The Department of Finance disclosed over the weekend a three-year plan to reduce the deficit-to-GDP ratio through fiscal consolidation as the economy resumes its vibrant growth after being stalled by the global health crisis.
“The current medium-term fiscal program is calibrated such that the deficit gradually narrows down without sacrificing infrastructure spending. The 2021 deficit is estimated to be around 8.2 percent of GDP [gross domestic product] and is programmed to fall down to 5.1 percent by 2024,” the DOF said in an economic bulletin.
Data showed the economy from 2016 to 2019,expanded by 6.6 percent annually, cutting the poverty rate from 18 percent in 2015 to 12 percent to 2018. But the pandemic caused a 9.6-percent GDP contraction in 2020, the worst since World War 2.
The DOF said infrastructure spending, as percentage of GDP, likely reached up to 5.6 percent last year, may increase further to 5.9 percent this year and settle at 5.4 percent by 2024.
“CREATE [cutting corporate income taxes], economic liberalization [amendments to the RTLA, PSA, and FIA] and infrastructure investment should be seen as key ingredients in a cocktail of economic recovery package that is most potent when all ingredients are available,” the DOF said.
PSA refers to Public Service Act, while FIA pertains to Foreign Investment Act.
Republic Act No. 11534, or the Corporate Recovery and Tax Incentives for Enterprises Act was passed by Congress in response to the COVID-19 pandemic as a fiscal relief to domestic and foreign corporations doing business in the Philippines.
President Rodrigo Duterte on Dec. 10, 2021 signed into law RA 11595 or the “An Act amending Republic Act No. 8762 or the Retail Trade Liberalization Act of 2000, by lowering the paid-up capital requirement for foreign retail enterprises and other purposes.”
The DOF also said it is important that infrastructure investments be continued. It said cutting infrastructure spending may narrow down the deficit momentarily but would be counter-productive in the long-run as far as economic recovery is concerned.
“While CREATE and liberalization definitely attract investor interest and enthusiasm, infrastructure projects that are left unfinished do not inspire investor confidence. Simply put, a half-finished bridge does not cut travel time even by a minute. Infrastructure projects have to be fully completed before they can increase the country’s productive capacity and enhance its growth potential,” it said.
Infrastructure are hard assets with which the economy can bootstrap itself into recovery, which, in turn, is hastened with the implementation of CREATE and the structural reforms on liberalization, it said.
“This will have set in motion a higher growth rate in per capita income and a much more meaningful fiscal consolidation,” it said.
Last year, the government posted a budget deficit of P1.67 trillion, or 21.78 percent higher than the P1.37-trillion deficit in 2020, as the 10.60-percent expansion in expenditures outpaced the 5.24-percent increase in revenues.
The full-year deficit was equivalent to 8.61 percent of gross domestic product, lower than the programmed 9.3 percent but still higher than the 7.65 percent recorded in the previous year.
Fitch Ratings recently affirmed its investment grade or “BBB” rating on the Philippines and kept its negative outlook. Accordingly, the rating balances strong external front and growth against structural indicators such as per capita income.
The negative outlook, meanwhile, reflects uncertainty about medium-term growth prospects and the challenges in bringing down the debt-GDP ratio to lower levels.
The national government’s debt amounted to 60.5 percent of GDP by the end of 2021, largely on account of pandemic-related spending, up from its pre-pandemic ratio of 39.6 percent.
Meanwhile, S&P Global Ratings and Moody’s Investors Service reaffirmed the country’s investment grade rating and disagreed with Fitch by keeping the stable outlook.
S&P noted that the Philippines “is likely unaffected by rising debt load” and expected growth to accelerate to 7 percent. Moody’s noted the “stronger fiscal performance in recent years”.