Health in a Time of Austerity

Author:Ramanan Laxminarayan and Ian Parry

Health in a Time of Austerity Finance & Development, September 2017, Vol. 54, No. 3

Ramanan Laxminarayan and Ian Parry

When public budgets cannot grow, targeted taxes and subsidies can help improve a population’s well-being

Improving health care and increasing the number of people who are healthy may be a major development goal of the international community, but even in rapidly growing developing economies there is little capacity to increase spending on health per se, mainly because of the difficulty in raising more general tax revenue. 

That constraint means that any additional funds for a health ministry would have to come from some other government ministry or project—a politically difficult, if not impossible, feat in low- and lower-middle-income economies.

Fortunately, many of the key factors that determine the health of a population—and how equally, or unequally, good health is shared among its citizens—lie outside of the health care system, and creative reform of taxes and subsidies can foster better health outcomes without big increases in spending on formal health programs. 

Outside the systemAmong the factors outside the formal health system that determine well-being are access to clean water and sanitation; air quality; access to and use of toilets, soap, and condoms; walkability of neighborhoods; rates of tobacco and alcohol use; and nutritional intake, including consumption of sugar and refined grains. Many of these can be influenced by changes in taxes or shifts in subsidies.

For example, commodities that harm health can be taxed while those that are beneficial can be subsidized. In India, subsidies for food, fertilizer, and petroleum—three commodities that can have large direct and indirect health effects—totaled about $52 billion in 2012–13 and $35 billion in 2015–16 (see chart). The subsidies in 2015–16 accounted for about twice what state and local governments spent directly on health. Taxes and tariffs can improve general population health when levied on commodities—such as alcohol, tobacco, salt, and sugar—that can harm people’s health. Subsidies on commodities such as sugar, diesel, kerosene, and coal could be reduced and the savings redirected to nutritious food and clean energy sources. Governments could subsidize liquefied natural gas, in place of kerosene for cooking, and fruit, dairy, and protein sources for nutrition (see table). 

Tax lessons Governments have long taxed tobacco and alcohol, and there are several...

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