Tariff and Subsidy Policies to Improve Health
Fiscal Instruments for Population Health
The run-up to universal health coverage is likely to run up against two important hurdles. First, the economic slowdown has significantly reduced growth rates, and by extension, government revenues. Government expenditures have been tightened, as has the ability to increase fiscal spending on health. A further challenge is the weakness and therefore, inability of the public healthcare system to deliver the quality of coverage that would either encourage people to seek care in the public system or to improve their health is a further challenge. In this context, there is great interest in fiscal measures, including taxes and subsidies and tariffs that can improve health without reliance on additional budgetary allocations to state and national Ministries of Health or on public health systems to work with greater efficiency, in the short term.
Discussions of these fiscal policies to improve health have mostly focused on risk factors that are proximal to health outcomes. These include tobacco and alcohol taxation but include a broad range of measures include condom subsidies, taxation of salt, artificially sweetened beverages, transfats and other dietary risk factors, subsidized provision of workplace promotion of healthy behavior and caregiving and direct subsidies affecting food provision and fortification, cooking fuels, water purification and soap, bednets, vaccines, and medical research. However, fiscal policies can also include import tariffs on essential drugs, bednets, insecticides and other tools for disease prevention and control.
Fiscal policies that influence health do not have to be restricted to the health sector, however. When one recognizes that health is predominantly determined outside the health sector, the set of potential fiscal policies is further widened to include fuel taxes (which affect local air quality), cooking fuel subsidies (which can reduce household air pollution), and transit subsidies (to encourage active lifestyles), there is a large set of potential policies that could be considered. Also important to consider is the negative consequences of current taxation and subsidy policies, such as on food grains for instance.
Fiscal policies could be a useful alternative to regulation, particularly in areas where regulation is challenged by the number of actors. For instance, subsidies for micronutrient fortification of food commodities may be more effective than direct regulation when there are many producers and it is difficult to enforce against non-compliance. Last but not least is the importance of focusing on the fiscal rationale for taxation.
Take the case of cigarettes. A focus on “market failure” arguments does not provide a clear guide as to whether high cigarette taxes are justifiable or not. Although the “external” costs of smoking (e.g., lifetime burdens imposed on medical services) are relatively modest, higher taxes are appropriate because people undervalue the costs of addiction and the difficulty of giving up smoking. But there is an additional, and perhaps more important reason governments tax cigarettes, namely to raise revenue. The theoretical literature on optimal (or Ramsey) taxes finds that given existing labor income taxes, it is efficient to tax an individual product (such as tobacco) – in excess of any amount justified by market failures – to help finance the government’s budget if that product is a relative complement for leisure (e.g., Sandmo 1975, Christiansen 1984).
Furthermore, ministries of finance have little guidance on the extent cigarette tax revenues should be earmarked for tobacco control programs, rather than for general government spending or reductions in other taxes.
In this component, we propose to develop a broad analytic framework to assess the effect of a range of fiscal policies on health. We will then apply this framework to assist a comparative analysis of fiscal policies, which would be aimed at informing fiscal that have an impact on health, either through new policies or by examining existing policies that have an adverse impact on preventive and curative healthcare. Improving fiscal policies to pay attention to health would be useful even when growth rates pick up and there is greater spending on health.
About the Fiscal Instruments Working Group
The Fiscal Instruments Working Group will consider tax, subsidy and tariff policy changes with the greatest potential to improve population health and health equity, while at the same time being sensitive to non-health considerations. The Working Group will be constituted of experts from finance, transportation, nutrition, agriculture, energy and environment and other arenas where consideration of health consequences could potentially support and enhance universal health coverage.