DOF: Build program to hike debt, but improved infra to boost economic growth

The Duterte administration’s build program would further jack up the government’s already high debt in the near term but the long-term impact of improved infrastructure would eventually outweigh the cost, the Department of Finance (DOF) said Wednesday.

The government’s outstanding debt jumped 9.2 percent to P6.7 trillion in 2017 mainly due to the “surge in domestic debt following the issuance of retail treasury bonds (RTBs) in the last quarter of 2017,” the DOF noted in a bulletin.

The government raised P255.4 billion from its sale of five-year RTBs to small investors last December, the biggest issuance to date.

DOF officials had said that besides being an investment tool for ordinary Filipinos, the proceeds from selling RTBs would also be used to finance the infrastructure rollout under the “Build, Build, Build.”

In April last year, the government also raised P181.9 billion from RTBs.

During its first 18 months in office, the Duterte administration already embarked on three RTB issuances.

Rise in debt

The DOF nonetheless pointed out that “despite the rise in the stock of debt, its proportion to GDP [gross domestic product] has been maintained at 42.1 percent as nominal GDP also surged by 9.1 percent.”

Finance Undersecretary and the DOF’s chief economist Gil S. Beltran earlier said the share of outstanding national government debt to the economy last year remained the lowest since 1980.

The ratio has been on a downward trend from  51.5 percent in 2012, 49.2 percent in 2013, 45.4 percent in 2014, 44.7 percent in 2015, and a similar 42.1 percent in 2016, Bureau of Treasury data showed.

“From a high of nearly 75 percent in 2004, the debt-to-GDP ratio was drastically reduced to below 45 percent, owing to prudent debt management, fiscal discipline, and economic growth,” the DOF noted.

The debt-to-GDP ratio measures the capacity of economies to pay off debts.

“The economy has been outgrowing debt in the past years, meaning, the country’s capacity to service its debt has been improving,” the DOF added.

Short term

But the DOF admitted that “in the short-term, the government’s ‘Build, Build, Build’ program may exert upward pressure on the debt stock.”

Economic managers had said that the build program would be financed by foreign borrowings such as official development assistance (ODA) and  loans, as well as by the additional revenues to be generated by the Tax Reform for Acceleration and Inclusion (TRAIN) Act.

While the TRAIN slashed and restructured personal income tax rates that stayed the same for two decades, it also jacked up or slapped new taxes on consumption of oil, cigarettes, sugary drinks and vehicles to generate up to P90 billion in net revenues this year.

Medium term

Still, the DOF maintained that “in the medium- to long-term, a sustainable high economic growth rate brought about by better infrastructure will outrun the growth of debt.”

The Duterte administration aims to further reduce the debt-to-GDP ratio to 37.7 percent by 2022, while it targets 7-8 percent GDP growth yearly in the next five years.

Finance Secretary Carlos G. Dominguez III said in a statement also on Wednesday that he expected the infrastructure initiative to “shift to high gear starting this year with the rollout of the first set of big-ticket infrastructure projects and the implementation of the TRAIN that will help support this infrastructure buildup.”

“I am sure the projects that have been planned for the Department of Public Works and Highways are going to go into high gear now that we have basically our capital already, our own funding for our portion of these projects [from the TRAIN]. And I guess this will also encourage the multilateral agencies and the other funding agencies to increase their lending to us,” Dominguez said.

Funding

The TRAIN, in particular, will fund one-fourth of the financing needs for the massive infrastructure modernization program, according to Dominguez.

Under “Build, Build, Build,” the government plans to roll out 75 “game-changing” projects, with about half targeted to be finished within President Duterte’s term, alongside spending a total of up to P9 trillion on hard and modern infrastructure until 2022 to usher in “the golden age of infrastructure” after years of neglect.

Finance Undersecretary Grace Karen Singson earlier said “the government can afford this massive infrastructure spending, given the ample fiscal space that the economy has right now as a result of the sound fiscal management of the past administrations.”

The TRAIN “will ensure a steady revenue flow for the government totaling P786 billion over the medium term,” Singson had said.

“The TRAIN will partly fund the infrastructure program as 70 percent of the incremental revenues from this tax reform law will be earmarked for infrastructure,” Singson had pointed out.

Prudent fiscal management

According to Singson, the “Build, Build, Build” will be supported by “prudent fiscal management” amid declining debt service payments.

“The “Build, Build, Build” strategy will be funded in a fiscally responsible and sustainable manner, with the government committed to keeping the budget deficit at 3 percent of gross domestic product so that national government’s debt-to-GDP ratio target of 37.7 percent could be attained by the end of the Duterte administration,” according to Singson.

“Though ambitious, every penny is worth spending for. The ‘Build, Build, Build’ program will create 1.7 million jobs by 2022 as well as secure our country’s fast-paced growth in the medium term. With economic studies showing that every peso invested in infrastructure yields two pesos and four centavos in economic activity, we can expect this stimulus to cause a surge in our growth,” Singson had explained.