Raising domestic resources for health Can tax revenue help fund Universal Health Coverage? • RESYST has generated new evidence showing that governments in South Africa, Kenya and Lagos State in Nigeria have increased domestic tax revenue by expanding the tax base and improving the efficiency of tax collection systems. • In Kenya and Nigeria, specific efforts have been made to reach the informal sector by taxing small businesses in Kenya and reaching informal trade associations in Nigeria. • In all three contexts, powerful politicians gave support to tax policy reforms and the tax collection agencies, and this led to additional funding for their operations and strengthened human resource capacity. • In South Africa, despite achievements in raising tax revenue, the share of government spending allocated to the health sector did not increase, partly because, in a quasi-federal context, it was unable to convince the Cabinet and Treasury of its effectiveness. • A critical challenge for Ministries of Health is to find ways to make a better case for health during budget negotiations so as to expand their share of government spending. • International actors, including WHO and donor organisations, have a role in helping Ministries of Health to develop the technical and analytical capacity to effectively advocate for health and demonstrate the benefits of Universal Health Coverage. Key points POLICY BRIEF 2 | Financing research theme January 2015 For countries that aspire to achieve the goal of Universal Health Coverage, the question of how to increase funding for health is of fundamental importance; external sources such as donor funding can be unstable and unsustainable, and insurance schemes often exclude the most poor and marginalised populations. Ensuring ‘health for all’ requires substantial increases in funding from domestic sources in a sustainable and equitable manner. One way of increasing revenue is through improved tax collection and larger total government budgets. Recent evidence from South Africa, Kenya and Lagos State in Nigeria, shows that it is possible to increase tax revenue without raising tax rates. What has been more challenging however, is ensuring that this additional revenue is allocated to the health sector. This brief outlines how the countries increased tax revenue and identifies common factors across contexts. It then uses the South African experience to explore whether the health sector benefited from additional tax revenue. The brief concludes with recommendations for health sector officials about how to negotiate more successfully for additional resources to be spent on health. R670bn government revenue in 2010/11, up from R300bn in 1994/95 35% 28% 1999 2008 Corporate tax rate Income tax payers 2.6m in 1998 4.1m in 2008 to 200 400 600 Rand billion (real 2010 prices) 0 Fiscal year 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 30 20 10 % of GDP 25% target tax-GDP ratio Figure 1: Total government revenue in South Africa, 1995-2011 How did countries increase tax revenue? South Africa Since the end of apartheid in 1994, South Africa has more than doubled total government revenue in real terms (see figure 1). What makes this success particularly striking is that it was achieved as new tax policies decreased rates for individuals and companies. Strong economic growth is a key factor explaining the rise in tax revenue and the increase in the proportion of tax FY 1995 FY 2012 40% 14% 26% 20% 34% 24% 26% 16% Personal income tax Company income tax VAT Other Figure 2: Sources of tax revenue revenue collected from companies shown in figure 2.
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Raising domestic resources for health Can tax revenue help fund Universal Health Coverage?
• RESYSThasgeneratednewevidenceshowingthatgovernmentsinSouthAfrica,KenyaandLagosStateinNigeriahaveincreaseddomestictaxrevenuebyexpandingthetaxbaseandimprovingtheefficiencyoftaxcollectionsystems.
• InKenyaandNigeria,specificeffortshavebeenmadetoreachtheinformalsectorbytaxingsmallbusinessesinKenyaandreachinginformaltradeassociationsinNigeria.
• Inallthreecontexts,powerfulpoliticiansgavesupporttotaxpolicyreformsandthetaxcollectionagencies,andthisledtoadditionalfundingfortheiroperationsandstrengthenedhumanresourcecapacity.
• InSouthAfrica,despiteachievementsinraisingtaxrevenue,theshareofgovernmentspendingallocatedtothehealthsectordidnotincrease,partlybecause,inaquasi-federalcontext,itwasunabletoconvincetheCabinetandTreasuryofitseffectiveness.
• AcriticalchallengeforMinistriesofHealthistofindwaystomakeabettercaseforhealthduringbudgetnegotiationssoastoexpandtheirshareofgovernmentspending.
• Internationalactors,includingWHOanddonororganisations,havearoleinhelpingMinistriesofHealthtodevelopthetechnicalandanalyticalcapacitytoeffectivelyadvocateforhealthanddemonstratethebenefitsofUniversalHealthCoverage.
Key points
POLICY BRIEF 2 | Financing research theme January 2015
ForcountriesthataspiretoachievethegoalofUniversalHealthCoverage,thequestionofhowtoincreasefundingforhealthisoffundamentalimportance;externalsourcessuchasdonorfundingcanbeunstableandunsustainable,andinsuranceschemesoftenexcludethemostpoorandmarginalisedpopulations.Ensuring‘healthforall’requiressubstantialincreasesinfundingfromdomesticsourcesinasustainableandequitablemanner.
