Deficit spending

The proposed national budget for 2024 is P5.767 trillion, which is roughly P500 billion more than this year’s P5.268-trillion budget.

According to Deputy Speaker Ralph Recto, next year’s budget would translate to an average of P15.8-billion daily spending to finance the national government’s operations.

Of that amount, only P11.7 billion would be sourced from projected revenue collections and the rest would have to be covered by loans.

Based on past experience, those borrowings could be by way of treasury bills, bonds and other forms of government indebtedness. If the internally generated funds would be insufficient, the credit window of multilateral or international financing institutions may have to be tapped.

That funding arrangement is described as deficit spending or a situation “when a government’s expenditures exceed its revenue during fiscal period, causing it to run a budget deficit.”

In reply to Recto’s comments, the economic managers said the country’s debts were manageable and that deficit spending was necessary to enable the government to fund the projects needed to promote the country’s development.

Under the same premise, private businesses incur loans to, for example, meet unexpected short-term obligations or for expansion purposes based on their repayment capacity or the value of the property mortgaged to secure the loan.

In the latter case, the security for the loan has to be of such character that would ensure that, when sold, the lender would be able to recover the principal and equivalent interest.

If, for any reason, the borrower defaults on the loan, the lender can either restructure it (assuming the business is still viable), foreclose the mortgage or, in extreme cases, take over the operation of the business.

Those remedies, however, are not easily available to sovereign debts or loans incurred by or extended to the government of independent countries.

When a country is on the verge of defaulting on its debt obligations, the usual course of action of its lenders is to prevent that from happening by restructuring the loans by, among others, stretching the payment period or accepting debt haircuts.

A country declared in default would be a pariah in the global financial community. It would have difficulty accessing the credit market in the future; if it is able to do so, the credit given would be covered by stringent terms and conditions.

For the lenders, the failure to repay their loans would have an adverse impact on their bottom line and whatever funding programs they have planned for the near future.

Unlike reneging private debtors, however, for practical, political and legal reasons, defaulting countries cannot be foreclosed or taken over by their creditors to recover unpaid loans.

Managing governments that had failed to honor their credit liabilities is not in the DNA of international lending institutions. The days when private companies ruled over their government’s far-flung colonies are over.

To avoid the adverse consequences of a debt default, it is imperative that the government exert all means possible to raise the foreign exchange needed to pay the loans.

That means the government may have to defer or cancel projects or programs that require the allocation of substantial financing so their allocated funds can be diverted or used to pay for outstanding obligations.

Proverbially, that would be like not paying the debts to Peter so the debts to Paul can be paid.

In infrastructure terms in the Philippines, for example, the construction of climate-change resistant public schools may have to be deferred to allow the funds budgeted for that purpose to amortize foreign loans that are due and payable.

That scenario could be replicated in other significant social and economic programs of the country with serious adverse consequences to the people.

Doesn’t the saying “one should live within his or her means” also apply to the government? INQ

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