Fiscal stability is a hallowed concept in Philippine public finance. Government is fixated on controlling the deficit. Producing a budgetary surplus is considered a major indicator of its success. I myself take pride in being part of the Ramos government that brought the country four years of budgetary surpluses.
And why not? Big deficits mean that revenues could not keep up with government spending. Before the election of the Ramos government in 1990, the deficit stood at P37.2 billion which was 3% of GDP.
Government had to borrow the same amount to finance its operations. Heavy government borrowing crowded out the private sector that had to offer higher interest rates in order to compete with government. High interest rates translated to high borrowing costs which resulted to high production costs. The end result of this process was increasing prices and inflation.
Increasing the size of debt is also anathema to many sectors in the country. Their advocacy is for government to spare the future generation from an increasing debt burden.
It is in this context that we understand how careful and “scrimpy” government has been in spending for an economic stimulus package. The amount of assistance from Bayanihan 2 was limited to only P140 billion. The nominal amount looks huge but compared to our GDP, it is only 0.7%. Similar economies like Vietnam were prepared to spend more to help their people. The economic stimulus in Vietnam was 8.9% of GDP; Malaysia-17% of GDP; Thailand, 9.4%of GDP; and Indonesia, 7.0% of GDP.
Under normal times, attaining a fiscal balance is laudable. But times are not normal. Nearly 9.0 million Filipinos have lost their jobs, and this number does not include the thousands of small traders in the underground economy who have no income. The SWS survey reported that 1 out of 5 Filipinos, 20.9% suffered from involuntary hunger in the past three months. The closure of many business establishments has been numerous. For the first time, in so many years, we see people like drivers begging on the streets.
Our government should have the resilience to change its paradigm from controlling the deficit to spending more through deficit spending. The poor calls for help and the government must respond. It has the power and the responsibility to provide a lifeline to 3.0 million families who do not have the wherewithal even to buy food. Government will need to spend P88.0 billion, to provide 3 million families with P7,337 a month from September to December. At the very least, government will bring a household with 5 members to subsistence level or the food threshold.
Government is backed with its experience in managing the budget. It successfully passed the TRAIN law despite all controversies. Government brought down the debt to GDP ratio from 71.6% in 2004 to 42.7% in 2015 and further down to 36.0% in 2019. Government has relied more on domestic borrowing than the external market which augurs well for its debt management strategy. It can monetize an increased deficit by borrowing from itself, i.e. from the Central Bank.
The additional spending will not go in vain. Putting more funds into the hands of families will not only spare them from hunger but will enable them to spend for basic necessities. And we know from basic economics that consumption will have a multiplier effect. It will stimulate production, generate employment, and income. But by being a scrooge, government will constrict demand and inhibit the economy from growing and will cause more and more families to suffer.
Going into debt will be worrisome if the borrowed funds will be wasted through senseless spending. But investments in human capital, health programs, distance education, will give government an ROI. We can expect lesser casualties from COVID if people are healthier, more informed, and are able to take care of themselves.
Countries like Japan went into deficit spending to resuscitate the economy from economic stagnation. Its debt to GDP ratio prior to the pandemic was at 230%. The ratio in Singapore is 112% and 50.7% in Malaysia. It is expected that these ratios will increase because of their significant stimulus packages. The times call for thinking beyond the traditional wisdom of fiscal sustainability.