Fiscal malady
The financial performance of the Duterte administration in the first six months of 2020 has exposed the critical fiscal situation the government is currently in. Expenditures from January to June exceeded revenues by P560 billion, a budget deficit that was 1,214 percent more than the gap in the same period last year.
It was a double whammy for the government: Expenses rose 26.6 percent to P2.01 trillion, while tax and nontax revenues declined by 6.1 percent to P1.45 trillion. Both were the result of the novel coronavirus disease (COVID-19) pandemic, which raised government expenditures for health care and assistance to the poor and displaced workers and at the same time slowed down economic activities that led to lower tax payments.
The only bright side in the first-semester performance was that the budget deficit was actually 25.4 percent short of the P751-billion shortfall expected by the government, as revenues were 0.12 percent higher than the downscaled P1.45-trillion target while expenses for public goods and services were 8.6 percent lower than the P2.2-trillion goal.
The government had to cover such budget shortfall with borrowings, mostly through the issuance of treasury bills and bonds locally and concessional loans from foreign multilateral agencies and governments. The local borrowings have an impact on the cost of funds, and treasury rates have been rising across the board. It’s good that the government is not crowding out the private sector for available funding as demand for new loans among businesses remains depressed.
The administration’s economic managers believe the country can accommodate a budget deficit of up to 9 percent of gross domestic product (GDP), beyond which would be disastrous in the long run because of the heavy debt burden it would entail. The Cabinet-level Development Budget Coordination Committee already projected the budget deficit to hit P1.61 trillion this year, or 8.4 percent of GDP. That is a huge gap that the government needs to cover.
Finance Secretary Carlos Dominguez III earlier spoke of a bounce-back strategy aimed at helping keep the economy afloat by raising additional funds through fiscal and monetary tools and foreign concessional financing. This, he said, was part of a broader socioeconomic strategy against COVID-19 that would require around P1.17 trillion worth of fiscal, budgetary, and monetary measures.
The question is where will it get much of the cash component needed for the bounce-back plan.
Despite the higher budgetary requirement for its COVID-19 response, the government last week ruled out additional taxes on “sin” products in the meantime. Also, any additional or new tax at this period of a recession would be difficult to implement.
One option is to allow more businesses or portions of the economy to reopen. Even with COVID-19 infections rising, public construction and infrastructure activities should also restart to help keep the economy moving and allow the government to generate more revenues from increased business activities.
A last resort, as President Duterte pointed out in one of his late-night speeches last April, is the sale of public properties if the government falls short of money to address the health crisis. The government has a number of assets that it can dispose of to raise funds. Observers have suggested, for a start, the sale of military camps and golf courses, idle public land, and ill-gotten jewelry and artworks seized from former first lady Imelda Marcos.
Given the absence of a vaccine against COVID-19 in the near future, the government’s options to manage the country’s finances are truly very limited. International observers are predicting that, with the country’s prolonged lockdowns, the Philippines will have one of the slowest economic turnarounds in the region, a far cry from recent years when its GDP was among the fastest-growing in Southeast Asia and the world. The last two years will thus be critical in ensuring that, despite the ravages of the pandemic, the Duterte administration will leave behind at minimum a stable if not recovering economic outlook for the country.
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