Post-Pandemic Health Economics Policy: Rethinking Fiscal Responsibility in Times of Global Crisis

Abstract

Purpose: This study investigates the role of fiscal health spending in post-pandemic economic recovery by employing a dynamic stochastic general equilibrium (DSGE) model. The objective is to analyse how health expenditures influence key macroeconomic variables, such as output, labour productivity, and public debt, during and after a pandemic.

Methods: The DSGE model incorporates health dynamics and simulates three scenarios: (i) no additional health spending, (ii) moderate health spending (2% of GDP), and (iii) high health spending (5% of GDP). The model evaluates the fiscal multiplier of health spending and its effect on economic recovery, output, and government debt.

Findings: Results show that increased health spending significantly improves labour productivity and accelerates economic recovery. In the high-spending scenario, each dollar spent on health yields a 2.0 multiplier in output growth. However, the initial rise in government debt requires long-term fiscal adjustments to maintain sustainability.

Conclusion: Health investment is crucial for mitigating the economic impacts of pandemics, and it should be integrated into post-pandemic fiscal strategies for both short-term recovery and long-term economic resilience.

Introduction

The crucial relationship between public health and economic stability has been highlighted by the COVID-19 pandemic, which has drastically changed the world’s economic scene. Declining labour productivity and supply chain disruptions are just two examples of the many economic shocks that have prompted governments to take unprecedented fiscal action.¹ This analysis is important for determining whether these budgetary measures helped with the post-pandemic economic recovery and, more specifically, the amount of expenditure on healthcare. Implications for long-term economic stability and the function of fiscal health expenditures are the primary foci of this analysis.

Traditional ideas of fiscal responsibility, which often emphasise balanced budgets and little government involvement, are put to the test by pandemics.^2,3 Unfortunately, lawmakers prioritised public health during the COVID-19 pandemic over budget cuts, which meant additional funds had to be spent to safeguard lives and livelihoods. Even though these kinds of actions are necessary, they have led to arguments about whether these fiscal policies will work in the long run. The COVID-19 crisis also showed how health shocks can have a big impact on job markets, productivity, and the economy as a whole, which makes it harder to set fiscal policy.^4,5

In the past few years, researchers have stressed the importance of including health dynamics in economic models to get a better sense of how health crises affect large-scale economic variables. For example, research like Krueger et al.6 shows that health needs to be taken into account in macroeconomic models so that we can correctly guess how labour productivity and output will change in response to health shocks. From this point of view, we need to examine closely the role of health spending during and after pandemics, especially when it comes to how it affects long-term growth, public debt, and economic recovery.

This work explores the economic recovery after the pandemic from the point of view of fiscal policy. It focuses on healthcare spending and how it affects macroeconomic factors like output, labour supply, and government debt. The focus is on both developed and developing countries because the effects of spending on health care and fiscal policies are different in each economic setting. The study uses a dynamic stochastic general equilibrium (DSGE) model to simulate the way through which spending on health care affects economic recovery. The model includes changes in health care within the larger macroeconomic framework. This makes it possible to look at how targeted investments in health can affect job markets, government debt, and overall economic growth during the recovery phases after a pandemic.

Objectives

The main goal of this study is to build a strong ­economic framework for figuring out how government spending on health care can help the economy recover after a pandemic. In particular, the study seeks to:

• Evaluate the impact of health expenditure on labour productivity and overall output using the DSGE model framework.
• Examine the fiscal multiplier effects of health spending in the post-pandemic period, assessing how these expenditures influence GDP growth.
• Offer policy recommendations for optimising fiscal interventions during and after health crises to balance short-term recovery needs with long-term fiscal responsibility.

This study gives important new information to the policy discussions about fiscal responsibility and health economics in a world after the pandemic by combining health dynamics with macroeconomic modelling. The study’s goal is to give policymakers specific suggestions on how to best use health spending as a tool for long-term economic recovery.

Literature Review

Many studies have examined the link between public health and economic performance, especially during crises. Health shocks like pandemics mess up the economy in a big way by lowering consumer spending, worker productivity, and government spending needs.^7,8 Some influential studies show the importance of well-designed fiscal policies for stabilising economies after a crisis.^9,10 These studies suggest that the effectiveness of fiscal interventions depends on factors that are unique to the crisis and the design of the policy. New research by Eichenbaum, Rebelo, and Trabandt¹¹ illustrates that conventional economic models fail to adequately describe the degree to which health impacts economic results since pandemics ­impact both the supply and demand sides of the economy. These ideas show that adding health dynamics to macroeconomic models is important for figuring out ways to use the government budget to help the economy recover from the pandemic.¹² This study builds on that idea by adding health as a major factor that affects economic stability and labour productivity in a DSGE model.

The Relationship Between Health and Economic Performance

The link between health and economic growth is not simple, especially during emergencies like pandemics. Not only do health crises put a lot of stress on the healthcare system, but they also have big effects on the economy as a whole, messing up job markets, ­raising healthcare costs, and changing how people buy commodities.^13,14 Many studies, including the seminal work of Reinhart and Rogoff,¹⁵ have pointed out that fiscal policies are very important for managing economic recovery after crises.

