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The government might raise value-added tax to fund its national health insurance scheme.
September, 12th 2011

The government might raise value-added tax to fund its national health insurance scheme.

The Treasury's chief director of economic tax analysis and tax policy, Cecil Morden, said at the annual meeting of the Government Employees' Medical Scheme last week that "a higher VAT rate could be justified on efficiency grounds".

An all-round increase in VAT would inflate the prices of food and other products, which would have dire consequences for the poor.

Finance Minister Pravin Gordhan has been tight-lipped about how a national health insurance scheme would be funded.

Morden said that "a higher VAT rate could be justified on efficiency grounds".

He said that South Africa's 14% VAT rate is "relatively low when compared to the worldwide average of 16.4%".

Though Morden warned that it was important to keep "an appropriate balance" between taxes, he said that "a consumption tax [such as VAT] is less distortionary" and has a "relatively broad [taxpayer] base".

"[VAT] ensures that those who manage to escape the income tax net pay some tax," he said. "[VAT] does not impact on savings negatively or on the cost of employment."

The Treasury has suggested four national health insurance "funding avenues", including tax, mandatory employer contributions, user charges and public-private partnerships.

Morden cited Ghana, which uses VAT to pay for its national health insurance scheme. Ghana's Revenue Authority has projected that a 2.5% consumption tax, known as the "NHIS levy" will fund 60% of that country's universal healthcare scheme.

But international aid organisation Oxfam has warned that the Ghanaian model, promoted by the World Bank, is "severely flawed".

Oxfam's health policy adviser, Anna Marriott, said: "It's time for the World Bank to ... stop promoting an inequitable health insurance system to other developing countries."

The Treasury's chief director of communications, Bulelwa Boqwana, said: "No decision has been made on which [health insurance funding] option or combination of options will be implemented".

Boqwana said that "no rate increase for any of these options can be announced at this stage."

Unions have warned against increasing VAT. Cosatu spokesman Patrick Craven said that VAT was "a very unprogressive tax" and that the rich should be taxed more than the poor. Cosatu will "consistently oppose" an increase in VAT, Craven said.

Rhodes University tax professor Matthew Lester said that Morden "seems to be favouring VAT" but any suggestion of raising VAT would cause an uproar by the unions.

He suggested that a carbon emissions tax and company tax, though unpopular, would be preferable to increasing VAT, which he described as a "holy cow" of the unions.

Company tax, personal income tax and VAT contribute 20%, 34% and 27% of South Africa's tax revenue respectively.

The projected costs of a national health insurance scheme are likely to change. Morden's presentation showed that the Treasury expects an R18.5-billion shortfall in health funding next year.

Health Minister Aaron Motsoaledi has set out standards healthcare facilities must attain to qualify as national health insurance scheme providers.

The Department of Health is auditing all 4200 public health facilities in the country. About 800 had been audited by July.

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