The Fiscal Cliff

The USA is apparently approaching what is being called “The Fiscal Cliff”.  I don’t quite understand this but I think it is essentially tax changes and budgets cuts that will take effect in January and that neither the Democrats nor Republicans are particularly happy about.  I saw an interesting post from the Centre for Economic and Policy Research, basically suggesting the only way to reduce the US budget deficit was to fix healthcare spending.

The post had the following graph which shows the change in US debt as a fraction of GDP over the next 10 years, and shows how it could vary if different types of healthcare spending were implemented. The options were sticking with current spending (big rise) or changing to that of Australia, Germany, or Canada (big drop).


The interesting figure is probably the next one which shows the growth of US debt over the next 10 years, again depending on which type of healthcare spending is implemented. Basically if healthcare spending were similar to that of Canada, Germany or Australia, US debt would be about $7 trillion lower than it will be if current healthcare spending is maintained.


I wanted to check if this made sense, so I looked at healthcare spending in each of the USA, Canada, Germany and Australia (and also included the UK). It’s shown in the table below. Basically the USA spends almost twice as much per person than Canada, Germany, Australia or the UK. The table also shows how much of the spending is public and how much is private. What I find amazing is not only that US healthcare spending is so high, but that it is so inefficient that even though it is essentially a private healthcare system (if you want full cover you need private healthcare) public spending on healthcare (per person) is still higher than in Canada, Australia, Germany or the UK.


The assumption about the figures above is that you maintain the same ratio of public to private healthcare spending. In the USA about 50% of healthcare spending is public. If they could reduce their spending by half (to be more comparable with Germany, Australia, Canada or the UK) they would save (in public spending) about $2000 per person. The population of the USA is 311 million, so this is a saving (per year) of $600 billion. Over 10 years, this would be $6 trillion. The analysis seems about right then. If total healthcare spending in the USA was more like it is in the UK, Germany, Australia or Canada and if 50% were public, over 10 years the US public debt would be $6 trillion lower than it might be if current healthcare spending is sustained.

Why is this relevant to us. Well, it seems quite clear that the US model is inefficient and that healthcare spending in the UK is not only quite low, but also quite efficient. We, however, seem to be moving towards US-like healthcare spending. I just don’t see the point of that. Why evolve towards a more inefficient system. Even if we can reduce public spending (which we may not be able to do anyway) why would we want more of our spending (public and private) to go on healthcare than we need to. If we want to generate wealth, we need to spend as little as possible on providing services (while still providing a decent service). The goal shouldn’t be only to reduce public spending, but to reduce overall spending (or to maintain it if it is optimal). If the most efficient system is one in which public spending dominates (as the above table seems to indicate) then that is the system we should have.


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