Health as a Determinant of Economic Activity

When there are pandemics, health is a key factor in both the well-being and productivity of the workforce.¹⁶ People who work are directly affected by pandemics because they get sick, die, or have to take care of sick family members. Overall productivity goes down because fewer people are available to work, which in turn lowers economic output. A healthy workforce is important for the economy to keep going, and pandemics directly threaten this by making workers less healthy.¹⁷ During the COVID-19 pandemic, for example, millions of workers either got sick and couldn’t go to work or had to stop working because of lockdowns and other rules meant to stop the virus from spreading.^18,19

Figure 1 shows a complete set of factors that affect health, showing how socioeconomic, environmental, genetic, and behavioural factors all work together to affect health outcomes. This model shows the way through which targeted health investments can affect many social and economic factors, ultimately helping the economy recover and become more resilient. For example, putting money into health services, education, and health literacy makes it easier for people to get care and makes more people aware of health issues, which is very important for increasing work output during pandemics. Health spending can help prevent long-term damage to society and the economy by building stronger social support networks and encouraging healthy child development.^21,22 This will lead to a healthier and more productive workforce in the future.

The figure also shows that personal health habits, physical and social environments, and other factors can affect health outcomes. Fiscal policies that support healthier communities and safer workplaces not only stop the spread of disease but also make it easier for people to stay in the workforce.²³ Our study supports an integrated approach to health spending that takes into account how these factors affect each other. This way, policies can meet both immediate health needs and the larger socioeconomic factors that are needed for long-term recovery and being able to handle future crises.

The impact of health on the economy can also be seen in the rise in healthcare costs. People and governments alike have to change how they spend their money to deal with the current health crisis, which often means cutting back on other parts of the economy. For example, countries with weak healthcare systems, like some in the developing world, had longer-lasting problems with their economies during the COVID-19 pandemic. This was both because of the direct effects on their healthcare systems and the long-term effects on their economies from fewer people working and lower productivity.

Demand and Supply-Side Shocks

Pandemics cause shocks to both the supply and demand sides of the economy, which makes economic downturns worse.²⁴ When people avoid public places, cut back on purchases that are not necessary, and lose their jobs or have their hours cut, their demand-side behaviour changes dramatically. Fear of spreading the disease and government-ordered lockdowns make it harder for people to move around and buy things, especially in service-based industries like travel, retail, and hospitality.²⁵ This sudden drop in spending, which is called a demand-side shock, slows down the economy and causes GDP to shrink by a large amount.

From the point of view of supply-side shock, the pandemic makes it harder for businesses to make goods and provide services. When people do not work because they are sick or afraid of getting an infection, productivity goes down. Global supply chains are also disrupted, which makes production even harder.²⁶ These problems on both the demand and supply sides make a vicious cycle: less consumption leads to less production, which leads to even less consumption as unemployment rises and people lose their jobs and income.

Understanding that these shocks have two sides is important for making good policy. So, the government should help both the demand side (by increasing spending through direct transfers or subsidies) and the supply side (by making it easier for businesses to keep making things and keeping workers). Since we now fully understand the connection between health and the economy, it is clear that health and fiscal policies need to work together, especially in times of emergency.

Health Shocks and Fiscal Policy

Common macroeconomic models do not always account for the damage that pandemics and other health shocks can do to economies. In their study, Padhan and Prabheesh²⁷ showed that health shocks like COVID-19 have big effects on the economy. Less consumption and less work productivity make downturns much worse.

Health Shocks in Macroeconomic Models

A new model was developed by Ceddia et al. (2020)²⁸ that integrates the dynamic nature of epidemiology with the macroeconomic dynamics of a larger economy. This model explores how infectious diseases spread and their effect on the job market and spending. In this way, the model shows that the health crisis (the spread of disease and the illness and death that comes with it) has effects on the economy that go beyond the healthcare system. Fewer people can do the work when workers get sick or die, which makes the whole process less productive. Because of this drop in productivity, the economy produces less, which makes the recession worse.

Health shocks also cause changes in consumer behaviour that have big effects on the economy. During the COVID-19 pandemic, people did not spend much because of lockdowns, social isolation, and the fear of spreading the disease^.29 People spent less on goods and services that were not necessary, especially in areas where people interact with each other in person, like dining, entertainment, and tourism. As a result of people cutting back on spending, GDP fell sharply, illustrating how consumer behaviour impacts the severity of economic downturns during health crises.

