The long road to fiscal consolidation
IIf there is one credit rating analysis that best encapsulates the fiscal challenge for the Marcos Jr. administration, it has to be Fitch Ratings’ February 2022 explanation of the negative outlook it assigned to the Philippines while by asserting its triple B investment rating.
“The negative outlook reflects uncertainty about the medium-term growth outlook as well as possible challenges in unraveling the policy response to the health crisis and bringing public debt down to low levels. Ifrm descending path.
The Philippine government, represented by the Secretary of the Department of Finance (DoF), Ben Diokno, is quite optimistic that business activities will resume with the lifting of pandemic restrictions and the normalization of people’s mobility. During the BSP-UP School of Economics Distinguished Lecture Series on July 18, the Chief Economic Officer expressed his belief that the economy could withstand the implications of current geopolitical events and post-pandemic shifts in the world. world. Iffinancial system.
Three days earlier, on July 15, he had assured the Group of 20 countries and the meeting of finance ministers and central bank governors of the European Union that “we have a comprehensive package of interventions to effectively balance the need to maintain growth momentum while controlling inflationary pressures and their cascading effects on the economy.
The day before, on July 14, Secretary Diokno had defended aggressive monetary tightening by the Bangko Sentral ng Pilipinas (BSP) on the grounds that the local economy remained robust enough to “absorb it”.
Confidence for more traction has been placed in recent initiatives such as the Business Recovery and Tax Incentives Act, Financial Institutions Strategic Transfer Act, Rice TariffIfcation Act and other initiatives.
RESILIENT GROWTH AND ECONOMIC SCAR
The Philippine economy remains resilient in large part due to more than 30 years of political and structural reforms that have allowed the country to reap gains in both economic efIfefficiency and total factor productivity. But it’s hysteresis, or the economic scarring of the pandemic, that could be the biggest impediment to both economic growth and Iftax consolidation.
As AMRO (ASEAN + 3 Macroeconomic Research OfIfce) The annual consultation report, published on July 20, pointed out that the prolonged closure of schools and the poor quality of online courses dependent on a weak internet connection would have serious consequences for the quality of the workforce. in the years to come. Upskilling and upskilling are imperative to achieving an effective transition to a technology-driven digital economy. Labor market mismatches could be a costly drag on the new normal imposed by the pandemic.
The closure of many micro, small and medium enterprises would also require substantial but targeted support. This is the driving force behind the unprecedented rise in unemployment and underemployment over the past two years. As a result, poverty worsened.
This is the main reason why the new medium-term budget program 2022-2028 should deliberately call for priority spending in the areas of health, disaster risk management, social security, digital economy and shovel-ready, growth-enhancing infrastructure projects. Prioritization should therefore be the buzzword, especially today, because this government’s fiscal space could continue to shrink.
But we Ifnd the fairly modest, if not unambitious, medium-term income growth.
It is programmed to fall from about 15.2% of GDP in 2022 to 17.6% of GDP in 2028. The average ratio programmed for 2022-2024 of 15.4% actually comes out even lower than the average ratio of 15.7% in the two pandemic years when the economy contracted sharply. In fact, the actual ratio for the first quarter of 2022 had already reached nearly 16%.
This must be based on Secretary Diokno’s position that tax administration, rather than new taxes, is the Iffirst priority to increase government revenues which would be reflected in the new Ifconsolidation plan scal.
Experience teaches us that the path of tax administration, although paved with good intentions, can lead nowhere. Improve the valuation of real estate and simplify Ifnancial taxation will depend on its proper implementation. It’s good that the DoF has indicated its support for taxing digital services and transactions, but perhaps there should be more. As DoF Chief Economist Gil Beltran recently pointed out, it is possible to raise excise taxes on products of sin like tobacco, vapes, and alcoholic beverages.
On the spending side, we are seeing some disconnect with medium-term growth targets. For 2022, the Development Budget Coordinating Committee (DBCC) is looking at 6.5-7.5% and for next year through 2028, 6.5-8%. But ironically, public spending is scheduled to drop from 22.9% in 2022 to just 20.6% by 2028.
