The absurd tax changes South Africa would have to make to afford the NHI

 ·18 Aug 2023

Recent data shows how illogical the government’s plan to implement universal healthcare in South Africa is when considering the country’s financial situation and how they expect to fund the National Healthcare Insurance (NHI) Bill.

The National Assembly passed the NHI Bill in June 2023, bringing the laws that will lay the foundation for the government’s ambitious promise of free healthcare one step closer to reality.

The bill still has to make its way through the National Council of Provinces before being sent to the president to be signed into law.

Health minister Joe Phaahla noted that “the people of South Africa would have access to the same clinic or hospital – either public or private – closer to where they live or work without paying – the government will pay.”

Phaahla made it clear that one way or another, taxpayers will be footing the bill. “All of us will contribute to this fund through taxes and special contributions in line with what we can afford,” he added.

Of course, when the minister says that the government will pay, he means that taxpayers will pay – and one of the biggest questions hanging over the controversial scheme is how exactly this will be done.

According to a report by the Solidarity Research Institute (SRI), South Africa’s National Health Insurance (NHI) plan requires an additional R295.93 billion, which the country’s strained budget and taxpayers cannot afford.

South Africa currently has a budget deficit of 4.2%. However, the report noted that HSBC believes it will be 5.1%, and Moody’s predicts a 5.6% deficit due to lower-than-expected tax revenue and a higher-than-expected salary adjustment for public servants.

In 2023, debt servicing costs will consume R340.5 billion of the national budget, which is over 17% of state revenue.

The report stated that middle-income countries like South Africa typically spend around 6% of their GDP on healthcare, including both state and private sector spending. In 2020, South Africa spent approximately 8.6% of its GDP on healthcare.

“The state usually budgets between 4% and 5% of GDP for health. For 2023, the proportion is a meagre 3.9%,” the SRI said. “This indicates a budget that is under severe pressure.”

Absurd tax implications

The report states that if NHI were to be implemented today, there would be a budget deficit of R181.95 billion. 

“The fact of a decrease from 2022’s assumed figure actually underlines the unaffordability of the NHI because it stems from the failure of the Treasury to properly adjust the health budget this year.” 

“Looking at 2026 – the year in which the NHI is supposed to be implemented – an enormous extra R295.93 billion will be required in order to balance the books.” This means healthcare would be the biggest item in the South African budget by far, at a total cost of R659.35 billion.

“This is unheard of for a middle-income country, where spending on education usually enjoys the highest priority. While more affluent countries spend more on healthcare, social grants usually receive the highest priority, never health,” said the SRI.

The report found that R295.93 billion could theoretically be generated by abolishing the medical tax credit (about R30 billion) and levying the following taxes: 

  • A 40% surcharge on income tax 
  • Increasing VAT from 15% to 22%
  • A payroll tax of 13.4%
  • Increasing corporate income tax from 27% to 45% 
  • A combination of these 

“In real terms, none of these is possible because the South African taxpayer is already overtaxed. These theoretical suggestions serve for illustration only and to demonstrate their absurdity.

Tax revolt

The SRI’s findings agree with those of Discovery Health CEO Ryan Noach, who said earlier this year on BizNews TV that implementing the NHI Bill in its current form would result in a tax revolt.

Discovery Health CEO, Ryan Noach.

Noach noted that due to the unavailability of accurate figures, it is very hard to determine the true cost of the NHI to South African taxpayers.

“Treasury has not calculated how much the NHI will cost. The only number in the public domain is R200 billion, provided by the Department of Health,” he said. “In reality, it is double that.”

Discovery’s estimates align with those from Intellidex’s Peter Attard Montalto, who estimates the NHI cost to be anywhere between R300 billion and R460 billion a year. However, for practical reasons, Discovery Health used R200 billion as a guide in calculating conservative tax increases to fund it.

According to Professor Roseanne Harris’s research, Discovery Health indicated that the following increases are necessary to generate an additional R200 billion for NHI.

  • Increase VAT from 15% to 21.5%.
  • Increase personal income taxes by 32%.
  • Implement a payroll tax equivalent to ten times their current UIF contributions.

The report noted that it is also possible to use a combination of VAT, personal income taxes, company taxes, and payroll taxes to fund NHI. However, the effect is similar.

“These big tax increases will only get the government to around 50% of what the NHI requires,” said Noach.

“These three scenarios are entirely unfeasible. You don’t need to understand that there will be a tax revolt. You will never raise it,” he added.

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