Onewayofincreasingrevenueisthroughimprovedtaxcollectionandlargertotalgovernmentbudgets.RecentevidencefromSouthAfrica,KenyaandLagosStateinNigeria,showsthatitispossibletoincreasetaxrevenuewithoutraisingtaxrates.Whathasbeenmorechallenginghowever,isensuringthatthisadditionalrevenueisallocatedtothehealthsector.
Thisbriefoutlineshowthecountriesincreasedtaxrevenueandidentifiescommonfactorsacrosscontexts.ItthenusestheSouthAfricanexperiencetoexplorewhetherthehealthsectorbenefitedfromadditionaltaxrevenue.Thebriefconcludeswithrecommendationsforhealthsectorofficialsabouthowtonegotiatemoresuccessfullyforadditionalresourcestobespentonhealth.
R670bngovernmentrevenuein2010/11,upfrom
R300bnin1994/95
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Income tax payers
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Figure 1: Total government revenue in South Africa, 1995-2011
How did countries increase tax revenue?
South AfricaSincetheendofapartheidin1994,SouthAfricahasmorethandoubledtotalgovernmentrevenueinrealterms(seefigure1).Whatmakesthissuccessparticularlystrikingisthatitwasachievedasnewtaxpoliciesdecreasedratesforindividualsandcompanies.
Strongeconomicgrowthisakeyfactorexplainingtheriseintaxrevenueandtheincreaseintheproportionoftax
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34% 24% 26% 16%
Personal income taxCompany income tax
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Figure 2: Sources of tax revenue
revenuecollectedfromcompaniesshowninfigure2.
KenyaKenyaalsoundertookmajortaxreformsfollowingachangeofgovernmentin2002.SincethistimegovernmentrevenueincreasedfromKshs.424billioninFY2003,toKshs.670billioninFY2013(figure3).
NigeriaBetween2000and2010LagosStateincreasedtaxrevenuefromN600milliontoN20billion,anditiscurrentlytheonlystateinNigeriatohaveachievedfiscalindependence.Thehugeincreaseinrevenueispredominantlymadeupofthestate’sinternallygeneratedrevenue,whichincludespersonalincometax,landsalestax,transferfeesandcarlicences.
Strongeconomicgrowthcontributedtotheriseintaxcollectedbetween2000and2010,andagrowingmiddleclassofeducatedpeopleinthestatewidenedthetaxbase.TheLagosStateInternalRevenueService(LIRS)alsotookstepstoreachthelargeinformalsectorbytransformingthemembershipbasesofinformaltradeassociationsintotaxbases,andbyemployingwomentopromotedialoguewithwomen’smarkettradeassociationssoastocollecttax.
Further,LIRShasworkedtoreducecorruptionbyrequiringpaymentstobemadethroughbanks(ratherthanincash),andtoincreasecompliancethrougheducationandpenalties.Ithasalsoincreasedthenumberoftaxfieldofficersfrom300to6000stafftoeducatecitizens,registernewtaxpayersandassisttheminmakingpayments.
Taxreformsincludedtheintroductionofa‘Turnovertax’forsmallbusinessesthataimedtobringinformalsectorbusinesses,suchasagriculturalenterprises,intothetaxenvelope.TheKenyaRevenueAuthority(KRA)-Kenya’staxcollectionagency,alsoimplementedstrategiestoimprovecomplianceincludingoutreachcampaignstosensitiseandeducatetaxpayers,andprovidingassistanceinfillingintaxreturns.
ThesuccessofKRAinimplementingthesechangeswashelpedbymanagementandstaffwhowerecommittedtomodernisingandreformingtheagency.TheKRAwasgiventheautonomytorecruit,retain,trainandmotivatehighcalibrestaff,andtoremovecorruptworkers.There
Figure 3: Total tax revenue in Kenya, 1998-2010
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Taxreformsalsocontributedtotheriseinrevenueincludingsimplifiedtaxstructures;theeliminationofinappropriateexemptionsandincentives;andmulti-prongedenforcementstrategiesincludingtargetingofhighnet-worthindividuals.Atthesametime,strategiesaimedtobuildpositivepublicperceptionsoftaxationandsuccessfullybuiltoncitizens’commitmenttoachievingthegoalsof‘thenewSouthAfrica’toencouragevoluntarycompliance.
Thesereformswereimplementedbyatransformedtaxcollectionagency-theSouthAfricaRevenueService(SARS),whichwascharacterisedbystrongleadership,experiencedstaffandlimitedpoliticalinterference.
