No money = no free fees, no health aid

Discussing how to fund free higher education, or even the long-mooted National Health Insurance (NHI), seems a lot like rearranging the deck chairs on the Titanic.

The economy has hit the proverbial iceberg — there is no growth and little money, even for damage control, the expenditure ceiling is about to be breached and additional demands on the state coffers continue. One gets the sinking feeling that it’s about to go down.

The Davis tax committee has, however, been tasked with looking at how the tax system can possibly accommodate these demands on the fiscus.

Speaking to the Mail & Guardian after the release of six reports this week, committee chairperson Judge Dennis Davis explained the committee’s findings on how higher education could be funded.

“Our priorities should be to start off with the poorest of the poor and work your way up. There isn’t enough money, perfectly obviously, for other priorities, whether they be health, whether they be infrastructure, whether they be social grants, or whether they be other key areas of social good.”

The committee was established in 2013 by the minister of finance to explore the role of the tax system in promoting inclusive economic growth, employment, development and fiscal sustainability. Part of its mandate is to evaluate proposals to fund projects that will grow the economy.

The reports published on Monday also looked at the financing of the NHI, base erosion and profit-shifting in South Africa and global reform, hard-rock mining, oil and gas, and tax administration.

Following the #FeesMustFall movement, the Heher commission was established to look into the feasibility of free higher education and training. When the commission released its interim report, the Davis tax committee offered to put together its own views for the finance minister.

“We sat down over two weeks, myself and two economists … and debated this in earnest and came up with this report, which sadly just gathered dust.”

Released just an hour before the long-awaited 750-page Heher report on Monday, the committee’s comparatively short eight-page report (which was handed to then finance minister Pravin Gordhan last year) came to remarkably similar conclusions.

“We say, there simply isn’t the money. It’s a retrogressive step to pay in full for all tertiary or higher education … technical colleges and grade  R [otherwise grade 0 in primary school] should be a priority if you are talking about transformation.”

To fully fund free higher education would cost up to R60-billion extra a year, the Davis report noted. It would also be regressive as it would disproportionately advantage those from wealthy households.

“If you take the idea of middle-class people, who actually in the South African context aren’t as bad [ly] off and fund them at the expense of the other issues, that really is criminal,” Davis said.

The report, dated October 2016, was released following permission from Finance Minister Malusi Gigaba. Davis said: “I’m very happy he has done it … they have been sitting there and, much to our frustration, waiting for a very long time.”

But, considering the deteriorating economic environment, he said the report was perhaps even more relevant now.

The Davis report suggested the maximum amount of additional funding for free higher education should be R15-billion. The committee said this could be raised by increasing the top marginal personal income tax rate for individuals by 1.5 percentage points (to bring in an additional R5.1-billion); by increasing the capital gains tax rate for corporates from 80% to 100% (to yield an additional R1.4-billion); and by increasing the skills development levy by 0.5% (to yield an additional R8.8-billion).

Why R15-billion? “Because we don’t think there is more to be raised,” Davis said. Anything more than that would either damage the economy, or should be used for other purposes. Overall, “where is it going to come from?” he asked.

Davis said the committee did not agree with the Heher commission’s proposal to draw funds from the Unemployment Insurance Fund, which is in surplus, but which is meant to be ring-fenced. “I think it’s incredibly irresponsible. When you start doing it for one thing, you start doing it for others.”

Davis agreed the definition of a poor household, as defined to qualify for state-funded financial aid, should definitely be raised from the “ridiculous” threshold of R125 000 a year, he said.

“But, beyond that, we have to have some imperfect schemes, like a loan scheme. There simply isn’t another way to do this when we need to balance what I think are more pressing issues with regard to poor people.”

But Davis said one could think creatively about how a loan scheme could be implemented. For example, students who go into the public sector or designated areas, such as doctors working in rural areas, could have their loans written off. Those who move into big firms and corporates would have to pay their loans off.

Any loan scheme would need to be supported by the government in the form of guarantees and debt — but the state is unlikely to be able to support it at this time.

Referring to the NHI, which Davis believes is even more important that free higher education, he asked: “How are you going to afford that? Frankly, if we are going to spend so many billions on tertiary education now, forget it — it’s not going to happen.”

The Davis tax committee report on the NHI attempted to answer the question about funding the whole scheme. “We think it can’t happen anyway. We are not sure; we find the funding models very difficult to understand.”

The White Paper on the NHI proposes implementation in 2025, requiring a R256-billion a year funding increase in the health budget, at 2010 prices, with a funding shortfall of about R72-billion, assuming real average growth over the period of 3.5%.

But the Davis tax committee said the additional cost a year could be substantially more than that, noting that the projected shortfall is highly sensitive to the economic growth rate.

Because it is struggling to get a good grip on the implementation cost of the NHI, the committee did not make any firm recommendations on funding. But it did state that, because the NHI would be a universal benefit, it would be appropriate for its financing base to be as broad as possible in the interests of social solidarity. The cumulative effect of the combination of tax instruments should be progressive, the report said, noting increases in VAT should not be ruled out as a funding source.

The Davis tax committee is yet to publish a report on VAT. But to plug the R50-billion revenue hole, it might be the most viable solution. It would, however, be retrogressive in nature, Davis said. “It is an awful compromise, it is not a satisfactory one but … it may be our only alternative.”

The committee’s NHI report suggested the regressive nature of VAT could be offset by a progressive way in spending it.

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