A Looming Crisis of Public Finances Spells Trouble for Universal Health Coverage in Low- and Middle-Income Countries

During the COVID-19 pandemic, health spending⁠—domestic and external⁠—increased in most low- and middle-income countries (LMICs) (136 countries), as governments sought to mitigate the devastating impacts of the pandemic on health and the economy. To give one example, the cost of the health response in Burkina Faso was equivalent to a 43 percent increase in the country’s health expenditure, using 2018 as a baseline. This was one of the largest single-year increases in health sector resources seen in several decades. Development Assistance for Health (DAH) also increased significantly: in 2020, an estimated $13.7 billion or 35.7 percent increase compared to 2019 was targeted in response to the pandemic. These resources were essential to mounting a response at the country, regional and global level–and for the world to move towards a recovery phase.

However, as the world faces multiple crises and the economic and health scars left by the pandemic are still evident, it is clear that governments are unlikely to sustain pandemic-era health spending increases in this recovery phase.

Failure to cope adequately with the new fiscal realities is likely to stunt recovery from the pandemic by harming the present and future provision of essential health services, further delay the progress and attainment of health-related Sustainable Development Goals, increase the burden placed on households through greater out-of-pocket payments, and undermine global health security efforts that will leave the world vulnerable to emerging pathogens. This will result in loss of life and increased poverty and disability, especially within marginalized and vulnerable populations who will likely bear the brunt of the crisis. If countries embark on fiscal tightening (in absence of external financing) to make their debt more sustainable, budgets are likely to come under further pressure with consequences for long-term growth.

This blog discusses the main drivers of fiscal pressure and type of policies that relieve such pressures in LMICs to mitigate their negative impact on health.

The main drivers of fiscal pressure

Fiscal pressure (in the health sector) occurs when “per capita levels of public spending on health do not rise to meet increased demand for health services or fall while demand remains stable or increases.” This is what we are starting to see in many LMICs and it is attributable to the following factors:

• An increase in the demand for services: This is likely to occur post-pandemic because of (i) disruptions in the provision and access of routine health services during the pandemic (and the resulting delayed impact on health) and (ii) changes in health-related behaviors, in part due to a deterioration of household financial security and the emergence of new stressors during the pandemic. For instance, from March to April 2020, the number of cervical screenings in one unit decreased by 80 percent in Cameroon. A missed diagnosis will have impacts on future burdens of disease and implications for the demand in healthcare.
• Decline in economic output and impacts on revenues and expenditure: In its World Economic Outlook, the International Monetary Fund (IMF) also paints a grim picture of economic growth and public finances in the medium-term. The effects of the pandemic, compounded by the war in Ukraine and global inflationary pressures, will still be felt in the coming years. The World Economic Outlook projects that a third of the global economy will contract in 2023. Global growth is projected to slow from 6.0 percent in 2021 to 3.2 percent and 2.7 percent in 2022 and 2023 respectively. Government revenues in these countries have not fully recovered from the sharp fall experienced during the pandemic: 38 countries are projected to have lower revenues in 2027 compared to pre-pandemic levels, reducing the ability of governments to fund public investment and social spending including on health. In many LMICs, the priority given to health compared to other sectors (e.g., education) remains low and this drop in government revenues could potentially have dire consequences on the health budget.
• High debt levels: In 2019, 54 LMICs spent more on debt servicing than on their health services, and this situation is likely to worsen in the aftermath of the pandemic. Increased spending in response to COVID-19, in part fueled by increased borrowing, has raised debt to GDP ratio in these countries. This means high interest repayment (especially as interest rates have recently soared) would further constraint public expenditure.
• Decline in aid: Finally, the prospects of higher development assistance for health beyond the pandemic response phase are uncertain. Low GDP growth will affect not only LMICs, but also the coffers of high income nations: the GDP of G7 countries is only set to grow on average 1.3 percent annually in the period 2023-2027. This will translate into lower official development assistance (ODA) in absolute terms (as ODA is often expressed in terms of percentage of GDP) and greater competition between the ODA budget and other budgets to address domestic priorities (e.g., energy subsidies to consumers, strengthening of social sectors), and global priorities. What is happening to the aid budget in the United-Kingdom illustrates this: after revising its targets from 0.7 percent to 0.5 percent, the government also decided to direct a significant share of this reduced funding to funding its Ukraine refugee programme within its border. Going forward, aid budgets are going to come under pressure as resources will be needed for reconstruction efforts in Ukraine.

What policy options are available to countries?

It is essential that LMICs align their plans and discourse around universal health coverage (UHC) with this new reality; and the global health community can support LMICs in navigating challenges.

First, it will be essential to map out policy levers in the context of LMICs. A big effort was carried out by Thomson and colleagues in Europe to address the global financial crisis of 2008, but the results may not be transferrable for LMICs. From literature reviews, we roughly map out LMICs’ options from the perspective of public finances. Example policy options are shown in the red boxes (the list is not exhaustive):

Dealing with lower economic outputs compared to pre-pandemic: framing the impact from the perspective of public finances

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In blue, the chain of events in the absence of policy intervention; in red, policy tools

Each option should be reviewed using key criteria such as feasibility, relevance, and potential fiscal space generated for LMICs. A recent study showed that 70 percent of budgetary space for health is driven by overall expenditures and 30 percent by the share of budget allocated to health. The growth of overall expenditures depends on revenue collections, borrowing and external grants. Those estimates shouldn’t underestimate the role of the Ministry of Health: in particular, strengthening public finance management practices (e.g., working towards full budget execution, reducing unnecessary funding by exploring flexible budget structures) is in the current climate one of the most effective way to expand existing budgetary space for health. Reforms towards better public finance management will also result in more comprehensive, effective, and balanced budgetary dialogues between health and finance authorities.

In general, a focus on essential services will need to be adopted in the short run, in countries poised to see their health budgets decline in real terms. One policy option to consider is the deprioritization or disinvestment in services that are deemed low value or simply non-essential. A recent paper discusses how such policies are often widely contested by the general public, and need to be supported by a strong evidence base, which takes time and resources. This may be a challenge, especially as the approval ratings for governments have been shaken by the recent crises, and the appetite for such unpopular measures will undoubtedly be low.

Systematically reviewing and learning from country experience and best practice from the recent pandemic, as well as the management of past crises is essential. Some LMICs may have already initiated thinking on this topic, others will have already implemented policies during the pandemic to cope with the demands of COVID-19 care on their already overstretched health systems. For instance, countries in Latin America and the Caribbean have experienced high levels of pressure on their healthcare system; stemming from the high burden of COVID-19 and disruptions in routine health services, as well as the enormous social and economic impact of the crisis. Documenting those can support learning at the country level and will also hold lessons globally.

Finally, health ministries at this juncture cannot overlook policies that are crucial for curtailing inefficiencies in the health system. Of course, the question arises whether they should keep the resulting savings. Certain conditions can help health ministries in this regard, thereby increasing their budget space. The resource base for the health sector should expand as tax compliance with the existing tax regime improves after the public sees an improvement in public services.

A recovery that works for all countries

There is a widespread agreement that even in the most optimistic scenarios of global recovery, most LMICs will experience fiscal pressures and will need support to contextualize the different policy options available to their own systems and fiscal challenges. An ambitious research and learning agenda combining approaches from public finance, health systems and political economy will be vital to address this gap.