raising domestic resources for health · raising domestic resources for health can tax revenue help...

R698336

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

35% 28%

1999 2008

Corporate tax rate

Income tax payers

2.6min1998

4.1min2008

to

200

400

600

Rand

bill

ion

(real

201

0 pr

ices

)

0

Fiscal year

0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

30

20

10

% o

f GD

P

25% target tax-GDP ratio

Figure 1: Total government revenue in South Africa, 1995-2011

How did countries increase tax revenue?

South AfricaSincetheendofapartheidin1994,SouthAfricahasmorethandoubledtotalgovernmentrevenueinrealterms(seefigure1).Whatmakesthissuccessparticularlystrikingisthatitwasachievedasnewtaxpoliciesdecreasedratesforindividualsandcompanies.

Strongeconomicgrowthisakeyfactorexplainingtheriseintaxrevenueandtheincreaseintheproportionoftax

FY 1995

FY 2012

40% 14% 26% 20%

34% 24% 26% 16%

Personal income taxCompany income tax

VATOther

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

200

600

400

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Keny

an S

hilli

ngs b

illio

ns (r

eal 2

010

pric

es)

Fiscal year

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

12.5%FY 201111.5%

5

15

10

Figure 5: Percentage of government expenditure spent on health

15% target set by the Abuja Declaration

% o

f gov

ernm

ent e

xpen

ditu

re

Increasedtaxrevenueledtomoremoneybeingspentonhealthperpersoninnominalterms.However,thepercentageofthebudgetallocatedtohealthfellby1.6%between1996and2004,andadecadelater,itremainsbelowthe15%targetsetbytheOrganisationforAfricanUnity’s2001Abujadeclaration(figure5).Oneexplanationforthisisthat,despite

Did the health sector benefit from increased revenue? Findings from South Africa

375%

191%

125%

83%

48%

44%

-1%

Figure 6: Trends in government expenditure across sectors

1. Education

2. Social protection

3. Economic affairs

4. Health

5. Police, law & prisons

6. Housing, community & water

7. Defence

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

1000

2000

3000

Rand

per

per

son

(real

201

0 pr

ices

)

% change in expenditure (FY 1997-2011)Rank in 2011

Fiscal year

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:dohertyj@telkomsa.net

Kenya:DrJaneChuma,KEMRI-WellcomeTrustResearchProgramme.Email:JChuma@kilifi.kemri-wellcome.org

Nigeria:DrHyacinthIchoku,HealthPolicyResearchGroup,UniversityofNigeria(Enugu).Email:hichoku@yahoo.com

RESYSTisfundedbyUKaidfromtheDepartmentforInternationalDevelopment.However,theviewsexpresseddonotnecessarilyreflectthedepartment’sofficialpolicies.

©RESYST2015resyst.lshtm.ac.uk