Fiscal architecture in Nepal: An assessment of allocative and technical efficiency of public health spending

Despite the public spending is being one of the instruments to ensure the broad based economic growth and poverty reduction, misallocated public spending, inter alia by substituting for private expenditure can lead to increase income inequality and poverty. The allocative and technical efficiency of public spending could lead a higher steady- state growth rate for the economy.

The paper seeks to provide necessary inputs to better understand the allocative and technical efficiency in use of public resources with an example of health sector in Nepal.

The study utilized two sets of information: secondary information including annual budget and expenditure, red books, economic surveys and primary information including surveys of state-owned enterprises, local bodies and donors. Economic and statistical tools were used to analyze allocative efficiency among the target groups and priorities. Production function approach and econometric tools were applied to measure the technical efficiency.

All sources of funding kicked in to increase public expenditure on health in terms of the ratio with GDP 1.6 to 2.1 percent and real per capita expenditure in Nepalese Rupees 290 to 438 in the given fiscal years. Public spending on the first priority programmes (almost 72 percent); public health services (almost 70 percent) and rural focused programmes (almost 60 percent) ensured the allocative efficiency; however, some of the areas such as primary health care did not provide a clear picture of allocative efficiency. An increase of public expenditure leads to improve in coverage, access to health care services and health status. The coefficients and elasticity from the econometric analysis suggested satisfactory results in technical efficiency.

Increasing public expenditure on health does not ensure the allocative and technical efficiency. It requires institutional capacity to design fiscal architecture and needs to know how public spending can improve the health status and equity in health.