ItispossiblethatSouthAfricacouldhaveincreasedtaxrevenueevenfurtherandachievedahighertax-GDPratio;however,macroeconomicpolicyconstrainedthetax-GDPratioto25%,withtheaimofstimulatingeconomicgrowth.
Theexperiencesfromthesethreecountriesdemonstratethatwithcommitmentandcreativity,itispossibletoraiseadditionaldomesticresources.Thisishelpedbytaxpolicythatexpandsthetaxbase,andtaxadministrationthatreducesthetaxgapthroughpromotingcomplianceandstrongenforcement.
Figure4outlinesthefactorsthatcontributedtowardsincreasedtaxrevenueinallthreecontexts.Onekeyfactoristhesupportthattaxpolicyreformsandthetaxcollectionagenciesreceivedfrompowerfulpoliticians,resultinginadditionalfundingfortheiroperationsandstrengthenedhumanresourcecapacity.
Inaddition,allthreetaxcollectionagencieswereabletofunctionautonomouslyandtoimplementtaxcollectionstrategiesandreformstosuittheirpolitical,economicandsocialcontexts.InSouthAfricathismeanttargetinghighnet-worthindividualsandbuildingoncitizens’aspirationstocontributetowardsthedevelopmentoftheirnewlydemocraticcountry.InKenyaandNigeria,specificeffortsweremadetoreachthelargeinformalsectors.
wasalsopoliticalsupportfortaxgenerationandtheKRAfromthegovernmentandexternaldevelopmentagencies:reformingthetaxrevenueadministrationwasakeypriorityinthegovernment’smacroeconomicframeworkalongwithstrengtheningaccountabilityandtransparency.
Withcommitmentandcreativity,itispossibletoraiseadditionaltaxrevenuewithoutincreasingrates.Thisishelpedbytaxpolicythatexpandsthetaxbase,andenforcementandcompliancestrategiestoreducethetaxgap.
External environment
Politicaltransitiontodemocracyandgovernmentlegitimacy
Strongeconomicgrowthduringkeyperiods
Features of the public sector
Politicalsupportfrompowerfulpoliticians
Continuityofstrongleadershipinbothgovernmentandtaxcollectionagency
Taxpolicyreformthatrationalisedtaxratesandexpandedthetaxbase
Administrativeautonomyforthetaxcollectionagency,whichenabledoperationalefficiencyandrecruitmentofhighlyskilledstaff
Adequatefundingofthetaxcollectionagency
The task network for tax collection
Strategicuseofexternalconsultants
Cooperationbetweentaxcollectionagency,governmentdepartmentsandprivateentities(especiallybanks)tobuildacoherenttaxinformationsystem
14.1%FY 1996
FY 2004 and 2008
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Figure 5: Percentage of government expenditure spent on health
15% target set by the Abuja Declaration
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Increasedtaxrevenueledtomoremoneybeingspentonhealthperpersoninnominalterms.However,thepercentageofthebudgetallocatedtohealthfellby1.6%between1996and2004,andadecadelater,itremainsbelowthe15%targetsetbytheOrganisationforAfricanUnity’s2001Abujadeclaration(figure5).Oneexplanationforthisisthat,despite
Did the health sector benefit from increased revenue? Findings from South Africa
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Figure 6: Trends in government expenditure across sectors
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The organisational capacity of the tax collection agency
Atransformationalstrategyfortaxcollectionthat:• Wasfoundedonaclearvision,sharedvaluesandgood
governance• Createdastreamlinedorganisationalstructureandnew
culture• Investedintherecruitmentanddevelopmentofskilledstaff• Investedincomputerisation• Dealtswiftlywithcorruption
Prioritisationoftaxcollectionactivitiesandsimplifiedtaxfilingsystems
Multiplestrategiestopromotetaxcompliance,includingpositivepublicperceptions
Strongtaxenforcementstrategies,includingpublicshamingofdefaulters
Human resource capacity
Increasednumbersofskilledstaff
Activeretentionofskilledstaff
Appropriatedeploymentofstaff
Strategicuseofincentivestomotivatestaff,includingtrainingandperformance-basedremuneration
Figure 4: Factors explaining improved tax collection capacity in South Africa, Kenya and Lagos State, Nigeria
economicgrowth,SouthAfrica’smacroeconomicpolicyreinedinpublicexpenditureandrequiredrapidservicingofdebt,squeezingoutsocialsectorspending.
However,duringthistime,governmentspendingonhealthalsofellrelativetoothersectors(figure6).ExpenditureonhealthwasovertakenbySocialProtectionandEconomicAffairs,whichconstitutesinfrastructure,energy,trade,industryandagriculture.
