NHI will chase taxpayers out of South Africa

Implementing the National Health Insurance (NHI) Bill in its current form will require significant personal income tax hikes and increased value-added tax (VAT). This will push South African taxpayers to leave the country and others to stop working. 

This is feedback from Dr Paula Armstrong from FIT Consulting, which released a study outlining the tax hikes needed to fund the NHI. 

As South Africans wait for President Cyril Ramaphosa to sign the NHI Bill into law, finance experts have warned that the scheme is not economically viable as it requires substantial funding sources.

“While everybody agrees that the country’s healthcare system requires reform and that this should provide access to universal health coverage, the NHI Bill, in its current form, is not economically viable for South Africa,” FTI said.

“The Department of Health, in its 2017 White Paper on the NHI and the NHI Bill, has flagged sources such as VAT, personal income tax and payroll taxes for raising additional funding.”

A presentation by the Department of Health indicated that in addition to public funds that can be allocated to an NHI Fund, an additional R200 billion will be raised. 

FTI clarified that the additional tax amount indicated by the government is not the total cost of the NHI, as it will probably need much more to implement fully. 

To raise the R200 billion required each year for the NHI, assuming that the number of taxpayers and their spending remains constant, will need a –

• VAT increase from 15% to 21.5%
• Personal income tax rates increase by 31% across the board
• A payroll tax on those employed in the formal, non-agricultural sector of an estimated R1,565 per month

“We do not think increases like this will happen,” Armstrong told Classic Business. “We do not think the NHI will be funded from one tax source, but we are showing the size of the increases needed.”

The Health Department has indicated that it would prefer a combination of hikes to personal income tax and VAT and the transfer of private medical scheme contributions to the NHI Fund. 

Armstrong said implementing such extreme tax hikes, no matter the combination, would have disastrous effects on South Africa. 

“I think you would see the tax base shrink even further. We will see more emigration than we see at the moment,” she said. 

Furthermore, if there are steep hikes to personal income tax rates, people will want to work less and retire early as there will be less benefit to working more. 

“People will work less and retire early as the return to their income from more work would be so low after tax that it would not be worth their while to work longer or harder.” 

And so, the government has very little scope to raise taxes without widespread negative effects, and the National Treasury is aligned with this view. 

In the Budget presented last week, only R1.4 billion was allocated towards the NHI, and the Treasury made it clear that there is much work to be done to improve public sector healthcare before an NHI Fund can be created. 

Finance Minister Enoch Godongwana has previously said the Health Department must focus on fixing the existing public healthcare system before it implements the NHI.