Fiscal space and sustainability from the perspective of the health sector

This paper applies the concepts of fiscal space and fiscal sustainability to the analysis of how higher aid flows may affect health sector spending in low income countries. It is structured around the following questions:

• What is the meaning of the terms fiscal space and fiscal sustainability from the perspective of the health sector?
• In the light of likely scenarios for increased donor funding how much room is there to increase public health expenditures in a sustained way?
• How does the way aid is managed affect fiscal space and fiscal sustainability from the perspective of the health sector?
• What are the challenges for aid recipients to ensure the effective use of increased aid resources in the health sector?
• What are the macroeconomic effects of increased health spending and how might this influence fiscal space and sustainability in the long term?

The paper includes projections on future levels of public expenditure on health in low income countries under alternative scenarios for changes in future aid flows, budgetary reallocation, domestic revenues and growth. Under the more optimistic scenarios many countries will achieve levels of expenditure that would potentially allow them to be in a position to achieve the MDGs. However, the extent to which additional fiscal space can be created and sustained depends crucially on the way both aid suppliers and its recipients manage additional aid flows. Combinations of donor and recipient behaviour will determine how effectively and durably additional aid will expand fiscal space.