OF SUBSTANCE AND SPIRIT

It was truly a big surprise for us to read Socio-Economic Planning Secretary Arsi Balisacan saying that “while growth is below our target of 6-7 percent for this year, this keeps us in the position of being one of the best performing economies in Asia.” A bigger surprise, truly unexpected, was the explanation that the fourth-quarter decline in government spending was actually intentional because the government opted to pursue fiscal consolidation.

It's like saying it was a strategic move to restrain government spending to avoid imposing taxes or raising borrowing, but even as it did, the Philippines managed to be one of the fastest growing economies around the block. It’s only Vietnam that we can’t seem to beat.

Two points.

One, it’s not something that we can truly be proud of. This output growth is actually below the 6-7 percent target for the year. We need to grow by so much more in order to strengthen our recovery from the pandemic’s economic scarring and to mitigate poverty and income inequality. We have enormous infrastructure gap, social services continue to be short especially in the provinces in all three main islands of Luzon, Visayas and Mindanao.

It is unconscionable to step on the brake when higher growth could have also translated into higher capacity of the economy to create more jobs and higher income for the Filipino labor force. At the same time, had the government succeeded in implementing non-monetary measures to complement the Bangko Sentral ng Pilipinas’ (BSP) tight monetary policy, we would have inflation lower than the average of 6.0 percent during the year, enhancing rather than compressing the real income of our working class.

And two, it was not only last year that the growth of public spending had slowed down. As early as 2021, public spending had started to lose steam from 10.2 percent to 7.2 percent even as anti-pandemic measures continued to be intensified. In 2022, its growth decelerated further to 4.9 percent and last year, to a low of 0.4 percent. In fact, it was precisely for accelerating growth that the National Government through the cabinet-level Development Budget Coordination Committee (DBCC) that some directives were issued to various agencies of government that they should spend or lose their budget allocation, last year and the years before.

Public spending is a critical component for advancing economic growth, to make it more durable and inclusive. Only governments can undertake, or authorize private business to put up, infrastructure and other forms of public goods. In the Philippines during the fourth quarter of 2023 public spending on goods and services for community needs actually dropped by 1.8 percent from the previous quarter’s expansion of 6.7 percent. The other component of public expenditure contributes to capital formation, or investment, in plants and machineries, as well as on the construction of roads, railways, schools, and hospitals. This is co-mingled with private capital investment in the national income accounts. For the last quarter of 2023, there was some strong recovery by 11.2 percent from the previous quarter’s actual decline of 1.4 percent.

But for the whole year 2023, weak public spending on goods and services failed to soften the impact of inflation on both household and investment expenditure.

So, what is fiscal sustainability for? Why do we want to attain it when the imperative for higher growth continues?

Perhaps, we are bothered by the stubborn fiscal deficit at more than ₱1 trillion since 2020. From only ₱660 billion fiscal deficit before the pandemic, the level doubled to ₱1.4 trillion in 2020, ₱1.7 trillion in 2021 and ₱1.6 trillion in 2022. For the first 11 months of last year, the shortfall in revenues relative to expenditure had reached ₱1.1 trillion. Those levels are indicative of big deficit in public finance that have to be invariably funded. What the economic managers would like to achieve is a reduction in expenditure because the next problem is how to fund it — whether by more or higher taxes, or by borrowing. They have to take the bull by the horns.

Achieving higher levels of output requires us not to reduce public spending but to increase it.

As reported, public expenditure as a percent of GDP rose quite significantly only during the pandemic years. First, it is logical that government ought to impose budget discipline: spend what has been allocated in the budget and spend it well. Congress should trim the fat. And second, explore ways to fund the deficit.

But we seem to be wavering on both modes of funding the deficit.

We would not want to impose new taxes or higher taxes for obvious reasons. Its good Secretary Ralph Recto has instructed his new team in finance to fine-tune what is on the congressional table. Definitely, there is a limit to better and more efficient tax collection. Good governance is key here, but this is a tall order. Our tax effort ratio has been essentially stagnant all these years. In another broadsheet, we reiterated the proposal to tax extreme wealth. If other super rich families in other parts of the world have realized that taxing them would not make them poor but would make the world a better place for everyone, why not?

On funding the deficit by higher borrowing, the rapid accumulation of public debt since the pandemic has rung the alarm bells. In the last four years, the government incurred debt by nearly 100 percent. From 2019’s ₱7.7 trillion, NG debt leap frogged to ₱14.6 trillion, or from 39.6 percent of GDP to 60.2 percent of GDP. That’s doubling the debt level from the previous administrations spanning decades in only four years! One can always argue that at 60.2 percent of GDP, public debt remains manageable. Indeed, but not when you control public expenditure to build better and more infrastructure, definitely not when you risk reining in economic growth for the sake of fiscal sustainability.

Yesterday’s broadsheets reported on the plan of the DBCC during a special meeting first attended by Secretary Recto and Secretary Frederick Go to review revenue and expenditure targets. In short, as Budget Secretary Amenah Pangandaman explained, “there will be a consolidation strategy — specifics to follow — but we will ensure that our spending-to-gross domestic product (GDP) ratio will remain above 20 percent until 2028. We will also ensure that infrastructure spending is between five percent and six percent of GDP over the medium term since this has higher multiplier effect on GDP growth.”

Why not stress on attaining higher, more inclusive economic growth within the broad context of fiscal sustainability in the medium term? There is less of a conundrum there.