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NHI roll-out will deliver benefits – KPMG study

07 November 2011 KPMG

Positive economic effects could outweigh cost of funding

The benefits that increased health expenditure could have on economic output could outweigh the negative economic impact of increases in taxation proposed to fund National Health Insurance (NHI). The potential increase in the productivity of the South African workforce through improving their health, could increase South African GDP per capita by between R1500 and over R2000 over the period 2012 - 2020, according to professional services firm KPMG. This is the equivalent of a net increase of 0.2 - 0.3 percentage points in the GDP growth rate. Funding the NHI: A spoonful of sugar? is based on cost estimates set out in the Government’s policy paper on NHI and tax proposals that could be designed and introduced to meet funding requirements.

However, a critical factor to realise the economic benefits of NHI will lie in its efficient implementation.

“Contrary to what has often been argued, our study shows that the long-term economic benefits of investing in healthcare could outweigh the costs of funding NHI through taxes,” says Sven Byl, KPMG’s Head of Healthcare. “Improving the health of the labour force could result in increased productivity and could lead to GDP growth above what is estimated without the introduction of NHI. Our calculations take into account the costs of funding the health insurance system.”

The introductory phase of the NHI will require R140.5 billion from 2012 to 2025, or R10.4 billion per annum over and above existing fiscal allocations. Options considered by KPMG to meet NHI funding requirements were based on an increase of 1.1 percentage points in the average personal income tax rate and a 0.8 percentage point increase in Value Added Tax (VAT). This reflects the choice of tax mechanisms discussed in the Government’s policy paper on the NHI.

In addition to these sources of funding, KPMG also considered an increase in sin taxes as a potential source of funding. Revenue collected from sin taxes would have to increase by 46% in order to fund NHI. In simple terms, this would mean that a box of 20 cigarettes would cost R4.47 more, a bottle of unfortified wine R0.80c more and a bottle of spirits (40% alcohol) R12.82 more.

Although KPMG is not arguing for specific tax increases, these increases appear a lot more accessible than is often imagined, says Byl.

To illustrate economic growth in South Africa, KPMG modelled two scenarios where the increase in taxes is combined with a conservative 10% increase in productivity. KPMG also assumed the increase in productivity would only come into effect from 2018 onwards, although the tax increases are assumed to kick in from 2012 onwards. In these scenarios, annual growth in GDP (between 2012 and 2020) has been projected to average 4.8% where a VAT increase is the source of funding, or 4.9% where an income tax increase is the source of funding. The baseline model places GDP growth at an annual average of 4.6% for the same period without the introduction of NHI.

“The positive impact on per capita GDP in real terms is also significant,” says Lullu Krugel, Associate Director and Senior Economist at KPMG. “It could mean an improvement in per capita GDP of about R1500 in the income tax scenario and over R2000 for the VAT scenario over the same period. Against a baseline GDP per capita of approximately R53000, these increases would be significant.”

Assessing the two approaches proposed by government, the study found that the negative economic impact created by increasing VAT is marginally less than that created by increasing income taxes. This could be attributed to the impact that an increase in personal income taxes has on the take-home pay of those employed and their subsequent lowered consumption expenditure. In addition, the VAT option is easier to administer and less costly than the income tax approach. However, the potentially regressive nature of VAT should also be taken into consideration in choosing the final funding option.

The speed with which the positive impacts of the interventions could be felt could present a number of challenges, however. “The speed of implementation is critical, but the quality of the intervention is just as significant,” says Byl. “Issues of capacity in the healthcare system have to be addressed urgently, as is well known. But easing the bottlenecks that prevent access to existing healthcare also has to be a priority alongside capacity-building.”

The study also identified other factors that need to be considered by government to enhance NHI quality and efficiencies. These include the flexibility of the tax regime to accommodate broader economic fluctuations and the efficiency of the intervention which should offset revenue generation against administrative, collection and compliance costs.

“An additional potential constraint closely linked to efficiency is equity,” says Krugel. “Not only must the tax system promote a fair distribution of benefits, it must be seen to be doing so. If this is not the case, taxation could have a negative impact on the behaviours of tax contributors and impede the realisation of the benefits identified in our study.”

“There is a misperception that the NHI is simply about costs to the economy,” maintains Byl. “This idea does not take into account that the NHI is a long-term investment in our workforce and an enhanced quality of life. In other words, there are positive financial and social multiplier effects. We hope that this study goes some way towards addressing the misconception that funding the NHI is a burden to the fiscus and the taxpayer.”

For the full copy of Funding NHI: A spoonful of sugar?, visit http://www.kpmg.com/ZA/en/WhatWeDo/Industries/Healthcare/Pages/default.aspx

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