Pushing up VAT ‘the least damaging way to fund NHI’

An increase in Value Added Tax (VAT) would go a long way in helping to meet the government’s goal of funding an effective National Health Insurance (NHI) within 14 years, experts say.

Several economists who spoke to the Mail & Guardian on Monday feel that raising the tax on all purchased goods would be the most effective way of financing the NHI.

“It is the least damaging way of funding the NHI as our income and company tax is already too high,” says Dawie Roodt, chief economist at the Efficient Group.

These thoughts are echoed by Stanlib chief economist Kevin Lings, who feels the cost burden of a comprehensive health scheme should be borne by the whole population.

“There is no doubt that the government needs to increase its coffers to pay for this and it’s not an unreasonable suggestion, seeing as though all will benefit from NHI — this way everyone will pay,” Lings says.

Consumption drives consumption
Chris Hart, chief economist at Investment Solutions, says the cost of NHI would be significantly offset by raising VAT: it would tie funding to the nation’s ability to spend.

“VAT is driven by consumption, which is exactly what the NHI is. The costs can be offset to a certain extent within the consumptive chain,” Hart tells the M&G.

The comments follow a report in the Times on Monday that the treasury’s is apparently warming to the idea of an increase in VAT.

The department’s chief director of economic tax analysis and tax policy, Cecil Morden is quoted as saying that “a higher VAT rate could be justified on efficiency grounds” and that at 14%, South Africa’s VAT rate is “relatively low when compared to the worldwide average of 16.4%”.

This is the first sign that government is seriously considering the idea of a higher VAT rate. Finance Minister Pravin Gordhan has so far remained mum as to how the scheme will be funded.

It is expected that NHI could cost in the region of R125-billion in 2012 and R214-billion by 2020, according to a government’s green policy paper on the issue released in August.

Based on recent financial data, this would equate to 6% of the country’s Gross Domestic Product (GDP) in 2012.

An NHI pilot project is expected to be launched across the country in 2012, following the conclusion of an audit currently being undertaken at the country’s about 4 200 health facilities. If VAT were to be increased, it would be the first time the tax has risen since 1993 after it was first introduced in 1990, at a rate of 10%, as a substitute to General Sales Tax (GST).

Don’t target the poor
The Congress of South African Trade Unions (Cosatu) is strongly against the idea of raising VAT, as this would put those who are most economically vulnerable at risk.

“It’s something we will continue to have an issue with. The NHI aims at accessibility and affordability but if you rely on VAT, it defeats the purpose by placing pressure on those with the least money. Those who are supposed to benefit will suffer the most,” Cosatu president Sdumo Dlamini tells the M&G.

Dlamini believes that although the NHI has become a non-negotiable goal for government, its cost must never “fall on the shoulders of the poor”.

Hart counters this argument with a suggestion that VAT should only be increased substantially on luxury or non-essential items.

“I don’t see anybody who buys a flat-screen TV having a problem with a portion of the VAT included on the item being increased to fund NHI — so the poor won’t be affected,” Hart says.

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