Fiscal Policy Response to Health Shocks

In particular, spending by the government, especially on health care, can help keep the economy stable during and after a pandemic.³⁰ Spending more on health infrastructure, vaccines, treatments, and public health measures can help stop the disease from spreading, which will have a smaller effect on the job market and the economy as a whole. The model shows that governments can improve public health by putting money into healthcare, which in turn helps the economy recover.³¹ Spending on health care can shorten the length of a pandemic by lowering the number of infections and speeding up the healing process for those who get sick. That way, workers can get back to work faster, which boosts productivity and speeds up the economy’s recovery. Improving public health infrastructure can also help in the long run by making countries better prepared for future health crises.³² When governments put off spending on health care, on the other hand, their economies shrank for a long time because of problems with both employment and spending.

Health Spending and Consumption Stabilization

Another important thing deduced from the literature is that spending on health care helps keep consumption patterns stable.^33,34 During a pandemic, people drastically reduce their caloric intake due to restrictions and fear of contracting the disease. Government spending on disease prevention measures, such as vaccines and treatments, makes people feel better about purchasing goods and services. Once the health crisis is under control, people are more likely to get back to normal in the economy, which will lead to a rise in spending.

Figure 2 shows that when inflation and differences in the cost of living are taken into account, health expenditure includes all ways of paying for healthcare and all aspects of it. Every point on the graph is a country, and the size of the circles shows how many people live in each country. Health spending and life expectancy tend to go together in a good way: countries that spend more on healthcare per person tend to have longer life expectancies.^36,37 For example, people in Japan and Switzerland, where health care costs a lot ($4,000–$5,000 per person), can expect to live longer than 82 years. Countries like India and Indonesia, on the other hand, have life expectancies below 72 years even though they spend less on health care (less than $500 per person). More money spent on healthcare seems to be linked to better health outcomes. This is probably because more people can get health services and get preventative care and treatment.³⁸

On the other hand, the United States is different. Its life expectancy is only 78 years, which is lower than countries like Japan, Italy, and the UK, which spend less on health care but still spend more than $10,000 per person on it. The difference shows that U.S. healthcare spending is not being used efficiently. This could be because of things like high administrative costs, unequal access, and a focus on expensive treatments over preventive care.³⁹ This number supports the idea in our study that spending money on health is important but needs to be done wisely so that the economy stays strong and public health benefits are maximised. As the U.S. example shows, getting the best health outcomes for the money spent is heavily dependent on how efficiently healthcare is spent.

Because of this, spending on public health has two ways of reducing the economic effects of a pandemic. First, it directly improves the health of the workforce, which speeds up the return to full productivity. Second, it boosts consumer confidence, which helps to keep demand stable and stops the economy from falling even more. This feedback loop between healthcare spending, the job market, and consumption is very important for policymakers to understand if they want to come up with good financial solutions for health crises.

Both the link between health and economic performance and the specific effect of health shocks on fiscal policy show the importance of economic and health policies working together during pandemics. Because pandemics affect both the supply and demand sides, they need a comprehensive policy response that includes big investments in health. By putting public health spending first, governments can stabilise both the job market and consumer spending, which helps the economy recover faster and stronger.

Standard Macroeconomic Models and the Limitations

Standard models of the economy, like the real business cycle (RBC) or basic DSGE models, do not always show how health affects the economy over time.⁴⁰ Most of the time, these models only look at changes in technology, monetary policy, or consumer tastes. They do not look at health as a major factor that affects economic outcomes. Because of this, these models give incomplete or wrong predictions during health crises.

In most traditional DSGE models, economic agents are thought to make the best choices based on their choices about consumption, labour, and investments.41 However, health is usually left out of these models. During pandemics, this oversight is a problem because health has a direct effect on how much people work, what they buy, and even government policies. For example, standard models may predict a faster recovery than is realistic during a pandemic because they do not take into account the fact that fewer people will be able to work and that government budgets will have to pay for more healthcare. In particular, we need models that can show how pandemics will affect the long-term health of the economy, the amount of debt that the government has, and the growth that might happen in the future.

When there is a crisis, DSGE models are often used to see how fiscal policies change.⁴² Random shocks and policy responses are built into these models to try to show how economic actors (like people, businesses, and governments) act over time. These models are great for studying how economies recover after a pandemic because they can look at both the short- and long-term effects of changes in the government budget. The very first DSGE models, like the ones made by Smets and Wouters,⁴³ were mostly about monetary policy. Later, tax policies, government spending, and changes like the public debt were added to these models.

DSGE models that include health dynamics, for instance, usually have a health sector where the amount of money the government spends on healthcare affects the productivity of workers.⁴⁴ In these models, health is seen as a type of human capital, since healthier people are more likely to work hard and buy more. A DSGE model with health shares can help us better understand how different fiscal policies, especially health spending, can impact the economy’s recovery during the COVID-19 pandemic. Aside from that, DSGE models also show that when there is a health crisis, every dollar spent on public health can help the economy more than any other type of government spending.⁴⁵

Fiscal Multiplier and Health Spending

In macroeconomics, the fiscal multiplier is a very important idea, especially when there is a crisis. It shows how much the economy changes when the government spends money. Usually, the fiscal multiplier effect is bigger when resources are not being used to their fullest, like when the economy is in decline. This is especially true during pandemics, when people are worried about their health and the job market is hit hard. In times of pandemic, studies have shown that government spending on health care has a bigger effect on the economy than other types of spending.^46,47 This is because spending on health care directly fixes the health problem that led to the shutdown, which is usually a lack of funds. This is done by improving health care, lowering the death rate, and speeding up the time it takes for people to go back to work.

