Impact of public health spending on Mexican economic growth

Abstract

This study analyzes the effects of public health spending in Mexico, using a panel vector autoregressive (VAR) model with annual data from 31 states (excluding Mexico City). Unlike most studies, which focus on general public spending, this paper’s focal point is health spending as an engine of economic growth in the context of fiscal federalism and limited resources. Using the identification methodology of Blanchard and Perotti (2002), the analysis differentiates structural shocks in health expenditure from those in other types of public spending, under the premise that it does not respond immediately to variations in GDP. It is argued that increasing the proportion of the budget allocated to health, without enlarging total spending, can stimulate economic growth. The results show that a 1% increase in health spending can raise GDP by 0.1% over a five-year period. In addition, improvements are observed in indicators such as infant mortality and access to services. Although health spending has been stagnant since 2003 and remains low compared to OECD countries, its positive effects suggest that increasing it is an effective strategy. Finally, the study highlights that although the impact on public health is positive, there are structural limitations in the system to absorb more resources efficiently. Therefore, it is recommended that health be considered as a strategic investment to promote economic growth and reduce poverty in Mexico.