Fiscal Space for Health: Use of Donor Assistance

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Fiscal Space for HealthUse of Donor Assistance

• Dr. Pablo Gottret
• Lead Economist
• Human Development, South Asia Region
• The World Bank
• Colombo, March 18, 2009

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Format

• What is fiscal space?
• Sources of fiscal space
• Fiscal space through donor financing
• Aid effectiveness
• Volatility
• Fungibility
• Fiscal Contingencies
• Fragmentation
• Vertical Programming
• Key messages
• The Financial Crisis and Health

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What is Fiscal Space?

• 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
  governments financial position.
• 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.
• Financial returns generated by additional
  expenditure should cover cost of borrowing
• Governments need to assess the availability of
  alternate source of funds to replace donor
  funding (grants)
• Governments should be able to cover future
  recurrent costs, etc.

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Types of Questions to Pose

• How are you going to finance additional
  expenditure?
• What are the implications for expenditure in
  future years and can these also be financed?
• Any implications for other sectors expenditures?
  If so, how will these be financed?
• Is financing of todays expenditures consistent
  with todays macroeconomic policy framework
  (exchange rates, inflation, growth)?
• Do we need to worry about how these expenditure
  programs, if continued, will fit into the
  medium-term budget and macroeconomic policy
  framework?
• Does todays expenditure create debt obligations
  that must be serviced in the future? If so, will
  the expenditures have an impact on the underlying
  growth rate?

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Key Expenditure Facts

• Public spending accounts for less than 25
  percent of total health spending in LICs, some
  50 in MICs but over 60 in HICs
• Policy-makers need to focus on private spending
  as well as public.
• Public spending on health is some 10 per capita
  in LICs, over 100 in MICs, and 2000 in HICs
• Policy-makers in LICs will be challenged to
  provide an essential package of basic services.
• Out-of-pocket payments account for 70 percent of
  health spending in LICs, 40 percent in MICs and
  15 percent in HICs
• Policy-makers need to focus on improving formal
  risk pooling mechanisms in order to provide
  financial protection and protect the poor.
• Social health insurance accounts for some 1 of
  all health spending in LICs, 20 in MICs, and 30
  in HICs
• Policy-makers in LICs need to carefully evaluate
  whether they have the enabling conditions in
  place for SHI to succeed.
• While external sources on average account for
  only some 6 percent of total health spending in
  LICs, in over 20 African countries, it accounts
  for more than 30 percent
• Policy-makers in LICs and MICs need to keep
  focused on internal sources of finance, as these
  sources account for the bulk of their health
  revenues.

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Is there Room to Increase Public Expenditure on
Health?

• With share of government expenditure to GDP of
  30 (about twice the current average for LIC),
  and healths share at 15 of the budget (Abuja
  target for African countries), fiscal space is
  likely to be limited to around 4.5 of GDP.
• Current average of public expenditure on health
  is about 1.35 in low-income countries.
• In an average country with GDP per capita of
  US400 and population of 44 million, increasing
  public expenditure on health from 1.35 to (say)
  5 of GDP would raise per capita health spending
  by less than
• US15 per capita.
• There may be upper limits to increasing health
  spending in low-income countries without economic
  growth.

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Sources of Fiscal Space

• Government budget constraint
• G Taxes B (domestic) ?M B (external)
  Grants
• Is there potential to increase tax revenue?
• Can efficiency be improved?
• Can expenditure be reprioritized?
• Can borrowing be increased (domestic or
  external)?
• Is there room to print money to finance
  expenditure?
• Can you finance by receipt of grants?
• What is the effect of debt relief (frees up
  fiscal space previously used for debt service)?
• Must be consistent within a reasonable
  macroeconomic framework (e.g., taking into
  account impact on the exchange rate, inflation
  rate, etc).

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Fiscal Space is Needed
Budgetary room that allows a government to
provide resources for a desired purpose without
any prejudice to the sustainability of its
financial position

• Estimates of revenue effort may suggest that an
  additional several percent of GDP could be raised
  through domestic revenue measures.
• Additional grants from donors are unlikely.
• Spending efficiency can be improved.
• Macroeconomic and debt management may suggest
  that new borrowing over the period should be
  limited.
• Seignorage (govt prints money which it loans to
  itself) is yet another, but generally limited,
  mechanism for creating fiscal space.

Source World Bank, PREM, 2007.
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We were asked to talk about financing public
expenditure through donor funding
One of the MDGs on global partnerships for
development itself recognizes the need for donor
assistance to attain MDGs. ODA is rising but is
far short of what is needed to meet the MDGs.
Moreover, ODA is largely irrelevant for a large
number of countries in the region
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Financing Public Expenditure via Donor Funding
Much of the increase in aid is not directed
towards financing the incremental costs of
attaining the MDGs.
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Growth in Bilateral Donor Assistance for Health
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Aid Effectiveness

• Aid has diminishing returns.
• There are limits to country absorptive
  capacity.
• Aid is fungible overall (can offset budget
  contributions) and among sectors.
• Aid achieves better results in good policy
  environments.
• Aid requires ownership by countries (e.g., donor
  imposed conditionalities or preferences rarely
  work).
• Aid is related to increased investments and
  growth.
• Aid has high transaction costs for countries.
• Aid makes governments accountable to donors as
  opposed to their citizens.
• Aid in the form of grants instead of loans may
  reduce domestic resource mobilization efforts.

