Paying for it all

Governments the world over are fighting both the public health and economic costs of the COVID-19 pandemic by literally pouring money on the problem. It matters little whether or not the money is available. Under the circumstances, the question is not “can we afford it?” but rather, “can we afford not to?” It’s like rushing a critically ill family member to the hospital; whether or not you have the money for the hospital bills is something to worry about later. Governments have had to spend much money on virus testing kits, hospital supplies and equipment, quarantine facilities, and more. They’ve also needed to spend for social protection to forestall possible social unrest and public breakdown. Further on, the economic shutdown necessitates funding to keep the economy afloat, including possible large subsidies for industries flattened by the pandemic, such as in travel and tourism. All these add up to a massive drain on government finances. How are we paying for all this?

As of early April, our government was reportedly expecting to allot an aggregate of about P1.1 trillion for the COVID-19 response, equivalent to about 5.6 percent of gross domestic product, which last year amounted to P19.5 trillion. Much of it was to come from realigned allotments in the 2020 budget for expenditure items that could not move under the prevailing emergency circumstances anyway. The remainder would have to be borrowed, via loans from lending agencies like the Asian Development Bank; from private banks here and abroad; and from the public, by floating government bonds. Government could also borrow from the Bangko Sentral ng Pilipinas, in what would amount to printing additional money to pay part of the bill. It is argued that we need not worry about the usual inflationary effect of such move because low oil prices and weak overall demand currently offset that effect. All told, government plans to breach the customary ceiling of 3 percent of GDP generally imposed on its budget deficit, and allow it to reach 5, 6, or even up to 7 percent of GDP this year.

If it’s any consolation, the Philippine government is far from alone in deciding to breach usual limits to the deficit and government borrowing. In late March, European finance ministers suspended deficit limits under the European Union’s Stability and Growth Pact that requires member governments to keep budget deficits below 3 percent, and public debt under 60 percent, of GDP. Italy, hard hit by the virus, expects its deficit to exceed 10 percent this year, after posting a 12-year record low of only 1.6 percent in 2019. As of last year, the US government already ran a $984 billion deficit, which was 4.6 percent of GDP. With close to $3 trillion in stimulus packages so far approved by the US Congress to counter COVID-19, the Congressional Budget Office projects the budget deficit to nearly quadruple to $3.7 trillion, implying a deficit-to-GDP ratio approaching 20 percent! And yet, US public debt already exceeds 100 percent of GDP.

Thankfully, the Philippines’ debt numbers are far more comfortable, with our debt-to-GDP ratio having been brought down by our past and present economic managers to only 41 percent; it had peaked at nearly 75 percent in 2004. Compared to our peers and even some of the largest economies (including Japan, with the highest debt-to-GDP ratio worldwide at around 270 percent), we have much more leeway to raise our deficit, hence our debt levels. In reality, there is really nothing sacred about the 3 percent rule of thumb, which has become more of a convention through the years.

The real test of whether a country’s public deficit is sustainable is its ability to pay for its debts. For an individual or household, ability to pay comes into question if total debt grows faster than income does. Through the last 15 years, our economy has grown much faster than our total debt was allowed to rise by our fiscal managers. As there remains much growth potential in our economy beyond the crisis, we can take comfort in our being able to afford spending beyond our current means during these unusual times. But from here on, we need to make sure we do things right.

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