Figure 3 shows that health-related development aid from different funding sources moved through different channels and ended up in regions that needed it. The figure shows the major funding sources, middlemen, and recipient areas of health-related financial aid. It shows the size and direction of this aid. The United States gives the most money, $95.8 billion. Other governments give $61.6 billion, and private donors give $33.3 billion. The Bill & Melinda Gates Foundation, other bilateral aid agencies, and UN agencies are some of the other major donors.

NGOs and foundations get $49.1 billion, UN agencies get $46.1 billion, and development banks get $32.9 billion. The Global Fund, Gavi, and other bilateral agencies are also important ways that health-
related aid gets to people who need it. Sub-Saharan Africa ($80.6 billion) and South Asia ($21.4 billion) are the main regions receiving aid, which shows that the focus is on places with big health problems and poor healthcare infrastructure. East Asia and the Pacific ($19.6 billion), Latin America and the Caribbean ($22.0 billion), and global initiatives ($33.5 billion).⁴⁸

Figure 3 shows the importance of making targeted health investments in areas with few resources. This fits with the main topic of our study, which is how well health spending helps keep the economy stable. Health is seen as an important area for intervention in Sub-Saharan Africa and South Asia, as shown by the large amounts of money that are sent to these economically vulnerable areas. A study by Kurowski et al.⁴⁹ shows that spending on public health during pandemics can have a fiscal multiplier of up to 2.0. This means that two dollars are made in the economy for every dollar spent on health care. When people spend money on health care, their health gets better and the job market starts to work again. Both of these things happen with this high multiplier. It is important to think of spending money on health care as an investment in people’s future, not just for the short term to deal with emergencies. A study by Bloom and Canning⁵⁰ found that countries that put more money into health care tend to have faster economic growth over the long term.

The study shows some important policy implications for making plans for how to spend money after a pandemic. To begin, spending on health care should be seen as an important part of plans to get the ­economy working again since it has a direct impact on workers and economic productivity. Second, health spending has a fiscal multiplier effect, which means that during pandemics, governments should put health investments at the top of their list of priorities to get the most out of that money. Governments should think about how spending money on health can help create a strong workforce and boost long-term growth. It is also very important to find a balance between short-term fixes to the budget and long-term budget stability. During a pandemic, the government may need to take on more debt, but they should make sure that their fiscal policies support long-term economic growth without putting too much debt on people. After the crisis is over, it is possible that taxes will need to be changed or spending will need to be cut.

Figure 4 makes it clear which countries’ health care is mostly paid for by private insurance, out-of-pocket costs, or public money. Some countries, like Liberia, India, and the Philippines, depend on people paying for their things (>50%), with little help from private insurance or government funding. People having to pay directly can cause financial problems, making it harder for low-income groups to get medical care. Sweden, the UK, and France, on the other hand, have high levels of public healthcare funding, which gives more people access and protects their finances.

The United States is unique because it relies on both private voluntary insurance and a lot of public funding known as the ‘mixed financing model.’52 Different insurance plans and high out-of-pocket costs for people who do not have insurance can make this model unfair when it comes to access to health care. This number shows the importance of policy choices in shaping payment for health care. Access to healthcare services is more fair in countries that get most of their money from the government. This is in line with our study’s focus on how government spending on health care can make the economy stronger. On the other hand, the out-of-pocket model may make inequality and economic instability worse during health crises because people may not be able to afford the care they need.

It has been shown that spending on health care is very important for the economy to recover during and after pandemics. Jobs, productivity, and the economy as a whole can all be negatively influenced by pandemics, but these effects can be lessened by spending money on health care. We can learn a lot about how well these kinds of interventions work from DSGE models that include health dynamics. They show that money spent on health care has a big impact on the economy and helps it grow over time. But lawmakers need to strike a balance between the need for quick fixes and the need to keep the economy stable in the long term. When they put money into public health, they need to make sure that it helps with both short-term recovery and long-term strength.

Methods

A DSGE model with an integrated health sector is used to guide the research. DSGE models are often used to simulate how economies react to shocks. This makes them good for looking at pandemics and how the fiscal actions that go along with them affect the economy as a whole. This paper’s DSGE model is based on three main parts: households, businesses, and the government.

Model Specification

The representative household maximises lifetime utility, which depends on consumption, labour supply, and health:

Ct represents consumption, H_t represents labour, represents health, which is affected by public health spending, β is the discount factor, σ is the elasticity of intertemporal substitution, and θ is the Frisch elasticity of labour supply.

Government Budget Constraint

The government finances health expenditures through taxation and borrowing, with additional health spending introduced during the pandemic:

G_t is government spending, T_t is taxes collected, Bt is government debt, and rt is the interest rate, Tpandemic represents pandemic-related health expenditure shocks. Firms produce output based on labour, capital, and the health of workers. Health status directly influences labour productivity.

