A top business leader has warned that South Africa’s fiscal and economic challenges pose a threat to the future funding of the mooted National Health Insurance (NHI) scheme — and raising taxes is not the answer.
Expectations are high over what will be contained in finance minister Enoch Godongwana’s budget, to be presented on Wednesday. Questions remain over whether he will continue holding the line on fiscal consolidation, or if he will commit to further spending in an election year.
About R200bn in additional funding will be needed to bankroll the NHI annually, and this could be raised by hiking taxes. The National Treasury is required to present a “money bill” to clarify any new tax amendments, if these are on the cards, to fund further spending, including on the NHI. But neither the status of this bill nor how the mooted health insurance scheme will be funded has been clarified so far.
“It is unclear whether this will be provided in National Budget,” Discovery Group CEO Adrian Gore told Business Times.
Gore said — based on calculations by economists, and with reference to funding sources in the white paper and the NHI Bill, which is yet to be signed into law by the president — there are several ways the additional R200bn could be raised: a 31% increase in personal income tax and raising VAT to 21.5%, among others.
But these approaches are unfeasible, he said.
“Against the backdrop of an extremely narrow and stretched tax base of about 5.2-million registered taxpayers, as well as high unemployment, none of these proposed tax approaches is realistic or achievable.
“We do not believe that increasing the tax burden on a narrow tax base is sustainable.”
Economists have advised the government to stick to prudent choices and not increase spending — which is difficult in an election year.
Old Mutual strategic investment strategist Izak Odendaal said hiking taxes would be problematic, as South Africans — particularly the middle class — were already taxed close to the maximum of what they could endure.
“The likelihood of an increase in VAT or personal income tax rates now seems small. It is still likely that the VAT rate will be hiked later to fund an expansion of social grants or the NHI. Most of the work of fiscal consolidation will therefore have to be done on the spending side.
He expects the Treasury to stick to the fiscal consolidation, as it has political cover from President Cyril Ramaphosa and the cabinet to do so.
“I think they are very aware of the negative long-term consequences of letting debt spiral out of control, one of which is that you are forced to turn to other countries or entities for bailouts, including possibly the IMF. Rather than wait for the IMF to come in and impose austerity, do it now and on your own terms.”
The likelihood of an increase in VAT or personal income tax rates now seems small. It is still likely that the VAT rate will be hiked later to fund an expansion of social grants or the NHI
— Old Mutual strategic investment strategist Izak Odendaal
Odendaal said the finance minister should focus on stabilising debt by running a primary non-interest surplus, which is still on the cards over the medium term, despite further slippage in the current year.
“Given the high levels of transparency in the budgeting process, including an October adjustment of projections and monthly updates on revenue and spending, the market largely knows what it is dealing with.”
He said rising debt meant a growing share of scarce resources was being devoted to interest payments every year.
“This results in a deterioration of the government’s perceived creditworthiness, which means the market charges a higher interest rate to lend to the government, which in turn increases the debt burden. It can become a vicious spiral.”
But independent economist Duma Gqubule said the economy could benefit from an extension of social relief, especially the R350 social relief of distress (SRD) grant. He wants this amount to be raised to the food poverty line, which Stats SA says is R760.
“At Sona [the state of the nation address], Ramaphosa said we were going to improve the SRD grant and extend it. I want them to at least do that. So [they must raise] the amount to the food poverty line. Extend ... means we must reduce some of these conditions,” he said.
Gqubule said a similar stimulus grant in Kenya had showed spin-off effects, in that beneficiaries were spending the funds they had received on productive goods for farming.
“We’ve written many papers on the basic income grant, and the studies from Kenya showed that the stimulus effect was much higher than we are getting in South Africa. If you’ve been to Kenya [you will see] they don’t have the big retail situation,” he said.
However, a researcher at the Institute for Economic Justice (IEJ) was not hopeful a basic income grant (BIG) would be introduced.
“We expect to hear the minister again repeat the incorrect claim that the grant is not affordable ... [and to hear] warnings that the Treasury will cut other essential programmes if the government further extends the SRD or transitions it into a BIG. [Alternatively, the minister] may even suggest that VAT could be increased,” said Kelle Howson, senior researcher in labour and social security at the IEJ.
Howson said there were routes to fund a BIG that would not require additional taxation, including raising money by cutting wasteful expenditure and leveraging South Africa’s gold and foreign exchange reserves.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.