Cutting debt-to-GDP ratio means growing faster – DOF

Published June 23, 2022, 2:34 PM

by Lee C. Chipongian

To better manage debt accumulation, one of the government’s lead economists is urging to make debt-to-GDP ratio reduction the first priority since this will ensure faster economic expansion despite rising debts, both local and US-dollar loans.

“From economic management in general, trimming down the debt-GDP ratio means growing the economy at a faster rate than the build-up of debt,” said Department of Finance (DOF) Chief Economist, Gil S. Beltran on Thursday, June 23.

DOF Chief Economist Gil S. Beltran

As of end-March, the debt-to-GDP ratio climbed to 63.5 percent, up from the 60.4 percent in 2021. It is way past the 60-percent threshold of major global multilateral creditors.

In the latest DOF Economic Bulletin on the country’s debt stock, the emphasis is on the bloated P12.76 trillion debt as of end-April. As noted by Beltran, this was 0.66 percent higher than end-March and also 8.83 percent higher than what was reported in end-December 2021.

Beltran, who is also the president of the Philippine Tax Academy and former DOF undersecretary, said that with the higher infrastructure spending and more investments, the government target of seven percent to eight percent GDP growth this year, and six percent to seven percent in 2023, is achievable.

“There are higher odds of achieving these investment-led growth targets given the infrastructure spending in prior years, the lowering of corporate income taxes, and the recently-passed structural reforms (i.e., amendments to the FIA, RTLA, and PSA). Note, however, that these growth assumptions rest on the absence of negative economic shocks (such as the resurgence in infections),” he said in a commentary Thursday.

As for the increase in the country’s debt, this was mainly on account of the economy’s response to the pandemic. “The economy was able to borrow massively precisely because it had the capacity to do so prior to the pandemic. The debt-GDP ratio could have been higher had the additional stimulus bills earlier proposed by Congress (e.g., Bayanihan 3) been passed. Stimulus packages are best unpacked at the appropriate moment such as when disasters strike, not when the economy is on high gear at which time the appropriate policy response is to conserve energy and keep powder dry,” said Beltran.

Meantime, Beltran said fiscal consolidation is achievable by raising revenues and trimming non-priority expenditures “but without sacrificing infrastructure spending.”

“Absent new tax measures and further cuts in spending, the latest baseline scenario projects the deficit reaching 4.1% (percent) of GDP by 2025, down from 2021’s 8.6%,” he said.

Beltran reiterated that mobilizing an additional P250 billion a year “will cut further the deficit so as to reach around 3.2% by 2025, a figure comparable to the pre-pandemic deficit of 3.4%.”

“It is therefore important to restore fiscal health and build up reserves when the economic weather is fine so as to have the capacity to respond again should shocks materialize. This is akin to having an insurance that covers for contingencies. Not having one is a fool’s game and fiscal heartaches hit the hardest when it’s too late,” he added

Incoming finance chief, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno has said that he will prioritize restocking the state’s eroded revenue coffers and reduce the higher debt- and deficit-to-GDP ratios incurred by the Duterte government because of the pandemic.

Diokno, who was also a former budget chief in two past administrations, the tax system left by the Duterte administration is better than the previous, and that he will consider the fiscal consolidation plan left by outgoing DOF chief, Carlos Dominguez III, which includes a resource mobilization plan.

The fiscal consolidation program is designed to bring back the debt-to-GDP ratio to its pre-pandemic level plus it has an economic stimulus package. The DOF said it is necessary to maintain spending for productive activities that could help the country recover from Covid-19.

The DOF said the fiscal consolidation will also protect the country from fiscal or economic shocks.