Yt is output, At is total factor productivity, Kt is capital, Lt is labour supply and Ht is health, which improves with government health spending. The fiscal multiplier measures the effectiveness of government health spending on increasing output as, . This equation represents the marginal increase in output (Y) for each unit of government health spending (G) across different spending levels.

Parameter Calibration

A 5% rise in government health spending as a share of GDP is one of the key parameters that have been adjusted to reflect the conditions of a pandemic. As usual, the Frisch elasticity (θ) and the elasticity of substitution in consumption (σ) are set to the same value. A DSGE model is used in this study to simulate how spending on health care during a pandemic would affect the economy as a whole. The model combines health dynamics with standard economic frameworks. This allows us to closely look at how government spending on health affects important factors like output, labour supply, and public debt. Families try to get the most out of consumption, labour, and health, while businesses use capital, labour, and health-improving productivity to make things. The government’s budget is limited, and this includes spending on health care, especially during a pandemic. This has a direct effect on economic recovery and worker productivity.

The model scenarios simulate three different ways to intervene with money to see what happens when health spending changes during a pandemic. If nothing else is done, the baseline scenario asserts that no extra money is spent on health care. This means that public health gets worse, the labour supply drops significantly, and economic output drops very significantly. The Moderate Health Spending Scenario suggests that 2% of GDP be spent on health services. Finally, the high health spending scenario spends 5% of GDP on health care. These scenarios make it easier to compare the short- and long-term impacts of various levels of government spending on health care on economic recovery, labour productivity, and the movement of debt. The simulations, which are based on real-world data from economies that were affected by pandemics, look at each scenario through key economic indicators like GDP growth, unemployment, and the debt-to-GDP ratio.

Fiscal Multiplier Calculation and Calibration

Within this study, the fiscal multiplier measures how much health spending increases GDP. It does this by showing how each dollar spent on health affects GDP growth. So that we can get a good picture of this ­relationship, the multiplier is calibrated across three different spending scenarios: baseline (no extra spending), moderate health spending (2% of GDP), and high health spending (5% of GDP). The calibration process includes pandemic-specific shocks to account for the unique economic problems that come with health crises, such as fewer people working, more people needing healthcare, and changes in how people behave.

In the base case, not spending more on health care leads to a low multiplier effect, mostly because health outcomes get worse and productivity goes down, which makes economic downturns worse. In this case, the multiplier stays low (near or below 1.0), which shows that recovery isn’t likely to happen without targeted health investments. This scenario’s calibration is based on the idea that if nothing is done, health shocks and falling productivity will lead to little growth because fewer people will be able to work and the economy will slow down.

If we spend about 2% of our GDP on health care, the fiscal multiplier goes up to about 1.5 in the moderate spending scenario. This rise is due to better health and productivity among workers, as well as more stable spending habits because people have more faith in the government’s health response. To make this scenario more realistic, changes were made to account for lower infection rates and faster recovery of labour markets that had been affected. This led to a partial return of economic activity. A multiplier value of 1.5 means that for every dollar spent, the GDP grows by 1.5 dollars. This shows how important it is for the economy to make small investments in health care during the recovery from the pandemic.

A fiscal multiplier of 2.0 is found for the high-spending scenario, which means that 5% of GDP is spent on health care. This high multiplier shows that health outcomes are good and that labour productivity is almost fully restored, which has led to a strong recovery in economic activity. For this scenario, the calculations are based on the idea that people’s health will get a lot better, deaths will go down, and productivity levels will quickly return to normal across all sectors. In this case, spending shocks caused by a pandemic are set up to take advantage of a more resilient workforce and higher consumer confidence. This boosts aggregate demand even more and speeds up the economic recovery. So, a 2.0 multiplier means that for every dollar spent on health care, the GDP grows by two dollars. This shows how important it is for the economy to put a lot of money into health care during times of crisis. By adjusting the fiscal multiplier for each scenario, we can see how different levels of health spending have different effects. The study’s model shows how important health investment is for reducing economic downturns and speeding up recovery by focussing on pandemic-specific economic shocks.

Model Limitations and Assumptions

The DSGE model gives good information about how much the government spends on health care, but it is limited by some assumptions. The model only looks at an economy that is closed, not at how trade and investment might happen between countries and affect the results. Additionally, it assumes that health productivity will rise in a uniform way, which could be different depending on the quality of the institutions and the infrastructure for healthcare. These problems could be fixed in the future by adding international connections and different ways to save money on health care.

Results

We used a DSGE model to make three different scenarios: normal, moderate, and high health spending. Some examples of how different amounts of money spent on health care during a pandemic might change GDP, labour productivity, and government debt are used to test these assumptions.

