Ballooning budget deficit, debt top post-COVID issues

MANILA, Philippines — Withdrawing support to vulnerable sectors amid green shoots of economic recovery as well as narrowing the ballooning budget deficit and debt would be the key challenges that need to be addressed as the Philippines emerges from its pandemic-induced slump, according to the state-run think tank Philippine Institute for Development Studies (PIDS).

“As the Philippines will likely remain within a gray area where both relief and recovery spending will be needed to shore up the economy, at least for the next year, important areas for public spending will still be infrastructure, which had suffered a cut during the pandemic, and education, aside from health and social protection,” PIDS senior research fellow Margarita Debuque-Gonzales said in the paper “Navigating the COVID-19 Storm: Impact of the Pandemic on the Philippine Economy and Macro Responses of Government” published on Monday.

“Such investments will help minimize the losses in both human and physical capital experienced at the height of the pandemic. They will not only bolster aggregate demand but also prevent economic scarring,” Gonzales said.

Output losses

Earlier estimates of the state planning agency National Economic and Development Authority (Neda) had shown the stringent COVID-19 lockdowns in the past, which prolonged high joblessness, slashed government revenues, and delayed the return to in-person classes among school children would cost the Philippine economy up to P41.4 trillion in output losses until 2060.

Socioeconomic Planning Secretary and Neda chief Karl Kendrick Chua had said that while the return to prepandemic growth potential—including record-low poverty and unemployment rates—could be delayed by 10 years, foreign investment and other reforms pending in Congress could fast-track recovery.

For Gonzales, “in a postpandemic world, the country’s policymakers will need to lay down strategies on how to keep the economy stable after the once-in-a-lifetime shock.”

“A proper exit must be staged,” she added.

The Bangko Sentral ng Pilipinas (BSP), for instance, needed to “[determine] the right timing for the reversal of liquidity and credit support measures in such a way that would not set back growth,” she said.

Gonzales noted that monetary authorities extended liquidity support and regulatory relief to calm the domestic financial markets amid the prolonged pandemic, on top of legislated measures such as the Financial Institutions Strategic Transfer (Fist) Act and the pending Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery (Guide) bill.

Policy toolkit

“While monetary-fiscal financing arrangements may be useful for emergencies, they must be put back into the policy toolkit when conditions normalize. Extending such arrangements would only raise the risk of perceived fiscal dominance and diminish both monetary and fiscal independence and credibility, and ultimately weaken inflation control,” Gonzales explained.

On the fiscal side, Gonzales said the government “would have the enormous task of bringing down the country’s budget deficits after much-needed pandemic spending, especially health spending, and the permanent tax cuts.”

Gonzales was referring to the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law—touted by President Duterte’s economic managers as the “the largest stimulus package for businesses in the country’s history” as it reduced the income tax rate slapped on large corporations to 25 percent while slashing the levy on micro, small and medium enterprises (MSMEs) to 20 percent, retroactive to the middle of last year, from 30 percent previously, which had been the highest in the Association of Southeast Asian Nations.

The government was hopeful that firms’ tax savings from CREATE would be reinvested while the economy recovered.

“While further public investment is needed to address the economic scars of the pandemic, the longer term goal would have to be to gently place the country on a downward debt trajectory—toward more sustainable levels, ideally through higher growth rather than through inflation and similarly inequitable measures,” Gonzales said.

The fiscal deficit ballooned since last year as the government needed to boost its COVID-19 war chest amid a prolonged pandemic, while tax and non-tax revenue collection weakened due to the worst post-war recession posted in 2020, which shed millions of jobs and shed thousands of businesses.

Last year, the budget deficit more than doubled to P1.37 trillion or 7.6 percent of gross domestic product (GDP), from only P660.2 billion or 3.4 percent of economic output in 2019, pre-pandemic.

While the emerging 2021 deficit estimated at P1.61 trillion will be narrower than the programmed P1.88 trillion, it will remain the largest in history. To finance the wider budget deficit, the government also ramped up borrowings, such that the debt-to-GDP ratio climbed to a 16-year high of 63.1 percent as of September.

The combo of a debt-to-GDP above the 60-percent level deemed by debt watchers as manageable among emerging markets like the Philippines, plus a huge budget deficit, had posed risks to the Philippines’ investment-grade credit ratings.

But as the economy recovers from the pandemic-induced slump, the Cabinet-level Development Budget Coordination Committee (DBCC) expects the fiscal gap to gradually decline to 7.7 percent of GDP next year, 6.1 percent of GDP in 2023, and 5.1 percent of GDP in 2024. Meanwhile, the debt ratio had been projected to end 2021 at 59.1 percent and peak to 60.8 percent in 2022 before easing to 60.7 percent in 2023 and 59.7 percent in 2024.

Through the fiscal consolidation strategy currently being crafted by the Department of Finance (DOF), the DBCC wanted to return to the pre-pandemic deficit levels of about 3 percent of GDP beyond 2024.

DOF officials had said the forthcoming fiscal consolidation strategy may possibly include new or higher taxes which the next administration could implement to generate more revenues.

The DBCC expects pre-pandemic, 2019 revenues amounting to P3.14 trillion to be exceeded starting next year, with an estimated P3.3 trillion; P3.62 trillion in 2023; and P4.05 trillion in 2024.