Business Environment

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Class

Professor
LO 2) Know how government spending impacts on businesses

After the 18th amendment health has been made a provincial subject and health related
decisions and management is now the responsibility of the provinces yet federal government is
still responsible for the hospitals and health institutions operating in the federal capital. PIMS is a
public hospital operating in Islamabad and is thus the federal government's responsibility.

Health care is one of the services a government provides to its citizens through various public
hospitals. Thus the financial and managerial decisions on the operations of the hospital lie with
the government. Thus any changes in the government spending will have direct effects on the
service delivery in the public hospitals and PIMS is no exception to the rule. In the most layman
terms an increase in government spending will increase the level of service delivery and a fall in
government spending will decrease the level of service delivery. When a government increases
spending it is aiming for increased economic activity and the Keynesian theory suggests that an
increase in government spending can help a country overcome recession because increasing
government spending will have a multiplier effect on the economy that is an increase in 1 rupee
of government spending will result in economic growth worth more than 1 rupee. Increased
government spending at PIMS can help advance the service delivery through a plethora of ways.
If the salaries of doctors are increased, it will help reduce absenteeism and the doctors will be
more committed and motivated to work diligently at PIMS instead of investing their time and
energies at private clinics and hospitals. Similarly, through increased government spending the
infrastructure and patient capacity can be increased at PIMs which will help treat more people in
need of subsidized health care. This will increase the demand for health care when people will
realize they will receive good facilities and simultaneously the hospital will be able to increase its
service delivery output. On the other hand, if the government decides to cut spending it will
disincentive the doctors and the level of service delivery output will fall. With cuts in government
spending most of the attention will be to meet the day to day operational expenditures of the
hospital with little to no regard for future implications or growth perspectives. Another important
implication here is the factor of inconsistency. With inconsistent economic conditions growth in
the health sector both public and private is at risk because it crowds out investment and is a
disincentive to prospective investors from investing in the health sector of the country.

When we analyse PIMs in regard to government spending and its impact the visual image is very
unusual because even though in the recent budget government almost halved spending on health
which should theoretically speaking lead to a lot of disadvantages for PIMs hospital. Yet this is
not the complete picture because along with these overall expenditure cuts for the health sector
the government specifically earmarked money for the development of PIMs through about 1.2
billion rupees’ budget allocation for construction of a nursing facility, a waste management plant,
up gradation of the mortuary, ENT department to name a few. In light of these developments it
can be safe to say that PIMs will not face much burn of the government spending cuts in the
health sector.

LO 4) Understand fiscal and monetary policies and the effects on spending

Apart from government spending the government often utilizes another fiscal policy tool to control
the economy and this tool manifests in the form of tax policy. Taxes are crucial for government
functioning as they are the primary sources of revenue for the government to fund the budget
requirements. The government imposes taxes on the income and expenditure of citizens and
corporations similarly the government also imposes taxes on production and sale of goods and
services. We can say that taxes are an integral part of the economy and play a vital role in the
success or failure of different business ventures in any country because the tax policy of the
country defines the business environment of the country. In simple demand and supply
terminology we can say that an increase production and raw material taxes in taxes will lead to a
fall in the supply of goods and services and an increase in the income and sales/consumption tax
will lead to a fall in the demand for goods and services. Thus high taxes essentially slow down
the economic growth and economic activity in the country. Whereas the opposite happens when
tax rates are reduced or subsidies are provided by the government. In this scenario a stimulus is
provided for economic growth. The recent budget imposed almost rupees 17 billion worth of
additional taxes. This has drastic impacts for the functioning of PIMs hospital in various ways. For
example, an increase in taxes will increase the cost of medicines used by the hospital increasing
their cost of operations. Similarly, increased taxes will increase the cost of all kinds of
procurements in the forms of beds, medical supplies, instruments, equipment etc. this will
discourage the hospital from procuring new material and they will use the broken and outdated
equipment in the hospital and compromise the level of service delivery. If import duties are raised
the cost of importing medicines and international equipment will skyrocket which will force the
hospital to use low quality and cheap substitutes that could prove to be detrimental to public
health.

The discussion above mainly focuses of the fiscal policy implications on health the government
has another policy measure to control and impact the economy. This is the monetary policy which
utilizes interest rates and money supply to impact the economy. Interest rates are rates set by the
State Bank of Pakistan at which loans can be issued. Higher interest rates result in a fall in
investment because the cost of borrowing increases and people will avoid borrowing money to
invest in business or economic activity. Like the tax policy interest rates also impact public
hospitals but not as directly as the former. With an increase in tax rates in investments in private
health care will fall as people will not have the money to invest. This will increase the demand for
health care in the public sector. This is mainly because the private health care will become more
elusive in the case of low investment in the sector considering the interest rates. This will make
private health care unaffordable to majority of the population and they will move towards the public
sector to get the services they need. Thus the service demand for PIMs will increase. On the other
hand the level of service delivery might also be affected by high interest rates as it will also
discourage PIMs from borrowing money to spend on elements that can help increase the level of
service delivery.

LO 5) Know how the international economy affects businesses and competition

Today’s era is an open economy where international forces play a vital role in the functioning of
different sectors. The health sector in Pakistan is dependent on the international economy not
only for imports of medicines and equipment but also for funding through different international
organizations like the World Health Organization and World Bank that have through the years
provided funding for different health related initiatives like Polio, Malaria, Tuberculosis and AIDs.
If the international prices of equipment’s and medicinal drugs rises the cost of service delivery will
rise drastically in all hospitals in Pakistan and PIMs will not be an exemption, it will have to pay
more to import the drugs and equipment which will decrease its disposable revenue for other
operational uses.

Similarly, if the international conditions are not favorable for the country the health care grants for
the country will also fall. This will lead to huge gaps in the expenditure and revenue spreadsheets
of hospitals across the country. A strong case presented by the concerned ministries can help
raise grants for the public hospitals in the country through the International organizations that aim
for good governance and development of the developing countries. After the financial crisis of
2008 most of the countries across the globe were engaged in the austerity measures which
reduces the grants for funding in the developing countries. Thus, it is safe to say that during times
of international boom funding for development in developing countries especially in the fields of
health and educations also increases while the opposite happens during recession. Recently we
have seen that with the MDG’s and the SDG’s where health has been included as a major
component significant amount of funding infiltrated in the country. Most of these funds and grants
are conditional in nature and majority of the times come with good governance characteristics
that need to be implemented. Japan International Cooperation Agency provide about rupees 400
billion for extension of the MCH and the children’s hospital at PIMs. Funds like these helps
increase the service delivery in the hospital in the form of increased output as well as good
management and governance that comes with the conditional requirements attached to the finds.

Bibliography
Abbasi K. PIMS generating less revenue than country’s average private hospitals.
https://nation.com.pk/13-Oct-2019/pims-generating-less-revenue-than-country-s-average-
private-hospitals

Akram M, Khan F J. Health Care Services and Government Spending in Pakistan. PIDE
Working Papers
2007:32. http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-32.pdf