Reducing the deficit from 7.6% in 2022 to just 3% by 2028 can only be done by increasing incomes and real GDP. But the government, adhering to an ambitious growth target, should also keep public spending very committed, rather than reduced as planned, as private sector spending is not yet self-sustaining. In short, as long as revenue grows by a margin greater than the expansion of spending, we can have a situation of robust growth and sustainable public financing. Ifnance.
Otherwise, as AMRO warned, “it would take longer to lessen the scarring effects” which have become more visible, and growth prospects could therefore be compromised.
Some IfFiscal space could be achieved from possible budget reassessment by individual agencies and realignment between departments andIfthese.
We believe that the Department of Budget and Management’s (DBM) previous publication to review the 2023 budget proposals is relevant.
National Budget Memorandum No. 144 calls for existing and new programs to be reassessed to ensure they meet the strategic direction for the year, are ready for implementation, consistent with absorptive capacity of each agency and aligned with the plans and priorities of the Marcos administration. These are a mouthful and require serious thought and compliance.
DBM should be genuinely committed to ensuring that national budget allocation is prudent and judicious. The Commission on Audit (CoA) has repeatedly qualified its conclusions on many public bodies with regard to their use of public funds. It is not enough for the government to be proud of its ability to increase the issuance of Cash Allocation Notices (NCAs), the use of these funds should be intensified.Ifespecially in the Iffirst half of the year when the weather is conducive to carrying out public works sites.
For example, it was reported by the CoA that due to implementation issues regarding 14 Ministry of Transport projects receiving foreign aid worth 1.61 trillion pesos in 2021, the government has was forced to pay 128.42 million pesos in additional costs.
The CoA also found that the Ministry of Social Welfare and Development failed to distribute 1.9 billion pesos of social betterment program funds during the pandemic. Moreover, it was only recently that the Department realized that approximately 1.3 families should have been excluded from the financial assistance program because they had come out of extreme poverty. Some 600,000 others should be written off.
Some disbursements worth 33.446 million pesos, according to CoA, remain unliquidated by the OfIfthis from the President for the National Task Force to End the Local Communist Armed Conflict. It remains to be seen whether a cash distribution has been made for each local government unit.
On a larger scale, some infra experts believe that many large Build, Build, Build projects could hardly be justified in terms of economic value. Interest rates charged by bilateral sources have proven to be above market. Giving a second look at these flagship projects could save the Republic billions of pesos that would otherwise have to be raised through taxes or additional borrowing, which could once again inflate the debt-to-GDP ratio.
Therefore, the DBM directive to government agencies to streamline their individual budget proposal should result in lower overall amounts. If necessary, some realignments between and among agencies should also be made. In congressional hearings, we should see CoA officials do their due diligence on each agency’s goals and spending capacity. Special sessions should also be organized to determine the economic values of large infrastructure projects in relation to their total costs and their source of financing. Media coverage should be encouraged.
STATE OF THE NATION ADDRESS
We expect to hear President Bongbong Marcos explain the details of his government’s policy Ifscal program to achieve rapid economic recovery, pandemic mitigation and a return to Ifsustainable development on Monday during the state of the nation address. If the market conIfGrowth is stimulated and investments are starting to flow in, growth should be sustained.
Going back to Fitch’s assessment, one can see the weight he places on effective government, a weight that includes good and smart governance, rule of law and control of corruption. If we fail to reduce the ratio of public debt to GDP, it could be negative while the broadening of the revenue base would be positive. The consolidation of public finances ensures a good trajectory of economic growth and promotes poverty reduction.
While we are well above Sri Lanka’s woes, this is a strategy to avoid a descent to its level.
Diwa C. Guinigundo is the former Deputy Governor of Monetary and Economic Sector of Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. From 2001 to 2003, he was Alternate Executive Director of the International Monetary Fund in Washington, DC. He is the Senior Pastor of Christ Fulness International Ministries in Mandaluyong.