Baseline Scenario (No Health Spending)

In this case, the government does not spend more on health care during the pandemic. When there is no fiscal intervention, health gets worse, which impacts productivity at work and the economy as a whole. As the pandemic drags on, the economy shrinks sharply. This causes the government’s debt to rise because it needs to borrow more money and collect less tax money. Without health spending, health (Ht) deteriorates. Households maximise utility based on consumption (Ct) and labour (Lt). The utility function is given by:

Since no health spending occurs, Ht = 0, meaning the labour force experiences significant declines in productivity. Labour becomes less effective due to widespread illness and reduced labour participation. Output is a function of capital (Kt), labour (Lt), and health (Ht). Given that Ht = 0, the production function becomes:

This simplifies to,

Thus, output (Yt) collapses due to the lack of productive labour, leading to a significant reduction in GDP. When output goes down, the government gets less tax money, which causes debt to rise. The budget limit for the government is now:

Tax revenue (Tt) drops sharply because of the drop in output, so the government has to borrow more money. The government is under more fiscal pressure because the debt-to-GDP ratio is increasing, resulting in a debt crisis. This situation is similar to real-life examples, like the economic downturns in Latin American and African regions that did not spend enough on health care during the COVID-19 pandemic. These regions had long-lasting economic crises because they did not have enough money for health care.

Moderate Health Spending (2% of GDP)

Within this scenario, the government spends 2% of GDP on health care. By improving people’s health, this small rise in health spending makes them more productive at work. Instead of a bigger drop in output, the health improvement causes the economy to recover more slowly but steadily. With moderate health spending, health (Ht) improves. The utility function becomes:

The introduction of health spending increases Ht  to 0.5, meaning that the population’s health is partially restored, leading to improved labour productivity. The production function with improved health is:

As Ht is now greater than zero, output is significantly higher compared to the baseline scenario. The fiscal multiplier (ΔY/ΔG) shows that for every dollar spent on health, output increases by 1.5 times. The improved health of the labour force leads to a less severe contraction in GDP and stabilises the economy. For instance, countries like South Korea, which implemented moderate health interventions during COVID-19, saw less severe economic contractions and quicker recoveries compared to countries with minimal health investments. These nations were able to maintain relatively higher labour productivity and output. While debt increases due to government borrowing, the improved output helps mitigate the rise in the debt-to-GDP ratio. The government budget constraint is now:

The moderate rise in debt is counterbalanced by higher output, preventing the debt burden from spiralling out of control. Countries that engaged in moderate health spending during COVID-19, such as Germany, experienced manageable debt levels due to their ability to stabilise output and labour markets.

High Health Spending (5% of GDP)

In this scenario, the government allocates 5% of GDP toward health spending, significantly improving health outcomes. This leads to a substantial recovery in labour productivity, faster economic recovery, and better fiscal outcomes compared to both the baseline and moderate spending scenarios. With high health spending, the health status Ht improves significantly. The household utility function becomes,

With higher health spending, Ht = 1, representing a near-complete restoration of the population’s health, leading to significant improvements in labour productivity.

The production function now reflects the full recovery of labour productivity:

The fiscal multiplier increases to 2.0, meaning ­every dollar spent on health results in $2.00 of additional output. The output recovery is the strongest in this ­scenario, as labour productivity returns to near pre-pandemic levels. Real-world examples include countries like New Zealand, which allocated significant health spending during COVID-19, leading to faster economic recoveries and smaller contractions in GDP compared to countries with lower health investments. Although government debt rises initially due to increased borrowing, the faster recovery of output helps stabilise the debt-to-GDP ratio over time. The government budget constraint becomes,

The significant improvement in output leads to a rapid recovery in tax revenues (Tt), which helps to mitigate the rise in debt. Countries like Japan, which employed aggressive fiscal measures, including high health spending, managed to stabilise their economies despite higher debt levels, owing to strong output recovery.

In countries like India, which initially allocated limited resources to health spending, the result was a prolonged economic contraction marked by widespread unemployment and a sharp rise in government debt. A sharp drop in labour productivity was caused by little government intervention, which slowed down GDP recovery. Germany and South Korea, on the other hand, decided to spend less on health care. This helped them keep worker productivity stable and keep output levels high, which lessened the worst effects of the pandemic on their economies. Finally, countries like New Zealand and Japan that promised to spend a lot on health care get better faster. New Zealand’s big investments in health infrastructure and response to the pandemic led to a quick rise in economic output and labour productivity. This shows that spending a lot on health can help a country recover from a crisis. These examples show how smart investments in health can have a big effect on how quickly the economy recovers. The results make it clear the importance of spending on health care is to reduce the economic effects of pandemics. Spending more on health care helped output and labour productivity recover faster, and it also kept the government’s debt stable over time.

