Speech

Opening Remarks by Min Zhu
Deputy Managing Director, IMF
October 3, 2011

Good morning! I am delighted to be participating in this important conference on public health care reform in Asia and hear perspectives from both policymakers and academic experts. This is a critical fiscal issue in a number of our member countries, including in Asia.

In my remarks, I would like to touch upon three interrelated topics. First, the state of the world economy. Second, fiscal developments across the globe and the fiscal challenges countries face. And third, how health care reform fits into the debate related to these fiscal challenges.

Turning to the first topic, almost three years after the global financial crisis, world economic growth continues to be weak. Our latest projections indicate that global growth will moderate to about 4 percent in 2011 and 2012 from 5 percent in 2010. Economic activity in major advanced economies—the United States, euro area, and Japan—is projected to expand at an anemic pace of 1½ percent in 2011 and 2 percent in 2012. The picture is much brighter in the emerging and developing countries, however, where we expect solid growth of 6 percent in 2012.

As always, there are both upside and downside risks that could lead to world growth being different than what we forecast. As of late, downside risks have increased. One of these risks is that already weak economic activity in the U.S. loses further momentum. Another is that the crisis in the euro area runs beyond the control of policymakers, despite the strong policy response agreed by euro-area leaders in July 2011.

Fiscal developments and prospects

This takes me to global fiscal developments and prospects. The weakening of the world economy has made the task of fiscal policy even more difficult in many advanced economies. Already, the financial crisis and resulting Great Recession have left a deep dent on their public finances, with the average general government gross debt in these countries projected to rise to over 100 percent of GDP by year end for the first time since World War II. Such high levels of debt expose countries to confidence crises and, even in the absence of crises, are a burden for potential growth. Country authorities need to send clear signals that they are committed to bringing debt ratios down to more moderate levels over the medium term. At the same time, they run the risk that a too sharp tightening of fiscal policy in the near term could choke off the economic recovery, which is at a delicate stage. In short, the dilemma that policy makers face is that both too much and too little consolidation could be destabilizing. Countries under market pressure have no choice but to begin significant deficit reduction now. Others may have space for a more gradual consolidation, in keeping with the economic cycle, as long as they can make a credible commitment to bring debt ratios down in the medium term.

In the euro area, the concerns of financial markets about government debt have spread beyond the smaller economies. This has happened in spite of the progress countries have made in reducing their budget deficits. A common measure of how much progress countries are making in improving their fiscal position is the change in the budget balance, adjusted for the effects of economic activity on government revenues and expenditures. Based on this cyclically adjusted measure, budget deficits in the euro area are projected to decline by an average of 1¼ percent of GDP in 2011. Furthermore, some countries have made progress in clarifying their medium-term fiscal plans. Consolidation is proceeding rapidly in Greece, Ireland, and Portugal with financial support from the IMF and the EU. In addition, potentially important institutional reforms are underway in many European countries. Several countries have also undertaken measures to improve the sustainability of their pension systems by raising retirement ages.

In the United States and Japan, there has been less progress in fiscal adjustment. Little adjustment is expected in the United States this year, although the deficit on current policies would decline markedly in 2012. A sharp withdraw of fiscal stimulus at a time when downward risks to growth remain significant could be risky. The adoption of an appropriate medium-term fiscal adjustment strategy in the US would allow a more gradual fiscal adjustment, which would be more consistent with the uncertain growth outlook. An essential component of a credible medium-term strategy will be entitlement reform, including spending on health, which is projected to rise by 5 percentage points of GDP over the next 20 years without additional reforms. Higher revenues will also be needed, and a widening of tax bases by phasing out tax expenditures—that is the favorable tax treatment of certain sectors or activities— would be a good place to start.

In Japan, the overall budget deficit is projected to be the largest among the G-20 in 2011. While the fiscal position has been adversely affected by the impact of the earthquake and tsunami, Japan’s fiscal problems predate this. Relief and reconstruction to address the social costs of the natural disaster are the key short-term priorities. The associated increase in the budget deficit, however, further strengthens the case for laying out specific, detailed measures for medium-term reform, including a tax and social security reform plan.

Fiscal adjustment is underway in emerging economies this year, especially in Asia and Europe, and is projected to continue in 2012. Nevertheless, in several emerging economies, fiscal positions are weaker than before the crisis, despite the favorable effects of high commodity prices and capital inflows on government revenues. Continued fiscal adjustment remains appropriate for the emerging economies, and in some cases should be accelerated, unless the growth outlook weakens significantly with respect to the current baseline outlook.

The role of heath reform in the fiscal adjustment process

What role should health care reform play in countries’ fiscal adjustment plans? Given past trends in the growth of age-related spending, and the aging of the population, it would be very difficult to achieve a reduction in this spending as a share of GDP. A viable strategy for fiscal adjustment in the advanced economies would thus be to stabilize health and pension spending as a share of GDP, allowing the burden of fiscal adjustment to fall on other categories of spending and on raising additional revenues.

Stabilizing age-related spending ratios would require that health spending grows at a considerably slower pace than currently projected. As we will hear this morning, under unchanged policies, public health spending is projected to rise by an average of 3 percentage points of GDP over the next 20 years in advanced economies. The projected increase in health spending in advanced Asia is lower than this, reflecting the past success of these health systems in containing spending increases. However, aging will still put pressure on this spending, and it will rise as a share of GDP unless additional reforms are put in place. In an era of tight budget constraints, it will also be necessary to improve the efficiency of this spending and to ensure that health outcomes and the quality of health services continue to improve in spite of limited increases in resources.

Fortunately, policymakers in advanced economies can draw on the lessons of the past to help guide their efforts to slow the growth of public health spending without harming health outcomes. The best approach involves a mix of macro level reforms that help control aggregate spending, and micro level reforms that help make spending more efficient. The best combination of these reforms, of course, will be country specific.

In emerging economies, the challenge posed by health reform is different. In emerging Asia, many countries have fiscal space that could be used to help expand coverage and access to health services, which is low. But this expansion must be undertaken in a way that is fiscally sustainable.

Before concluding, I should note that health care reform is among the most complex areas of public policy. There are many imperfections in health markets, which makes it undesirable to leave the sector entirely to private markets to allocate resources. Furthermore, many countries desire that access to basic health care is not confined only to those with the ability to pay. This requires that the government plays an active role in the sector as either a provider or a payer. Preferences over the role of the state in health care, however, vary significantly across countries. In light of these complexities, it is all the more important that we learn from different country experiences on health care reforms. Of particular interest are reforms that contain the growth of public spending without adversely affecting the government’s objectives for improving health outcomes and the access of the poor to health services.

Conclusion

In conclusion, successful fiscal consolidation efforts in advanced economies will require containing the growth of age-related public spending, including for health. In emerging economies, there is more fiscal space to increase spending to help expand coverage and improve health outcomes, but this must be done in a manner that is fiscally sustainable. Today’s conference provides a forum for a fruitful exchange of ideas and experiences on addressing these challenges in the health sector in Asia. I wish you all a very productive and successful conference.

Thank you very much.

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