Government and Fiscal Policy

Political debate on Health spending – more heat than light

Thursday June 09, 2016 Mark Cox

One of the most contentious and enduring issues in the political arena is health expenditure, and whether it has increased sufficiently.


Recently, the government has argued that health expenditure has increased, not only in real terms, but also on a per capita basis. The opposition, on the other hand, has argued that health expenditure has not kept up.


Who is correct: the government or the opposition? The question is simple enough but, as is often the case when public policy is being debated, the answer is much more complicated. Indeed, both the government’s and the opposition’s positions are defensible, depending on exactly what point is being made.


The chart below is based on Treasury data on Vote Health (i.e. government health expenditure). It shows how Vote Health has changed in real terms (i.e. adjusted for inflation) since the current government introduced its first full budget. It also shows how inflation-adjusted expenditure on Vote Health has changed on a per capita basis (i.e. allowing for population growth).


The red line in the chart, which relates to the left axis, indicates that expenditure on Vote Health fell slightly in real terms between Budget 2009 and Budget 2010, but that it has increased consistently since then. The blue line in the chart, which relates to the right axis, indicates that per capita expenditure on Vote Health is higher in real terms in 2015/16 than it was in 2009/10, but that the increase has been unsteady.


 govt hlth 2


However, the chart does not necessarily indicate that government health expenditure has kept up with needs; for two reasons.


The first reason is that, for any given size of population, the need for health expenditure will be greater, if the population is ageing. This is because older people require more medical interventions and, so, require more expenditure than younger people. The average 75-year-old will require 3 or 4 times as much health support and expenditure as the average 50-year-old. An ageing population will, therefore, need more health expenditure than the same population that is not ageing.


The other reason is that the cost of providing health services may rise faster than inflation generally. This is likely to happen if new medical technologies are used to keep patients alive and healthy are more expensive than the medical technologies they supersede.


Taking both these factors into account, there may well be justification for the opposition to argue that health expenditure has not, in fact, kept up. Expressing government expenditure on health in inflation-adjusted terms and on a simple per capita basis does not necessarily show whether the expenditure has increased in line with needs.


But, then, determining exactly how much expenditure is needed is an entirely different matter.