A Framework for Assessing Fiscal Space for Health

1. A Framework for Assessing Fiscal Space for Health Ajay TandonHealth, Nutrition, and Population Anchor World Bank

2. Outline • What is Fiscal Space? • Understanding overall fiscal space from a macroeconomic perspective. • Assessing fiscal space from a health sector perspective. • Some country examples.

3. Outline • What is Fiscal Space? • Understanding overall fiscal space from a macroeconomic perspective. • Assessing fiscal space from a health sector perspective. • Some country examples.

4. What is Fiscal Space? • Overall fiscal space (IMF definition): • Fiscal space refers to the availability of budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of a government’s financial position. • Definition does not specify fiscal space for what, eg, there is no sector specification – generally presumed to be for some “meritorious” purpose, or for financing public investments for aiding economic growth. • Strong link to the notion of financial sustainability. • Financial sustainability is the capacity of governments, in future, to finance desired expenditure programs, service its debts, and ensure its solvency.

5. Types of Questions to Pose • Can government expenditure be increased? If so, how is the government going to finance additional expenditure? • What are the implications for expenditure in future years and can these also be financed? • Is financing of today’s expenditures consistent with today’s macroeconomic policy framework (exchange rates, inflation, growth)? • Will new expenditure programs, if continued, fit into the medium-term budget and macroeconomic policy framework? • Does today’s expenditure create debt obligations that must be serviced in the future? If so, will the expenditures have an impact on the underlying growth rate?

6. Sources of Fiscal Space • Can be understood by examining a simplified government budget constraint. Uses of Budgetary Resources = Sources of Budgetary Resources Gt + rBt-1 = Tt + Bt + At + Ot • Gtis (discretionary) non-interest expenditure. • rBt-1 is (non-discretionary) debt repayment. • Ttare taxes and other revenues. • Btis new domestic and/or foreign borrowing. • At are grants. • Otare other sources of funds, eg, from sale of assets.

7. Sources of Fiscal Space Can be visualized as a diamond plot with the axes representing the amounts from different sources

8. Fiscal Capacity and Fiscal Space • Fiscal capacity measured as 2002-2007 average of indicators for: • Debt/GDP. • Fiscal deficit. • Current account balance. • International reserves. • Reversible capital inflows. • High Exposure-Low Fiscal Space • Ethiopia, India, Pakistan • High Exposure-Some Fiscal Space • Bangladesh, Cambodia, Indonesia • High Exposure-More Fiscal Space • Uzbekistan, Bhutan, Botswana

9. Outline • What is Fiscal Space? • Understanding overall fiscal space from a macroeconomic perspective. • Assessing fiscal space from a health sector perspective. • Some country examples.

10. Fiscal Space for Health • Availability of budgetary room for increasing public spending for health without jeopardizing macroeconomic stability. • Fiscal space for health can be assessed by: • Deriving implications for health sector from overall fiscal space framework, eg, as a result of conducive macroeconomic conditions. • Focusing on the extent to which health might be reprioritized within the government budget. • Examining pros and cons of sector-specific means to raising resources, eg, by use of earmarked taxes. • Evaluating the use of sector-specific grants from international agencies such as GAVI and Global Fund. • Improving the efficiency of sector outlays.

11. Fiscal Space for Health • Can be understood by examining a simplified government budget constraint. Uses of Budgetary Resources = Sources of Budgetary Resources Gt + rBt-1 = Tt + Bt + At + Ot • Gtis (discretionary) non-interest expenditure. • rBt-1 is (non-discretionary) debt repayment. • Ttare taxes and other revenues. • Btis new domestic and/or foreign borrowing. • At are grants. • Otare other sources of funds, eg, from sale of assets. Ht = k Gt • Ht is government health spending. k is share of overall budget to health.

12. Fiscal Space for Health Health sector-specific assessments of fiscal space can be visualized using a spider plot.

13. Why Fiscal Space for Health? • Assessment of overall fiscal space is meaningless without some sense as to why the fiscal space is needed. • A specific overall policy objective or a sector-specific focus is necessary for any assessment of overall fiscal space to have some utility – fiscal space for what? • Demographic pressures (aging, high fertility rates) may require a rise in government health spending. • Implementation of health reforms may require a rise in government health spending, eg, introduction of subsidized insurance. • Often perceptions/evidence that health sector is under-funded. Fiscal space assessments can complement costing studies. • Demand as part of PERs or as inputs to MTEFs.

14. Fiscal Space for Health

15. Fiscal Space for Health

16. Conducive Macroeconomic Environment Important • With share of government expenditure to GDP of about 30%, and health’s share at 15% of the budget, fiscal space is likely to be limited to around 4.5% of GDP. • Current average of public expenditure on health is about 2.5% in low-income countries. • In an average country with GDP per capita of US$400 and population of 44 million, increasing public expenditure on health from 2.5% to (say) 5% of GDP would raise per capita health spending by only US$10 per capita. • There may be upper limits to increasing health spending in low-income countries without economic growth.

17. Health Spending Increases with Income On average, government and total health expenditure rises with income.

18. Share of Government in Health Increases with Income Government’s share of expenditure rises with income (akin to Wagner’s Law).

19. Share of Government in Health Increases with Income As countries become richer, revenue generation tends to improve. Indonesia’s collects about 19% of GDP in revenues – lower than the average for its income.

20. Fiscal Space for Health

21. Reprioritizing Health in Government Budgets • Prioritizing health in the government budget: often linked to difficult political economy considerations. • Can “unproductive” expenditure be reduced to make space for health, eg, expenditure on subsidies? Often entails difficult political trade-offs. • Literature suggests factors such as level of democratization, income inequality, ethno-linguistic fractionalization, initial levels of education, etc., are important determinants of the degree to which health is prioritized by governments.

22. Reprioritizing Health in Government Budgets Source: WHO NHA Database and WDI. Note: EAP and LMC averages are unweighted.

23. Fiscal Space for Health

24. Fiscal Space for Health

25. Sector-Specific Sources of Fiscal Space • Earmarked taxes may be an option • Often criticized from a public finance perspective, but tend to be a popular option used by countries – some argue earmarking is important when governance is weak. • Thailand has employed “sin taxes” to fund health promotion. • Ghana has 2.5% VAT for health insurance fund. • India employs an education cess. • Mandating social health insurance may be an option • If the pool of premium-paying population is large, this may be a means to raise public funds for health. • Difficult option to implement in countries with large informal sectors.

26. Fiscal Space for Health

27. Health System Efficiency Can efficiency gains be a source of fiscal space?

28. Health System Efficiency Can efficiency gains be a source of fiscal space?

29. In Conclusion • Fiscal space assessments in health entail: • Outlining a framework for assessing the different sources of funds underlying government health expenditures; • Given needs, identifying possible options for increasing fiscal space for health from the different sources of funds; and • Addressing the pros and cons of the different policy options in a given country context. • Conducive macroeconomic conditions and economic growth are prominent drivers of fiscal space for health. • Lack of prioritization often a key issue – one that is not easy to overcome as is often driven by political economy considerations. • Some options may entail creative use of sector-specific options – can learn from different country experiences.

30. Outline • What is Fiscal Space? • Understanding overall fiscal space from a macroeconomic perspective. • Assessing fiscal space from a health sector perspective. • Some country examples.