OF SUBSTANCE AND SPIRIT
It was about to be an existential crisis, that US deadlock over its debt ceiling of $31.4 trillion. If nothing came out of the negotiation between the White House and the US Capitol, the US would have defaulted for the first time in history. Although the Americans were not expecting a recession, and the labor markets and other economic indicators were rather resilient, failure to resolve the impasse could send the US economy on a free fall, the stock markets collapsing and federal workers in actual limbo.
No less than the IMF had warned against this dangerous brinkmanship game weeks before the deadline. Given the strategic importance of the US in both the global economy and financial markets, a breach of the US debt limit could send global interest rates higher and more pains to highly leveraged countries.
The IMF managing director, Kristalina Georgieva, was correct to point out that if the threshold is passed and the US is forced to reduce public spending, it is possible the world would be in “unchartered territory.”
There were other voices to hear.
Nobel laureate Paul Krugman in early May in his New York Times column stressed that the risk of a US default is real. Noting that this congressional play has become habitual, Krugman called for the abolition of the debt ceiling. The US has been effectively governed on thin ice all these years.
In late May, Larry Summers of Harvard described in Fortune the debt ceiling negotiation as “a foolish exercise,” perhaps as foolish as taking a wander with one’s eyes closed in traffic while putting Americans’ entire livelihoods at stake. True, this game has zero upside and just too many risks including a possible blow to financial markets.
There is really nothing new in negotiating the debt ceiling which was established by Congress in 1917. A debt ceiling provided some parameters of fiscal discipline that was meant to rally support of reluctant allies to join in World War I. Since World War II, Congress has raised, modified, or temporarily suspended the debt limit more than a hundred times.
And brinkmanship has grown messier over the years.
This deadlock over the debt ceiling has betrayed poor policymaking and weak political institutions even during challenging conditions in the US. This was apropos in 2011 when S&P downgraded the US from the highest AAA to a lower AA+. Poor governance in the US sank to lower than S&P’s expectation, and policymaking has become more unpredictable and may not stabilize “any time soon.” S&P was vindicated; highly disruptive shutdown in America happened twice once in October 2013 and in the winter of 2018.
This year’s 11th hour resolution is another proof that just working around the debt ceiling, rather than abolishing it or making the approach more institutionalized and more permanent, would only yield transitory victory.
While President Biden was hailed as a good dealmaker, this came at a cost. The Republicans insisted on cutting investments in workers and families, and inserting heavy and wasteful new criteria for vulnerable families requiring federal support. They would rather protect the wealthiest American households and corporates from paying their just share of the tax burden. Some think tanks described the deal as representing “the worst of conservative budget ideology.”
Biden must have been in a bind because if Congress turns intransigent, the worst in 2011 could happen again in terms of financial chaos, weaker labor markets and tarnished US’ global economic leadership.
Thus, Biden’s gestalt veered away from any unilateral solution or anything that was legally risky. Some Democrats wanted him to be more aggressive until House Speaker Kevin McCarthy backed down. But some would rather admit that Biden was “negotiating with a fanatic who has a hand grenade.” The situation could get worse.
Good for the Philippines that we do not have a hard debt ceiling as in the US. After all, the Philippines has relatively good fiscal fundamentals. While public debt ballooned to ₱13.9 trillion as of end-March 2023, relative to GDP, the ratio is about 61 percent. Before the pandemic, public debt stood at only ₱7.7 trillion by end-2019, or just about 39.6 percent. Due to the extraordinary expense during the pandemic, public debt soared to ₱13.4 trillion or 60.9 percent of GDP by end-2022.
To secure market confidence in the investment climate in the Philippines, fiscal consolidation ought to be pursued by the authorities to show a declining trend in both the high fiscal deficit and the fast growth of public debt. We recall that in 2021, right in the middle of the pandemic, a proposal in Congress was filed to limit the country’s outstanding debt to 50 percent of GDP.
The problem with that proposal was that in the first year of the pandemic, public debt was already 54.6 percent of GDP. At the end of the year when the proposal was filed, debt to GDP ratio stood at 60.4 percent. Then Finance Secretary Sonny Dominguez was right when he argued that there was no need for a cap. The proposal would deprive the government of the flexibility to seek additional financing to mitigate a crisis.
Any semblance of a debt cap is to be driven by how much deficit and debt we could tolerate to achieve a certain level of growth for the benefit of the Filipino people. But we are afraid that today, the budget is threatened by several fiscal challenges. If the Maharlika Investment Fund bill, and all its weaknesses, is signed into law by the President, this could further stall both fiscal and debt sustainability. If the reform of the pension fund of the military and uniformed personnel does not advance, the fiscal costs could indeed be game-changing.
Obviously, even if we don’t have any debt ceiling to observe, fiscal responsibility among our lawmakers and the Palace is sine qua non to establishing fiscal and debt sustainability.