Bill of Health

• Author: Benedict Clements, Sanjeev Gupta, and Baoping Shang
• Position: a Division Chief, is a Deputy Director, and is an Economist, all in the IMF’s Fiscal Affairs Department.

Containing growth in public health spending is one of the most important fiscal issues facing advanced economies. Such spending has grown substantially over the past three decades (Clements, Coady, and Gupta, 2012) and accounts for about half of the increase in noninterest government spending over these years.

During the same period private health spending—which on average accounts for about a quarter of all health expenditures in advanced economies—also rose. While higher spending has coincided with enormous improvements in health, it has also put substantial pressure on budgets, particularly now, when total public debt as a percent of GDP has reached unprecedented levels in advanced economies.Â

Since 2010, growth in public health care spending has slowed, and it is crucial to understand what that means. Will the slowdown persist and is health spending under control? In the past, periods of slow growth typically were followed by periods of acceleration (see Chart 1). Will this slowdown be different? The answers to these questions have important implications for the long-term economic outlook for advanced economies. Rising health care spending in those economies could force governments either to reduce spending in other priority areas (such as education and infrastructure) or slow their progress in reducing public debt—both of which could have a bearing on growth prospects in these economies.Â

Simultaneous slowdowns

The slowdown in the growth of public health spending that began in 2010 occurred in almost all advanced economies. Public health spending includes outlays for services provided in government hospitals and health facilities, as well as for public health insurance that pays for treatment from private hospitals, doctors, and nurses. On average, public health spending in those economies fell from 7.4 percent of GDP in 2009 to 7.1 percent of GDP in 2011. In 2012, the most recent year for which comparable data across countries are available, average public health spending rose slightly as a share of GDP. The growth of public health spending, adjusted for inflation, tells a similar story—it fell from 4.5 percent in 2009 to close to zero in 2010. While real spending growth rebounded in 2011 and 2012 it was still well below its historical average.Â

The spending slowdown was larger in countries that were hit hard by the global financial crisis and experienced sharp declines in output—Greece, Iceland, Ireland, Portugal, and Spain. But in countries less affected by the crisis—such as Germany, Israel, and Japan—spending slowed little or not at all (see Chart 2). The slowdown has touched nearly all categories of health care spending: inpatient, outpatient, pharmaceutical, preventive, and public health (Morgan and Astolfi, 2013).Â

The slowdown in growth for all types of spending in nearly all advanced economies—and at about the same time—suggests that it was driven by a common factor. The common element appears to be the global financial crisis, which affected economic activity and governments’ capacity to finance continued health care spending growth.Â

Whether the slowdown will persist depends on how the underlying drivers of spending evolve in the future. There are five main drivers.

Population aging: Health care needs typically increase as people grow older. The average age of the population in advanced economies is projected to rise over the next 20 years as a result of continued increases in life expectancy and likely will contribute to further increases in...