MANILA, Philippines—Budget cuts, which would impact on the government’s delivery of social and other services, may be the bitter pill that the Philippines will have to swallow en route to narrowing its budget deficit to pre-pandemic levels by the end of Ferdinand “Bongbong” Marcos Jr’s rule in 2028, UK-based think tank Pantheon Macroeconomics said on Monday (June 20).
In a report, Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco said the incoming administration’s plan to revert to a manageable fiscal deficit equivalent to 3 percent of gross domestic product (GDP) by 2028 was “an admirably realistic goal, one that is unlikely to necessitate any shock therapy in the short run that risks severely disrupting the economy’s recovery.”
As the government spent more amid the prolonged pandemic, the budget deficit hit a record-high P1.67 trillion last year or 8.6 percent of GDP.
However, Chanco said Benjamin Diokno, currently Bangko Sentral ng Pilipinas (BSP) Governor and incoming finance chief of the next administration, “appears to have set some unrealistic expectations on how this target will be reached.”
“[Diokno] has tied his own hands, pledging both not to raise tax rates or wield a knife to the government’s spending plans. His hope is that a recovery on auto-pilot and steps to improve tax administration will be enough to realize this path towards fiscal consolidation,” Chanco said.
Both President-elect Marcos Jr. and Diokno have been cold to the Department of Finance’s (DOF) fiscal consolidation proposal to repay debts and narrow the deficit, mainly requiring higher or new taxes to be slapped on consumption while delaying by three years the personal income taxpayers’ scheduled tax cuts under the Tax Reform for Acceleration and Inclusion (TRAIN) Act. Outgoing President Rodrigo Duterte’s economic team also proposed sustaining robust spending, especially on the new administration’s priority programs and projects, including infrastructure.
When push comes to shove, Chanco said he reckoned that “one of Diokno’s red lines will have to break, with expenditure likely to see most of the adjustments.”
“We aren’t as optimistic about the economy’s prospects this year and next, and see the deficit falling to just 7 percent of GDP in 2023, about a percentage point above existing plans,” Chanco said. The government had programmed a P1.65- trillion deficit (7.6 percent of GDP) at a projected 7 to 8 percent economic growth rate for this year.
“If our forecasts prove to be correct, spending growth would need to be at 45 percent of the pre-COVID-19 average in 2015-2019, from 2024, for the 3-percent-of-GDP target to be hit. This would be the case even if nominal GDP and revenue growth return fully to this benchmark,” Chanco said.
Last week, the DOF’s chief economist and retired undersecretary Gil Beltran reiterated the DOF’s push for the fiscal consolidation plan while advising the incoming administration to prioritize infrastructure development.
“It is important that infrastructure investments be continued due to its positive impact on competitiveness and economic recovery. Cutting infrastructure spending may narrow down the deficit momentarily but will definitely be counter-productive in the long-run as far as economic recovery is concerned,” Beltran said in an economic bulletin.
“Simply put, a half-finished bridge does not cut travel time even by a minute. Stopping construction works midway through the project cycle deprives the economy the opportunity to immediately benefit from the catalytic effects of infrastructure investments,” Beltran said.
The government will spend a new high of P1.19 trillion on infrastructure this year, equivalent to 5.5 percent of GDP, up in value from last year’s P1.12-trillion infra expenditures or 5.8 percent of GDP.
In a statement on Monday, the DOF said the share of the national government’s tax and non-tax revenues to GDP averaged 15.6 percent from 2016 to 2021 — “the highest ratio in over two decades since the Ramos administration.”
“The government achieved this level of revenues despite some restrictions in economic activity last year due to the reimposition of prolonged community quarantines in response to the emergence of the more infectious Delta variant of the COVID-19 virus,” the DOF said.
In 2021 alone, the P3-trillion tax and non-tax collections equivalent to a revenue effort of 15.5 percent was in the middle of the pack in Asean, the DOF said, quoting a recent report of its domestic finance group director Rowena Sta. Clara.
“Among six Asean countries with available central government data or estimates, Brunei is projected to top the list in terms of revenue effort with 19.1 percent, followed by Singapore with 18.7 percent. The Philippines’ 15.5 percent is next to Thailand’s 17 percent but ahead of Malaysia’s 14.3 percent and Indonesia’s 11.8 percent,” Sta. Clara said.
As for expenditures, the Philippine government’s spending on public goods and services as a share to GDP hit 24.1 percent last year, the second-highest in Asean next to Brunei’s 28.4 percent, and exceeding Singapore’s 21.1 percent.
Sta. Clara attributed the 10.6-percent increase in 2021 disbursements to P4.7 trillion to “infrastructure and other capital expenditures amounting to 5.8 percent of GDP; continued spending for various recovery measures, including vaccine procurement and equity infusion in support of government financial institutions’ lending assistance programs; and spending on personnel services, which has increased to about 30 percent of national government expenditures in the past decade.”
Among six Asean countries monitored by the DOF, Brunei had the widest budget deficit, equivalent to 9.3 percent of GDP last year, followed by the Philippines.
“The Philippines’ elevated deficit-to-GDP ratio since the outbreak of the COVID-19 pandemic was due to the combined impact of lower-than-usual revenues as a result of the community quarantines and the increased spending to mitigate the health and economic shocks brought about by the pandemic,” the DOF said.
The DBCC had projected the budget deficit, or the gap between usually higher spending on public goods and services than tax and non-tax collections, to gradually narrow to P1.45 trillion (6.1 percent of GDP) next year, P1.33 trillion (5.1 percent of GDP) in 2024, and P1.17 trillion (4.1 percent of GDP) in 2025.
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