Expanding budget deficit, the biggest debt problem after the coronavirus

MANILA, PHILIPPINES – Withdrawing aid to vulnerable sectors and reducing ballooning budget deficits and debt amid a budding economic recovery will help the Philippines emerge from the pandemic-induced recession, the government says. This will be an important issue to address when doing so. -Operates the think tank Philippine Institute for Development Studies (PIDS).

“A key area of ​​public spending will remain infrastructure, at least for next year, as the Philippines is likely to remain in a gray zone where both relief and recovery spending will be needed to support the economy. PIDS Senior Researcher Margarita Debuque Gonzalez wrote in her paper “Weathering the COVID-19 Storm: The Impact of the Pandemic on the Philippine Economy and the Government’s Macro Response” published on Monday. mentioned in. .

“Such investments will help minimize the losses in both human and physical capital experienced during the height of the pandemic. They will not only boost aggregate demand but also prevent economic scarring. It also makes sense,” Gonzalez said.

output loss

Previous estimates by the National Economic and Development Authority (Neda), a national planning agency, show that severe lockdowns due to the novel coronavirus infection have been implemented in the past, resulting in prolonged high unemployment rates, declining government revenues, and in-person classes for school children. It was shown that the return to the United States would be delayed and costly. The Philippine economy faces a production loss of up to P41.4 trillion by 2060.

Karl Kendrick Chua, Socioeconomic Planning Secretary and NEDA Director-General, said that although a return to pre-pandemic growth potential could be delayed by a decade, including record-low poverty and unemployment rates, He said foreign investment and other reforms pending in Congress could help speed the recovery.

“In a post-pandemic world, national policymakers will need to strategize how to maintain economic stability after a once-in-a-lifetime shock,” Gonzalez said.

“We have to stage a proper departure,” she added.

For example, the Bangko Sentral Pilipinas (BSP) had to:[determine] “This is the right time to reverse liquidity and credit support measures in a way that does not hinder growth,” he said.

Mr. Gonzalez said that in addition to legal measures such as the Financial Institutions Strategic Relocation (FIST) Act and the pending Government Financial Institutions Unification Initiative for Distressed Companies, financial authorities are trying to calm domestic financial markets amid the protracted pandemic. He pointed out that Japan has expanded liquidity support and deregulation to support the economy. Economic Revitalization (Guide) Bill.

policy toolkit

“Monetary and fiscal financing arrangements may be useful in emergencies, but they must be returned to the policy toolkit when the situation normalizes. “This would only increase the risk of inflation, reduce both monetary and fiscal independence and credibility, and ultimately weaken inflation controls,” Gonzalez explained.

On the fiscal front, Gonzalez said the government “will have a huge challenge in reducing the deficit through much-needed pandemic spending, especially health spending and permanent tax cuts.”

Mr. Gonzalez lowered the income tax rate on large corporations to 25% and announced the Corporate Restructuring and Enterprise Tax Incentives (CREATE) package, which President Duterte’s economic chiefs touted as “the largest corporate stimulus package in the history of this country.” He was referring to the law. Meanwhile, the tax on micro, small and medium enterprises (MSMEs) has been lowered from 30%, the highest in the Association of Southeast Asian Nations, to 20%, retroactive to the middle of last year.

The government had hoped that corporate tax savings from CREATE would be reinvested during the economic recovery.

“Further public investment is needed to address the economic scars of the pandemic, but the long-term goal is to gently move the country towards more sustainable levels, ideally through higher growth rather than inflation. It’s going to have to put us on a path to debt reduction.”It’s an unfair move,” Gonzalez said.

The budget deficit has ballooned since last year as the government had to build up its COVID-19 military amid the protracted pandemic, while the worst post-war recession recorded in 2020 has reduced tax revenue and External revenue collections have declined and millions of jobs have been lost. And it will destroy thousands of businesses.

The fiscal deficit last year more than doubled to P1.37 trillion, or 7.6% of gross domestic product (GDP), from just P660.2 billion, or 3.4% of economic output, in 2019 before the pandemic.

The new budget deficit for 2021 is estimated at P1.61 trillion, smaller than the planned P1.88 trillion, but still the largest on record. The government has also increased borrowing to finance the widening budget deficit, with the debt-to-GDP ratio rising to 63.1% as of September, the highest level in 16 years.

The combination of a debt-to-GDP ratio of more than 60%, which debt watchers consider manageable in an emerging market like the Philippines, and a large budget deficit posed risks to the country’s investment-grade rating.

However, as the economy recovers from the pandemic-induced recession, the Cabinet-level Development Budget Coordination Committee (DBCC) has predicted that the fiscal gap will rise to 7.7% of GDP next year, 6.1% of GDP in 2023, and 5.1% of GDP in 2023. It is expected that it will gradually decrease. Meanwhile, the debt ratio was expected to peak at 59.1% at the end of 2021, 60.8% in 2022, and then decline to 60.7% in 2023 and 59.7% in 2024.

Through the fiscal consolidation strategy currently being developed by the Department of Finance (DOF), the DBCC had hoped to return the fiscal deficit to its pre-pandemic level of around 3% of GDP from 2024 onwards.

DOF officials had said that future fiscal consolidation strategies could include new taxes or tax increases that the next administration could introduce to generate more revenue.

DBCC said its pre-pandemic 2019 revenue exceeded P3.14 trillion and is expected to reach P3.3 trillion starting next year. 3.62 trillion pesos in 2023. and 4.05 trillion pesos in 2024.

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