Fiscal consequences of plausible growth in Health- and Long-Term Care towards 2060

Measured in fixed prices per capita, Norway’s spending on Health- and Long-Term Care (HLC) in 2018 was 7.9 times higher than in 1970 (Section 2.1). Defined as in this report (Sec. 2.2 and 2.3), the employment share of HLC was 14 percent in 2017. 85 percent of total HLC expenditures is tax financed, and the HLC share of government expenditures is 17.5 percent. Population ageing and expectations of further improvements in well-being for all citizens make further growth in HLC-demand likely. In several of the scenarios studied in this report, more than ¼ of all man years in the Norwegian economy work in the HLC sector in 2060 (Sec. 6.3).

This report employs the macroeconomic equilibrium model DEMEC to give quantitative answers to two questions:

1. What is the long run tax bill attributable to an additional average man year in tax financed HLC? This unit effect accounts for increased use of other production factors, crowding out of the private sector and thereby tax bases, user fees, and that indirect taxes included in public HLC costs are not net government outlays (Sec. 4). In many, but not all, cases the unit effects will be scale independent and approximately stationary after 3-4 years. Then they provide robust and structural information about the total tax bill of public HLC. We explain the lack of exact stationarity and scale independency (Section 4.3, 6.5).
2. How do realistic scenarios for HLC growth affect government finances towards 2060? We answer this by simulating a fiscal gap, measured by excessive net expenditures compared with the fiscal rule, in seven scenarios for the HLC employment (Sec. 6). These scenarios are taken from Hjemås, Holmøy and Haugstveit (2019). They share the same demographic development, but they differ with respect to assumptions about the future health status of the elderly, the quality of the HLC services, productivity and the supply of informal care by family members (Section 5.1 and 6.1).

Measured by unit effects in 2035, the tax bill per extra man year of a proportional increase in all types of labour in all tax financed health services equals 1.28 million 2017-NOK (Sec. 4.2 and 4.4). The corresponding tax bill in Long-Term Care equals 0.96 million. These amounts result from deflation by the average wage rate growth. Thus, they capture the growth effect on the tax bases of future wage growth. Both tax bills are more than twice the wage received paid for the extra man year. More than 18 percent of the tax bill can be attributed to reduced tax revenues, which results from the crowding out of the private sector, and thereby the bases of indirect taxes, corporate taxes and the effective revenue from pay-roll taxes. The crowding out effect follows from the assumption of total employment being independent of the simulated changes (Sec. 3). 

In all our scenarios the fiscal gap per capita decreases until 2025. Thereafter it increases in every year (Sec. 6.4). In the minimum scenario S2, the health status of the elderly improves, the informal care increases, whereas the service standards do not rise. This implies that the fiscal gap I below the 2017-level till 2060. The maximum scenario S3 prolongs the present health status and supply of informal care, whereas higher service quality raises man years per user by 1 percent in all years. In light of the historic trends, such a scenario cannot be dismissed a priori. Here, the fiscal gap per capita passes 95 000 2017-NOK in 2060. We also compute the ratio between the growth in public HLC expenditures and the growth in total government revenues. In the period 2017-2035, this ratio is 27 percent in S2 and 51 percent in S3. Accelerated population ageing makes these ratios higher in the period 2035-2060: 41 and 121 percent, respectively, in S2 and S3. Thus, in the long run, S3 implies that the public HLC-expenditures outgrow the total government revenues.

Calculations of the kind presented in this report, do not provide sufficient information to evaluate how much resources that should be used in tax financed HLC production (Sec. 8). An efficient economy manages to reallocate resources to production facing the highest aggregate willingness to pay. More forces than ageing contribute to redirect aggregate willingness to pay in favor of HLC (Sec. 2.2). A high degree of tax financing does not preclude that the allocation of resources to HLC should be decided by standard social efficiency evaluations