** Article by 4 re-known economists; Donald Low, Yeoh Lam Keong, Tan Kim Song, Manu Bhaskaran: Myth #4: Spending on healthcare and social services are costs which have to be financed by higher taxes, and are therefore a drain on the economy The final myth is that some parts of the economy – like healthcare and social services – are a drain on the economy, while others are productive, “value-creating”, and generate “exciting jobs.” This characterisation of the economy has no basis in economic theory or evidence, although it is true that some sectors of the economy experience persistently lower productivity growth than others. In the popular imagination, healthcare and social services are a drain on the productive parts of the economy. They have to be funded by taxpayers and are therefore seen as a cost that reduces national output. This is bad economics. Healthcare and social services, like other industries such as manufacturing, financial services or construction, also contribute to national output (or GDP) growth. Your spending in healthcare and social services is someone else’s income and his spending boosts another person’s income. So raising our spending in these two areas is not different from increasing spending in other parts of the economy. There is no economic basis for the common intuition that some industries are a cost while others are a form of investment. What about the fact that healthcare and social services have to be financed by taxation? Doesn’t that mean they are a drag on the economy? Again, there is little economic basis for that argument. Many other things are financed by taxation too – MRT lines, public housing, law and order, security – but we don’t view these as a drag on the economy. Indeed, we may even see these things as productive investments. But won’t taxes have to rise sharply to finance our higher spending on healthcare and social services? Not necessarily. First, Singapore has large fiscal surpluses which can be used to finance a well-planned expansion of such services in a sustainable way. Second, if productivity increases and people’s incomes across-the-board rise, we should be able to afford the rising costs of healthcare. The real issue in healthcare spending is how the risks of incurring high healthcare costs are allocated. Most economists argue that given the low-frequency, high-impact nature of many medical contingencies, the most efficient way of financing healthcare would be through some form of risk-pooling or social insurance. That Singapore lacks a comprehensive and universal health insurance programme, combined with the fact that the bulk of healthcare spending currently comes from out-of-pocket payments, suggests that we can have a more equitable healthcare financing system without compromising on its efficiency. With an ageing population, won’t rising health and social care expenditures hurt our economic dynamism, as it has in Japan and other rapidly ageing societies? Perhaps, but not for the reasons that are commonly cited. Health and social care services tend to experience slower-than-average productivity growth. This is because they are more dependent on labour, and are much less amenable to automation and other labour-saving technological improvements. But despite productivity growth in healthcare and social services being lower than in other industries (such as manufacturing or ICT), wages in these “stagnant” sectors rise just as fast as they do in other sectors because if they did not, workers would leave these sectors. This means costs and prices rise in healthcare and social services rise faster than they do in other parts of the economy. Over time, healthcare and other social services will take up a larger share of our incomes – both individually and nationally. But this outcome does not spell doom. As long as we sustain labour productivity growth at historical rates of about 2%, we can afford more of everything even as the share of healthcare and social services in our total spending rises. The real risk of the “cost disease” (a term coined by the economist, William Baumol) is not that health and social care costs are rising, but that policymakers misdiagnose the problem and deal with it in a kneejerk way. For instance, they may shift a larger share of the rising costs to citizens. This doesn’t solve the underlying problem and may, in fact, make the problem worse as privatised healthcare is likely to experience faster cost inflation than socialised healthcare.
Posted on: Tue, 27 Aug 2013 07:39:06 +0000
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