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Financing Public Expenditure via Donor Funding
Large part of the increase is going to vertical
programs.
Source OECD DAC
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Some Key Problems mentioned about donor aid

• Volatility Making it difficult to finance
  recurrent expenditures
• Fungibility Government expenditures decline as
  donor funding increases and therefore there is no
  real additional financing for health
• Distortions generated by donor funding, specially
  through the financing of vertical programs
• Sustainability Donor funding must be replaced
  at some reasonable point in time for domestic
  financing. This domestic financing must fit
  appropriately within the domestic macroeconomic
  framework

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Donors are not a really big player in health
financing in most counties
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Households (OOP) finance a large proportion of
health expenditures
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Donors seem to play an increasing role as a of
GE, but some of the funding may be off budget
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Volatility is still an issue
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No excessive donor concentration on disease
specific funding
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No excessive donor concentration on disease
specific funding
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Fungibility of Aid

• Some evidence that aid is fungible e.g.,
  increasing aid for health may imply that the
  government reduces expenditure on health and
  spends it on something else.
• Some estimates show that only 3.6 of total aid
  is used to finance health expenditure, even
  though healths proportion in total aid tends to
  be around 17.
• Others have argued that it is important to
  distinguish between aid that is in the budget
  versus aid that is off-budget.

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Is Aid Fungible?
Some empirical evidence that aid is fungible, but
there is high variance across countries and
across sectors.
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How bad is the current crisis
Growth is expected to decline significantly
across developed and developing countries in 2009

• Growth in emerging and developing countries will
  fall from 6.25 in 2008 to 3.25 in 2009 (World
  Bank, 2009)
• GDP expected to decline by 4-6 in the euro area
  in 2009 (World Bank, 2009)
• The US and Europe have been the hit first, with
  US GDP falling by 3.8 (annualized) in the fourth
  quarter of 2008 (World Bank, 2009)
• Many currencies have experienced large
  devaluations

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How does the current crisis compare with previous
ones
East Asian Crisis (1997-1998), Argentinian Crisis
(2001), Russian Crisis (1997-1998), Peruvian
Crisis (1988-92), Mexican Crises (1980s and
1990s)

• Current Crisis
• Originated in developed countries
• Many countries with better fiscal positions also
  likely to face a crisis.
• The importance of FDI has increased
• Large number of poor countries, especially in
  Africa are Aid dependent for financing government
  expenditure in general and health in particular.
• Remittances constitute an important source of
  foreign exchange and direct support to household
  in many developing countries

• Previous Crisis
• Originated in developing countries
• Many countries had large fiscal external
  deficits
• A large part of the effort to resume growth was
  to increase exports to developed countries.

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From Crisis to Health Status

• Economic
• Unemployment
• Foreign aid/FDI
• Tax Revenue
• Demand for exports

Household Income
Capacity of other actors (NGOs, private sector)
Government Resources
Demand for health services
Supply of health Services / Quality
Access to quality health care
Health Status
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Potential consequences of the crisis

• Women and Children are the worst affected.
  Nutrition outcomes and IMR increase are decline
  at slower rates. The impact of outcomes tends to
  be more severe in the poorest quintiles of the
  population.
• Previous crises in Asia and LAC show the negative
  impact that crises can have on health and
  nutrition outcomes - may have been the result of
  sharp reductions of utilization of essential
  health services.
• Devaluation increases the price of drugs in local
  currency and impacts access by the population,
  specially the poor.
• Faced with reduced income, households may
  increase demand for publically financed (and in
  many countries provided) health services.
  However
• Total public expenditures in social sectors in
  many crises countries (those facing high external
  and internal imbalances) tend to be pro-cyclical.
• Government Health Expenditures (GHE) per capita
  in real terms declined in all countries reviewed
  immediately after a crisis. This decline occurred
  even as many countries protected GHE as a
  proportion of total government expenditures
• Capture of government services by the non-poor
  was known to have increased during crises in some
  cases

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Good and not so good efforts by governments in
past crisis

• Not so good
• Protecting expenditures for the whole sector as a
  proportion of Government Expenditures.
• Targeting budgetary commitments which may be
  quite different from actual government
  expenditures in health.
• Protecting expenditures without evaluating
  whether the expenditures were pro-poor to start
  with.
• Good practices
• Supporting the financing of the initiation or
  expansion of a sustainable safety net that tied
  essential health services to identified financing
  on a per capita basis with an appropriate system
  of monitoring and evaluation

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THUS.

• Fundamental objective of public policy in health
  during a crisis must be to maintain/improve
  access to essential services by the population,
  especially the poor and vulnerable
• From this perspective, protecting government
  health expenditures is not an objective in
  itself, but maintaining/improving access to
  essential services is

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Key Messages

• Domestic financing
• Low levels of public spending on health in many
  countries
• Large OOP with the corresponding implications
  regarding the absence of financial protection
  from catastrophic spending
• Increasing expenditures in the short-term must
  take into consideration Fiscal Space constraints
• Donor funding for health is increasing rapidly
  but is largely concentrated in SSA.
• Donor funding is not as relevant as a percentage
  of Total Health Expenditures in the SA Region
• However, Donor Funding is still important for the
  financing of certain government programs
• Challenges of current donor assistance for health
  in the region
• Insufficient resources
• Volatility
• Fungibility
• The financial crisis
• Will impact the ability of governments to
  increase and even sustain current levels of
  domestic expenditures in health
• Government must aim ensuring access to essential
  services specially for the poor and vulnerable
  with particular attention to mothers and children
  that are the hardest hit during crisis.

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• THANK YOU