OF SUBSTANCE AND SPIRIT
Diwa C. Guinigundo
It was good that the Department of Finance (DOF) decided to prepare “a transition plan to help the next administration manage the country’s debt.” Some of its components must still be tentative. We have not seen a copy of the plan but it is crucial that the country is made aware of the problem and how to manage it. If the markets and the civil society are in the loop, maintaining their trust and ownership of public policy would be more tractable.
A debt management plan is a valuable marker that the Philippines remains capable of servicing its debts even as the challenge may just be emerging. If debt servicing is not problematic, more resources would be available to keep economic growth sustainable and inclusive. Inclusiveness empowers every Filipino to be an active market player in stimulating business activity.
Following this, the DOF chief economist, my friend Undersecretary Gil Beltran last Monday, reiterated the need for a fiscal consolidation plan while aiming for a return to 6.5 percent annual output growth to restore output to pre-pandemic level. With an overall National Government (NG) debt at ₱11.73 billion as of end-December 2021, or about 60.5 percent of gross domestic product, we could be facing a serious debt challenge. Growing the economy is indispensable.
The situation is no different from a household which makes ₱100,000 and a month but owes its creditors ₱60,500. Of course, not every peso of debt matures at the same time so the stream of debt payments could vary across time. The DOF reported that as of 2021, more than a third of the outstanding debt or some ₱3.92 trillion, will be maturing in the next 10 years.
It would be too cavalier to think that attaining robust growth is all about expanding public spending on infrastructure and social services, education and health, subsidies and military pension. And since the indicators are yet to glow red, can we postpone discussing fiscal sustainability and concentrate on growth?
Unfortunately, the size of our debt service is already a big threat. We paid ₱500 billion on NG debt before the pandemic in 2019. Last year, we paid our creditors nearly ₱760 billion.
Our maturities of ₱3.92 trillion for the next 10 years is 78 percent of the ₱5.024 trillion NG budget for 2022. This means we should be prepared to pay back on average an additional ₱392 billion every year. Since both output and the budget normally expand, we should remain firm in insisting on judicious borrowing.
Having fiscal and debt sustainability means having a situation where fiscal deficit and debt level remain manageable. Economic growth and macroeconomic balance are maintained longer. This goal by no means implies that debt should be non-increasing. There is nothing patently bad about incurring large primary deficits or high borrowing to finance growth. At the end of the day, we want a government that avoids being broke while growing the economy.
There are different ways of doing this. One is to pursue a fiscal consolidation plan which could involve a combination of improving tax administration, or the way we collect revenues, and plugging existing and potential leakages. Raising more revenues through broadening of the tax base is another option. This was done more than 15 years ago when the number of tax exemptions was reduced and the tax net covered more professionals. Imposing new or higher taxes should be the ultimate measure although timing here is very critical because taxes initially suppress growth, like in today’s period of economic rebound.
Given a finite budget, fiscal consolidation could also mean prudent realignment from those items with least social return to those with the highest value added to society. For instance, we can do away with the budget for red-tagging and rationalize the funds for intelligence gathering, as much as we can scrap pork from the budget menu.
Good governance should also be upheld in all budget processes so that the leakages to corruption are minimized, and the fiscal deficit is trimmed. The Commission on Audit should pursue cases of non-liquidation of cash advances and graft. Public procurement rules should be revised based on the Pharmally findings by the Senate Blue Ribbon Committee. Given what is annually lost to corruption, we should be able to slice an abundant amount of additional borrowing.
Surely there would be more borrowings in the future. The demand for growth will continue such that the fiscal deficit will remain substantial. The next government may therefore have to continue depending on borrowed funds for current operation and capital outlay to sustain the pace of business recovery. Higher compensatory spending by NG is necessary because of the uncertainty of growth due to economic and pandemic scars, the Russia-Ukraine conflict and the unprecedented oil price hikes.
Collecting ₱125.98 billion in ill-gotten wealth from the Marcoses and the corresponding estate taxes on these assets aggregating ₱203.819 billion therefore assumes historic proportion, and strategic value. Once upon a time the absence of these assets denied us peace and prosperity. Today, they could very well buy us a reprieve on what the DOF called serious debt challenge, even as they offer no substitute to a good debt management plan.