Problems with the NHI: Why it cannot work

2018-06-22 08:53

So, recently Health Minister Aaron Motsoaledi announced proposals surrounding the long-anticipated National Health Insurance (NHI), designed to bring free universal healthcare to South Africans.

Although improving the current state of the public health sector is necessary, and the ideal of universal healthcare is a noble cause, this article will argue that implementing the NHI at this stage is impractical.

The most fundamental hurdle that the NHI currently faces is that it is simply unaffordable. South Africa, under Cyril Ramaphosa, had recently been on a drive to cut government expenditure. Halving the size of the Cabinet and mandatory lifestyle audits for all ministers had been some of the plans proposed to this end. The goal is to reduce South Africa’s debt and budget deficit. South Africa’s debt to GDP ratio was estimated to be 51,6% in 2016 and it is highlighted as a major risk facing the country’s economy by credit rating agencies, among others. To service this debt, which mean paying interest on the debt, the state estimates that it would have to spend 15% of its total revenue on it in the 2020/21 financial year. This is revenue that could have otherwise gone to social or economic spending. The state should attempt to limit its debt in order to free up revenue that would have otherwise been spent on debt servicing costs.

Within this context, the Davis Tax Commission calculated that the NHI will cost R265 billion annually. In the recent discussion of the bill it was unclear how the NHI will be financed. Dr Motsoaledi himself trotted out the generic answer that the rich will subsidise the poor, or that the rich will be taxed to fund the NHI. While this is a politically easy answer to give, the reality of it is more complicated.

The ‘rich’, defined here as those in the top tax-bracket, are required to pay 45% of their income annually in income tax. This is some of the highest income tax rates in the world, and even with these rates the state is struggling to close their budget deficit. In addition to that, it is estimated by Business Tech that the top 1% of tax payers already pay 61% of the tax in South Africa. Levying any more taxes on the rich would risk losing them, and their skills and capital, to foreign markets, which would contribute to South Africa’s already crippling brain-drain. Given these statistics, it would also be hard to argue that the rich are not currently paying their ‘fair share’ of taxes.

Doing the rudimentary maths also shows that the NHI cannot solely be funded from the top tax bracket. There are an estimated 480 000 South Africans earning more than R750 000 a year, which would place them in the top tax bracket. For the sake of argument, let’s assume that all of them earn R1,5 million a year and that they can be taxed by 100%. In this scenario, R720 billion of revenue could be generated from them. This would be enough to fund the NHI, but obviously this is an extremely idealised scenario.

Taxing a person by 100% is the surest way to get a person to quit their job, since they would essentially be working for free. Not all people in the top tax bracket earns R1,5 million a year, and the above calculation does not allow for the 45% of tax already paid by those in this bracket. More realistically, the revenue that can be generated by the rich is almost exhausted, and to rely on them to fund the NHI would require exorbitant tax rates, on top of the current high tax rates paid by them.

The ideals of the NHI are noble, and it is a policy that should be considered in the future. At the moment, however, the NHI would be a major burden on the state’s revenue, precisely when the state is attempting to fix its debt issue. Funding the NHI through the proposed measure of taxing the rich risks causing an exodus of the rich and revenue tapped from them would not be sufficient to close the funding gap even if they were to stay and pay a higher tax rate. At the moment, the focus should be on clamping down on wasteful expenditure and corruption within the public health service, in order to assure that the funds currently allocated to it goes further.


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