Magnitude of Healthcare Expenditure

Global health spending in 2002 was $3.2 trillion amounting to about 10 per cent of global GDP. Only about 12 per cent of that (0.35 trillion) was spent in low and middle-income countries. In terms of per capita expenditure on health (population weighted), high income countries spend nearly 100 times more than low income countries. Adjusted for cost of living differences, the per capita health expenditure of high income countries works out to 30 times that of the amount spent in low income countries. The public share of total health expenditure is disproportionately balanced against the low income countries: it is as low as 29 per cent in low income countries, 42 per cent in lower-middle-income countries, 56 per cent in upper-middle-income countries, and 65 per cent in high income countries. This has kept the out- of-pocket spending on health needs in low income countries the highest as compared to the middle-income and the high-income countries. The low income countries thus suffer from the most inequitable distribution of health financing/spending.

Increasing the share of public spending in health depends to a significant extent on the revenue generating capacity of the state. Although the revenue raising ability varies from one country to the other, in general, low-income countries face onerous constraints. This is due to factors like: low level of income, poorly developed administrative structures, large informal sectors, and limited overall resources. Estimates reveal that in the early 2000s, central governments in low-income countries collected 18 per cent of their GDP as revenues, while the corresponding percentages were 21, 27 & 32 for the lower-middle-income, upper-middle-income, and high-income countries respectively. Although tax revenues constitute the bulk of government revenues in all regions and income class groups, in some countries and regions (e.g. Middle East, North Africa) sales of natural resources also constitute an important source of revenue. An important feature of revenue generation is the ‘social security tax’. This, however, constitutes a small proportion of the overall tax revenues particularly in low income countries. While the proportion of this tax is highest at about 7.2 per cent of GDP for high-income countries (in the early 2000s), for the low-income countries it was lowest at about 0.7 per cent of GDP. Since large proportion of workforce in low-income countries are in the informal sector, not enjoying any form of income/social security guarantees, the potential to generate taxes from social security contributions is limited. This is inhibiting the expansion of health coverage to large number of such workers and their family by an economically viable system. This underscores the importance of increasing the efforts for the formalisation of employment structures and/or evolving appropriate government sponsored programmes in the low-income countries. Forced by the economic and institutional constraints, the developing countries adopt indirect taxation methods for generating the revenues. Sources of such taxation include consumption taxes on sales (e.g. general sales, value added, excise) and taxes on factors of production (e.g. payroll, land, real estate). High income countries, on the other hand, adopt direct tax measures like income and property taxes, corporate tax, capital gains tax, inheritance/death/wealth tax, etc., to generate their revenues.

Resorting to indirect tax methods in the low-income countries is consistent with the situation obtaining in such economies where large sections of the poor spend their income mostly on consumption.  An important question that arises in this context (which carries an important bearing on increasing the revenue for public spending on health services) relates to that of ‘economic incidence of tax systems’. This is important as the type of taxation adopted carry significant implications both for the revenue raising potential of the country as also on the equity considerations of the system. Direct evidence from studies focusing especially on poor income countries on this feature of taxation is sparse. However, a survey of 13 Asian countries spanning high/middle/low income countries (O’Donnell, et. al., 2005_a  and 2005_b) brings out that only the richest households qualify to pay personal income tax and taxes on capital. In other words, the informal workforce, skewed toward the lower end of income distribution, fall out of the direct tax burden. This makes the direct tax policies progressive (i.e. its burden remains confined to the rich).

Further, due to the relative small share of direct taxes generated, the net impact on the overall distribution effect of health and other services established out of such funds remain modest. The distributional impact of services established out of indirect taxes generated, is mixed as it depends on factors like tax base, rates, exemptions, and exclusions. The tax base in low income countries is usually less comprehensive than in richer countries as taxes like VAT are collected from businesses meeting a minimum turnover threshold. To the extent that the poor buy from businesses that do not meet this criterion (e.g. stalls, bazaars, etc.), they remain exempt from the burden of indirect taxes. This alleviates the regressive character of indirect taxes (i.e. burden of taxes being concentrated on poor people in low income groups). It thus follows that generating the revenue by resorting to well-designed indirect taxes does not necessarily result in adverse equity implications as they can be structured to be progressive. Generating revenue through indirect taxation to finance increased health expenditure in low income countries can therefore be made efficient as taxes like value added and excise are implicit with preferred characteristics like broader base, lower price elasticities, etc. However, such features are dependent on the exact details concerning the tax base, rates, exclusions, exemptions, demand elasticities, and tax administration capabilities which are country specific. The suitability of the type of taxes levied therefore needs to be assessed by keeping the specific local conditions in view.