Fiscal consolidation in PH going nowhere, says economist

The Philippines is seen lagging behind in the region en route to fiscal consolidation or narrowing the pandemic-induced wider budget deficit and ballooning public debt due to its slow economic rebound, such that economists warned of a looming credit ratings downgrade.

In a report on Tuesday, Pantheon Macroeconomics senior Asia economist Miguel Chanco said “fiscal consolidation in the Philippines is going nowhere.” He said the country’s strained public finances reflected its weak recovery.

Chanco’s estimates showed that the end-September budget deficit of P1.14 trillion was in the vicinity of 8.7 percent of gross domestic product (GDP). For 2021, the government had programmed a fiscal deficit of P1.86 trillion, equivalent to 9.3 percent of GDP, mainly due to bigger spending for COVID-19 response.

“The failure to narrow the budget gap this year will pose a big headwind to the economy’s incomplete recovery in 2022. Most of emerging Asia is moving on from the COVID-19-induced budget blowouts last year, easing the pressure on governments to make hard trade-offs going forward. The consolidation elsewhere is real, leaving aside the more flattering pictures painted by faster rates of nominal GDP growth in a few of the countries we watch closely,” Chanco said, citing the narrowing gaps in India, Indonesia and Thailand.

“The impact of the country’s lackluster recovery on government revenue was largely to blame. The Philippines wasn’t hit as badly by Delta in the third quarter, but its output gap to the pre-COVID-19 trend remains the largest in the region. To be sure, some of the weakness in collection is deliberate, following the retrospective cut to corporate tax rates earlier this year,” Chanco said.

Foregone revenue

This year’s foregone revenue from the implementation of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act was estimated by the Development Budget Coordination Committee to reach P138.2 billion.

The CREATE Law cut the income tax rate slapped on large corporations to 25 percent and that on micro, small and medium enterprises to 20 percent, retroactive to the middle of last year, from 30 percent previously.

The government was hopeful that the companies’ tax savings from CREATE would be reinvested and boost the economy’s recovery from the pandemic-induced slump.

But Chanco warned that “the country risks being caught in a vicious cycle, at least in the short run, as the lack of funds now looks to be limiting the public infrastructure drive which, in turn, will further dampen the recovery.”

ING senior economist Nicholas Mapa said the steady growth in both expenditures and revenue collections was a positive development, even if these might have been bolstered by the low base from last year.

End-September expenditure and revenue grew 11.7 percent and 4.4 percent year-on-year, respectively.

Mapa estimated that debt-to-GDP ratio could have climbed to 63 percent as of September. INQ