This is what the NGV will cost

Henry

By Theuns du Buisson

The National Health Insurance (NHI) will cost approximately R660 billion per year. If we subtract from that the budget already budgeted for the public health sector, this means that the state will still have to get about R300 billion from somewhere.

This amount is only what it will cost in the first year of full implementation. There is no way to predict where it will go from there. Foreign countries do offer indications of what happens when “free” health care takes up the entire national budget.

We can therefore start with the number that is certain. What must the state do to collect an extra R300 billion? It is well known that the South African taxpayer is already overburdened and moreover receives less services for their taxes than is the international norm. In South Africa there is therefore an extremely large focus on redistribution where taxes are collected to distribute that money to other people, who do not pay taxes. This redistribution can be in the form of services or direct grant. The NGV Act aims to do exactly that.

To finance the extra R300 billion required for this, the NGV Act proposes a few options, including a top tax (income tax surcharge), a VAT increase or a payroll tax. Other options are also to increase corporate income tax.

A top tax means that the government looks at how much income tax you already pay, and then levies a tax on it. Such a tax will amount to 40%. VAT will have to increase from 15% to 22%. If the government decides on company income tax, the rate will have to rise from 27% to 45%. At least there are still few indications that they would choose the VAT or company tax routes.

The type of tax that is most seriously considered is a payroll tax. This will amount to approximately 14% and will apply to everyone who earns an income. This then puts an end to the progressive tax system that South Africa has in that even a minimum wage worker will suddenly have to pay this 14% income tax. A payroll tax is simply an income tax that is collected in another way.

This is also just the beginning. If there are no longer barriers to access to private health care, and it is possible for all people to always obtain such care, there is no limit to what it can cost. It will end up taking up the entire budget. Cuba has a similar system and that is about all they have in terms of public services. After funding their elaborate health care system, the money runs out.

Nor is it just ash heap countries like Cuba that cannot operate such systems. In Britain and Canada, national health care is a major point of contention every year when the national budget is drawn up. Spending on health care becomes an ever greater expense and the care becomes ever weaker, because doctors do not want to work under the state’s rigid hand.

It will happen here too. An additional tax of 14% will, together with the already existing income tax, mean that those who are taxed at the highest level will have to hand over an absurd 59% of their income to the state. Most middle class earners’ effective tax rate is around 26%. To finance the NGV it will have to rise to 40%.

The people who will be worst affected by this are people who currently earn too little to qualify for income tax. Suddenly they will now also have to pay a tax of 14% for health care which they currently get for free in the public sector.

It should at least take a few years to get to this point. We can expect that medical aid tax credits will come to an end next year with the start of the new budget. Taxes will then be systematically introduced and increased. Upon full implementation, you will then pay the 14%, as mentioned above, and still have to see how it continues to soar every year unless Solidarity’s legal battle is successful and our proposed adjustments for a more fair and affordable health care system are approved and applied.

  • Theuns du Buisson is an economic researcher attached to the Solidarity Research Institute.