The Association between Health Expenditure and the Components of Fiscal Policy: VECM Approach in the Context of Latin America and the Caribbean

Abstract

Growing healthcare expenses are being experienced by numerous nations, particularly nations in Latin America, as a result of capacity inefficiencies, economic growth, demographic shift to the aging population, and an imbalance between the cost of manpower and output. Therefore, it is a significant burden for a nation to collect enough money for the health sector in view of escalating expenditures. Hereby, this paper analyzes the association that exists between health expenditure and the components of fiscal policy particularly in Latin America and the Caribbean during the last 21 years. To proceed with the study, we subdivided the fiscal policy components into two major models. The first model encompasses large-scale components whereas the second model consists of small-scale components. Correspondingly, we performed a VECM and granger causality approach to capture the long run as well the causal relationship between the factors. The findings revealed that in the short run trade, tax revenue, and interest rate have an influence on health expenditure. While in the long run, all the fiscal policies except domestic credit offered to the private sector presented an influence on the funds allocated to the health sector. Finally, considering the Covid, 19 pandemic, and other international wars, countries may be hesitant to allocate funds to a particular area. In light of this, the study helps ease these worries by outlining the scope of fiscal measures adopted by countries in relation to the health sector.