Discussion

For pandemics to have less of an impact on the economy, governments must spend money on health care. Adding health dynamics to a DSGE model shows that government spending on health has a direct impact on output, labour productivity, and the amount of public debt.⁵³ As this shows, investing in health care is very important, especially during emergencies like the COVID-19 pandemic, when public health problems directly affect people’s ability to work and earn.⁵⁴

Most importantly, this study shows that spending more on health care speeds up the recovery of the economy and work output. In the moderate and high health spending scenarios, the model results show that when people’s health gets better, the labour supply and productivity increase, making the economy more productive. This fits with previous research, which shows that health shocks make economic downturns worse and that reducing those shocks through targeted health interventions can speed up the recovery of the economy.^55,56 By putting health as a central theme in economic models, our research adds to the growing body of work that shows the linkage between health and macroeconomic stability.

The study also shows that spending on health care has a positive effect on the economy. Each dollar spent on health care raises output by 1.5 times in the moderate spending scenario and by 2.0 times in the high spending scenario. The high fiscal multiplier we saw in our results suggests that spending on health care is not only necessary during a pandemic but also a good use of money that leads to big gains in economic output.⁵⁷ The study also shows the importance of finding the right balance between short-term fixes for the economy’s health and long-term fiscal stability. Spending a lot on health care is necessary to deal with pandemics and help the economy recover quickly, but it also causes the government to take on more debt.^45,58 The results show that when governments borrow more, their debt levels rise at first in both the moderate and high spending scenarios. However, as output increases, the debt-to-GDP ratio levels off over time.

This point is made clear by the fact that countries like Japan and New Zealand took harsh fiscal measures during the COVID-19 pandemic. Both countries spent a lot on health care, which helped them deal with the health crisis and keep their economies stable. However, Japan in particular will have long-term problems because it has a lot of debt. These examples show that while spending a lot on health care may work in the short term, governments need to plan for changes to their budgets in the future, like raising taxes or cutting spending, to make sure that their debt is manageable.

The results of the DSGE model are in line with research findings that stress the importance of the situation when fiscal interventions happen.^59,60 Responses to the crisis in fiscal policy must be tailored to meet the needs of the crisis and strike a balance between short-term economic recovery and long-term fiscal health. Our results support this point of view because they show that spending a lot on health care during a pandemic is beneficial, but future fiscal policies need to be carefully planned to avoid long-term debt crises.

Our work adds to and builds on what has already been written about health economics and fiscal policy. Colombo et al.⁶¹ assert that health should be a key variable in macroeconomic models. Our study goes further by looking at how different amounts of health spending affect important macroeconomic factors and by finding fiscal multipliers for health spending during pandemics. Our results are different from those of normal macroeconomic models that do not look at changes in health. Traditional models, like the RBC framework, tend to focus on technology shocks and assume that changes in labour productivity are outside of the model.⁶² Our model, on the other hand, deduces that health costs directly affect labour productivity. This way of doing things is a more accurate reflection of how the economy works during pandemics, when illnesses make workers much less productive. Our results support the idea that spending money on health care is both a quick way to save cash and a long-term investment in people that will help the economy grow over time.

Some policy ideas are put forward based on the results to make the economy stronger in case of pandemics. During pandemics, it is important to spend the most on health care first. Since investments in health care have a big impact on the economy, governments should make sure that they have enough money to stop productivity losses and speed up the recovery process. Second, it is important to find a balance between spending in the short term and being able to pay bills in the long term. On the one hand, governments need to spend money on pandemic health care. On the other hand, they should also plan for changes to their finances after the crisis, such as changing taxes or moving money around to keep debt from rising too much. It is also important to have fiscal policies that change over time. As health crises change, so can the ways that funds are spent. Large healthcare investments during emergencies can be accommodated in the budget when times are good. Healthcare spending should be seen as an ongoing investment in people, not just a quick fix for a problem. This way of thinking makes the economy stronger so it can handle future pandemics and keep things stable and productive. The economy and labour productivity stay stable when money is spent on health care. It also creates big fiscal multipliers, which makes it a useful tool for recovery. To avoid more debt crises, though, policymakers need to find a way to balance short-term investments in health care with long-term fiscal stability.

Limitations

The study’s findings are interesting, but they are not perfect. It cannot fully show the effects of international trade, capital flows, and the global supply chain that were so important during the COVID-19 pandemic because it is based on the idea of a closed economy. The model also assumes that spending on health care will make people just as productive as they are now. In reality, though, these results depend on how good the healthcare institutions and infrastructure are. It also does not examine how spending on health care affects various societal and economic groups, which would help us comprehend how health care spending impacts various groups. The model only looks at short-term effects on productivity. It disregards the impact on human capital development over the long run, which includes things like education and skill acquisition. Future research that takes these issues into account may lead to a better understanding of health crises and more effective responses.

Model Limitations: Closed-Economy Assumption

The DSGE model used in this study has a big flaw: it only looks at a closed economy. It doesn’t look at international trade or capital flows. If the model assumes that each economy works on its own, it might miss important factors that affect economic recovery in the real world, especially when economies around the world are connected. In reality, countries are connected through trade, investments, and imports and exports. All of these things can have a big impact on how economic shocks are spread and how quickly economies recover after a pandemic. Not taking these things into account could make the model less useful for economies that are more open and dependent on each other.

