increase taxes. Coupled with South Africa’s subdued economic prospects, the ability to raise taxes is constrained,” FTI said.
It said high and rising levels of unemployment, coupled with declining earnings, erode a tax base that is already under considerable pressure.
The short-to-medium-term outlook for economic growth was fraught with downside risk and uncertainty that continues to weigh on the private sector and broader economy.
Disposable income tracks GDP, and the decline in disposable income during 2020 was greater than during the 2007 to 2009 global financial crisis. Despite a rebound from the low base in 2021, disposable income growth again decelerated in 2022, the report said.