Thehealthsectorwasde-prioritisedbecauseofacomplexinterplaybetweeneconomic,politicalandadministrativeissues.TheserangedfrompoliticalandtechnicalweaknessesintheNationalDepartmentofHealth,todifficultiesofbudgetingunderaquasi-federalsystem.Inaddition,theTreasurydidnottrustthehealthsector’sabilitytodeliverservicesefficiently.Nethertheless,sectorsreceivingsubstantialbudgetincreasesaresocialdeterminantsofhealth,e.g.housing,waterandbasicincomesupport.
About the research
RESYSThasgeneratednewevidenceshowingthatitispossibletosubstantiallyincreasedomestictaxrevenuebyexpandingthetaxbaseandimprovingtheefficiencyoftaxcollectionsystems.
Whatismorechallenging,however,ispersuadingMinistriesofFinancetoallocatemorefundstohealth.Healthbudgetsareconstrainedbymanyfactors,eveninthecontextofeconomicgrowthandincreasedrevenuecollection.
InSouthAfrica,atatimewhentotalgovernmentrevenuemorethandoubled,theamountofspendingallocatedtowardshealthfellasapercentageofgovernmentexpenditure.Thisispartlyduetothemisperceptionthathealthisanunproductivesectorwithfeweconomicbenefits.
AcriticalchallengeforMinistriesofHealthistofindwaystomakeabettercaseforhealthduringbudgetnegotiationssoastoexpandtheshareofgovernmentspendingonhealth.
Internationalactors,includingWHOanddonororganisations,havearoleinhelpingMinistriesofHealthtodevelopthetechnicalandanalyticalcapacitytoeffectivelyadvocateforhealthanddemonstratethebenefitsofUniversalHealthCoverage.
Conclusions and recommendations
Specific recommendations for Ministries of Health
• Developclearstrategiesfordefendinghealthbudgetsandnegotiatinglargerallocationsduringbudgetnegotiationsatbothnationalandprovincial/statelevels.
• Demonstratetheeconomicandsocialbenefitsofhealthinvestments,andthedebilitatingeffectsofunderfundinghealthservices.
• GiventhatefficiencyisakeyconcernofTreasuries,implementwide-rangingreformstohealthsystemstoensurethatmoneyiswellspentandthatresourcesaredistributedequitablythroughoutthecountry.
• Developcapacitytopromoteanddocumentgoodperformanceandefficientuseofresources.
• Investinstronghealthleadershipatnationalanddecentralisedlevels,anddevelopunityaroundavisionforhealth.
Related resources
• DohertyJ(2014)RESYSTWorkingpaper6:IncreasingtaxrevenueanditsimpactonfinancingpublichealthcareinSouthAfrica.
• Powell-JacksonT,HansonK,McIntyreD(2012)RESYSTWorkingpaper1:FiscalSpaceforhealth-areviewoftheliterature.
• McIntyreD,MeheusF(2014)Fiscalspacefordomesticfundingofhealthandothersocialservices.Workinggrouppaper,ChathamHouse.
• ThispolicybriefisbasedoncasestudiesfromSouthAfrica,KenyaandNigeria,whichdocumentedcountryexperiencesofincreasingtheeffectivenessoftheirtaxcollectionservicesandinvestigatedwhetherthiscontributedtoincreasedhealthsectorspending.
• Thestudiesusedamixed-methodsapproach,combiningbothquantitativeandqualitativedata.
• Quantitativemethodswereusedtoquantifytrendsingeneraltaxrevenue,governmentspendingonthehealthsectorandonothersectors,andtocomparegrowthinthesevariablesrelativetogrowthinGrossDomesticProduct.
• Qualitativemethodse.g.keyinformantinterviews,wereusedtoexplorethecontextualfactors,taxpolicies,actorsandprocessesaccountingforimprovedtaxrevenueandtoidentifyremainingchallengesforsustainabletaxrevenuegeneration.
Formoreinformationabouttheresearchpleasevisitourwebpage:http://resyst.lshtm.ac.uk/research-projects/case-studies-improving-tax-collection
Contact:
SouthAfrica:DrJaneDoherty,SchoolofPublicHealth,UniversityoftheWitwatersrand.Email:[email protected]
Kenya:DrJaneChuma,KEMRI-WellcomeTrustResearchProgramme.Email:[email protected]
Nigeria:DrHyacinthIchoku,HealthPolicyResearchGroup,UniversityofNigeria(Enugu).Email:[email protected]
RESYSTisfundedbyUKaidfromtheDepartmentforInternationalDevelopment.However,theviewsexpresseddonotnecessarilyreflectthedepartment’sofficialpolicies.
©RESYST2015resyst.lshtm.ac.uk
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