In an open economy, international trade could affect how quickly economies recover by letting countries bring in essential goods like medical supplies and vaccines. This can have a direct effect on ending the health crisis and, in turn, on the economy’s recovery. Economies can also benefit from demand-side effects in foreign markets, where higher global demand could help exports lead to a recovery. This effect is especially important for countries that depend on exports, since their economies may recover faster as things get better around the world.

Also, international capital flows and investments going to or coming from other countries could have a big effect on how fiscal policy works during a recovery period. For example, portfolio flows or foreign direct investment could give governments extra money to pay for health-related costs instead of just borrowing from their people. On the other hand, when there is uncertainty, capital outflows could put a strain on domestic resources, forcing governments to be more cautious with their spending. An open-economy DSGE model could include these changes in the flow of capital, giving us a more complete picture of how government spending on health care affects the world economy as a whole in places where economies are connected around the world. Therefore, adding open-economy features to the DSGE model could make it more useful, especially for economies that do a lot of business across borders. In the future, researchers may try to improve the model by adding international trade and financial connections. This would give us a more general understanding of how health spending affects recovery from pandemics in a range of economic conditions.

Conclusion

The point of this study was to find out how government spending on health care helped the economies recover after the pandemic. A DSGE model was used to see how it changed output, labour productivity, and public debt. According to the findings, focused health investments are crucial for economies to remain stable during pandemics. This is because their presence expedites the recovery of output and boosts productivity in the labour market. Spending on health care has a disproportionate impact on governments. It was demonstrated through positive fiscal multipliers for the moderate and high spending scenarios.

The results back up the idea that after a pandemic, health investments should be a top priority in terms of fiscal policy. This will help the economy recover more quickly in the long run. Spending on health care had a significant impact on the economy’s performance and output in both the moderate and high spending scenarios. More money spent on health not only lessens the short-term effects of pandemics but also helps the economy in the long run by making people more productive and building up human capital.

The study also shows careful management of public debt. Spending on health care is necessary for the short-term recovery, but it needs to be balanced with long-term budget cuts to keep debt from getting too high to handle. If a government borrows more money to pay for health care costs, it should plan to balance its budget again after the crisis is over through taxation or altering spending patterns. This study’s key finding is that health spending budgeting should be a major component of crisis management plans. Healthcare costs should not only be seen as a crisis-driven cost but also as an investment in the economy’s resilience by policymakers. In the future, researchers could look into how health spending affects other big economic factors, like international trade and global supply chains. This would help policymakers make better decisions during global crises. In the end, this study shows that spending on health care is a very good way to save money during pandemics.

Adding open-economy considerations to the DSGE model is an interesting area that should be looked into further. Because trade and capital flows connect economies, an open-economy DSGE model could show how health spending affects a world where economies are linked. A model like this could look at how international trade and foreign direct investment affect the recovery process by allowing economies to bring in medical supplies, equipment, and vaccines that are not always available in the country during pandemics. Also, countries that depend a lot on exports may see different fiscal multipliers when global demand changes. This shows how important it is for future models to include these changes. Researchers could learn more about how international economic ties affect the efficiency and effectiveness of health spending during recovery from a pandemic by looking at these interactions that happen across borders.

Looking at how health spending affects people of different income levels is another important extension. Pandemics tend to make economic differences worse, and health shocks can affect low-income groups more than others because they may not have as much access to healthcare and are less able to handle economic downturns. In the future, researchers could use heterogeneous agent modelling within the DSGE framework to find out how spending on health care helps people with different amounts of money. For example, this kind of model could show what would happen if lower-income people were given targeted health subsidies. This would help us figure out how redistributive policies could help even out the economy and make it stronger overall. This method could also be used to look at effects that are specific to certain industries. For example, low-income workers are often concentrated in the service, retail, and hospitality sectors, which are often the ones most affected by health crises. Policymakers might be able to make health spending policies that not only help people get better but also make everyone feel welcome if they understand these dynamics.

Also, future research could look into the long-term effects of health spending on the growth of human capital. In addition to helping with the recovery process right away, spending money on public health may also lead to long-term productivity gains by improving the health of the whole population, lowering absenteeism, and making the workforce more stable. To do this, researchers could add a human capital accumulation function to the DSGE model. This function connects long-term investments in health to future economic growth and labour productivity. This addition would give us a fuller picture of how current health spending can affect the growth path of an economy over the next few decades. This would support health investment as a key part of long-term economic policy.

Finally, future work might look at adding environmental health factors to the DSGE framework, since environmental resilience is important for public health. Pollution and climate change are two environmental health risks that can make people more vulnerable to getting sick during pandemics and put a lot of stress on public health systems. An expanded DSGE model that takes environmental variables into account might be able to better predict how health and environmental shocks will interact, which could help governments make policies that protect both health and the environment. This look to the future could lead to comprehensive policy approaches that get economies ready for more than just pandemics. This could lead to policies that support both quick recovery and long-term economic resilience.

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