Santé et Services sociaux Québec.
rss
Previous page Adjust text size

Brief analytical summaries or syntheses #3

Subnational health spending and soft budget constraints in OECD countries

Summary

Government spending on health has grown as a percent of GDP over the last 40 years in industrialized countries. Widespread decentralization of healthcare systems has often accompanied this increase in spending. This paper explores the effect of soft budget constraints on subnational health spending in a sample of OECD countries. It finds that countries where subnational governments rely primarily on central government financing and enjoy large borrowing autonomy have higher healthcare spending than those with more restrictions on subnational government borrowing.

Background

There has been a tendency toward decentralization in the health systems of OECD member countries over the last 40 years. The tendency reflects government desire to bring fiscal decisions closer to voter preferences and to improve the efficiency of transfer payments.

Subnational spending makes up a large portion of total healthcare spending in many countries. For example:

  • In the United States, local and State spending account for almost half of all public spending.
  • In OECD countries, local and State spending on health care accounts, on average, for over one-third of public spending.

Decentralization of responsibility for health care has contributed to coordination problems between levels of government, which have contributed to soft budget constraints. This concept relates to subnational governments expecting to receive additional resources from central governments in case of financial distress or budget constraints.

Analysis and results

This report empirically assesses the extent to which soft budget constraints contribute to increasing subnational spending on health care. It shows that strong dependence on central government transfers, coupled with greater subnational borrowing autonomy, contributes to increased subnational healthcare spending.

A key ingredient of soft budget constraints is the federal government’s inability to enforce fiscal discipline on the subnational government. Even if the federal government acknowledges that the situation of financial distress was caused by fiscal misbehavior at the subnational level, it nonetheless may be willing to provide a bailout.

The analysis reveals the following:

  • Canada ranks fourth among OECD countries in local and State health spending as a percentage of total health spending.
  • Canada ranks first among OECD countries in local and State health spending as a percentage of public health spending.

Conclusion

This report shows that the increase in subnational health spending over the past 40 years was largely financed by central governments. As a result, large vertical fiscal imbalances — dependence on central government transfers — have emerged in many countries.

Implications and recommendations

Soft budget constraints undermine the fiscal performance of subnational governments in health care. Their dependence means that subnational governments facing fiscal distress will always turn to central government.

As their responsibilities for delivering health services increase, subnational governments are spending more, and central governments, through transfer payments, are financing these increases. This vicious circle contributes to increasing healthcare spending in the majority of OECD countries.

Source

Subnational health spending and soft budget constraints in OECD countries. Fichier PDF.