Expanding budget space to improve health outcomes in low- and middle-income countries: what role for tax expenditures?

Recent evidence indicates that budget space for health can be improved through increasing government revenues, expanding the budget's health share, and improving expenditure efficiency through enhancing public financial management (PFM), with government revenue mobilization being the most substantial. Government revenue mobilization can be achieved by broadening the tax base, a key component of which is the rationalization of tax expenditures. Tax expenditures are preferential tax treatments, relative to a baseline tax regime, intended to achieve specific objectives by providing financial support to specific beneficiaries. They may, however, result in huge revenue losses, which could be otherwise invested in priority sectors, including health. In addition, tax expenditures ultimately exacerbate inequality, while also creating complexities that foster tax avoidance and evasion, all of which contribute to deteriorating health outcomes. In the context of scarce public finances in low- and middle-income countries, rationalizing tax expenditures can create the necessary fiscal space for development. This paper provides a first comprehensive analysis of the 'health costs' of tax expenditures by analysing the relationship between tax expenditures and health outcomes, with a focus on under-five and maternal mortality. Using data from 55 developing countries from 2000 to 2022, we find that an increase in tax expenditures leads to higher under-five and maternal mortality, especially in low-income countries. The results are robust to several instrumental variable strategies, alternative measures of tax expenditures, and alternative methods. We also find that PFM, through the quality of public administration, transparency in the public sector, and the efficiency of revenue mobilization, mitigates the corrosive effects of tax expenditures. A key implication of our findings is that understanding the 'health costs' of tax expenditures is a necessary precursor to eliminating wasteful tax expenditures, the benefits of which can contribute to expanding the budget space for health and improving health outcomes.