Nova workboard

a blog from young economists at Nova SBE

Discussing austerity and public health expenditures in Portugal

Nowadays, if we compare the front pages of the main Portuguese newspapers, in all of them we will find the two most currently used words: crisis and austerity. Etymologically, these words remember us that we are living a decisive moment in which we need to adopt rigorous procedures.  

Education, Social Security and Health – the largest Ministries in terms of public expenditure – are now facing a strong budget constraint. A special attention is devoted to Health due to the sector specific characteristics, and where the MoU predicts for 2012 that costs control will allow savings worth €550Million.

Since we are significantly cutting public expenditure, does this mean we will have a worse public healthcare sector? This is a legitimate question that everyone might ask. Indeed, these are changing times, but they are also challenging. As a science, Economics should offer its contribution. How? Economics studies the adequate use of scarce resources to satisfy theoretically unlimited needs. Economic analysis should work as an auxiliary tool in the decision-making process. It is important to know what is behind the trade-offs, which are the social preferences and which criteria we should set. In order to improve efficiency in the sector, the best choices and the definition of priorities should incorporate all these features.

Will this be painless? No. In order to induce a more rational use of the services and also to control expenditure, higher moderating fees will severely affect those who lost the exemption and those many others with a more inelastic demand for healthcare. According to the press, in some public hospitals, the reduction in intermediate consumption is already noticed and some basic materials have now become scarce (bandages, syringes, antiseptics). The adoption of innovation in the NHS is also more difficult when we are facing a more visible budget constraint. Since many physicians are now suffering the consequences of austerity, they might prefer to definitely change to the private sector, earning higher wages and benefiting from better working conditions. Does this raise equity concerns? If I were to a public hospital in January, am I sure that would I be treated equally as if I were in December when the budgetary limit is more evident?

How will the aftermath of the adjustment program be? Some might propose that, in the future, public health expenditures should have a constitutional limit as percentage of GDP in order to introduce commitment. The debate between rules and discretion is not new. We know that flexibility allows the reaction to unexpected shocks (a new deadly disease). However, we are also aware of the dynamic inconsistency of optimal plans. Usually, governments change their preferences over time and what was considered optimal in a certain point in the past may be considered inconsistent with what is preferred at another point in time. The problem is that preferences change without having any new information that was not possible to anticipate in the past. In summary, flexibility – the main advantage – becomes the main argument against discretion. However, this is what we learn from Public Economics: in thesis, rules are preferred to discretion. But now suppose: would it be difficult for the deputies in Parliament to congregate efforts and change the limit? 2/3 would be enough. And moreover: which limit should be set? Who will be responsible for calculating and monitoring? More recently, do we have any tradition of compliance with rules? This discussion illustrates how something theoretically good can, in practice, be inverted by reality.                                 

Tiago Silva

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Author: studentnovasbe

Master student in Nova Sbe

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