SummarySeveral factors are expected to put a strain on health financing in Bhutan. In a predominantly public‐financed healthcare, ensuring that the health system gains sufficient fiscal space to ensure the sustainability of its financing is a critical policy concern. This fiscal space assessment bases its analysis on national surveys and statistics, international databases and review of official documents and reports. Assuming that the government health spending will continue to respond in the same way to growth as in the period 2002–2012, Bhutan can expect to see a robust increase in government investments in health. If elasticity of health expenditure with respect to GDP does not change significantly, projections indicate that per‐capita government spending for health could more than double in the period 2012 to 2019. This increase from Ngultrum 2632 in 2012 to Ngultrum 6724 in 2019 could correspond to government health spending from 2.65% of GDP to 3.98% of GDP in the respective years. The country, however, needs to closely monitor and ensure that government investment in healthcare keeps pace with the growth of the national economy. Along with this, supplementary resources for healthcare could be explored through earmarked taxes and by generating efficiency gains. Copyright © 2015 John Wiley & Sons, Ltd.