"There were also corruption, bureaucracy and absorptive capacity."
Almost all international and individual analysts of the Philippine economy’s below-expectations performance in 2019 have attributed its 5.8-percent GDP (gross domestic product) growth last year to the four-months-late approval of the 2019 GAA (General Appropriations Act by President Rodrigo Duterte. The Chief Executive signed that all-important piece of legislation on April 27, 2019.
A logical interference from the attribution of the disappointing 2019 GDP outcome to the 2019 GAA’s delayed approval is that approximately P400 billion year-on-year in the 2019 GAA have been spent by the government on its economic—chiefly infrastructure—and social projects. Does such an inference accord with the realities on the ground?
I don’t think so. The inference that delayed GAA approval equals around P400 billion (the programmed 2019 government spending total minus the programmed spending total) with the Philippine economy’s physical and administrative realities.
One reality—perhaps the most important of the realities—is corruption. The belief is held widely—even in World Bank and ADB (Asian Development Bank) circles, though discreetly—that corrupt payments to government officials at all levels—account for anywhere from 30 to 40 percent of GAA allotments. These fiscal leakages wind up, for obvious reasons, not as incremental government expenditures on labor hirings and construction materials for bridges and schools, but as additions to private bank accounts. Result? A low multiplier effect, as economists say.
Another factor underlying the disconnect between what is appropriated by the GAA and what is released by DBM (Department of Budget and Management) is, quite simply, the bureaucracy. The time that elapses between the inception of a government project—whether of the economic or social kind—can very often seem like an eternity. Officials of government line departments are wont to say that this or that project is ready to go, but all too often that is not the case. Between inception and release of a DBM special allotment release order (SARO) lots of administrative obstacles—reviews, approvals and signatures—to be overcome. So, how can an additional P400 billion worth of GAA allotments be all spent within four months?
Finally, there is the Philippine economy’s absorptive capacity. To be able to absorb an additional P400 billion worth of government spending, the economy should have installed a commensurate amount of absorptive capacity of both the physical and the administrative kind. It clearly did not do that. The recurrent underspending by the government line departments surely attests to their incapacity to quickly absorb large increases in the resources allocated to them by the GAA. It was not the delayed 2019 GAA approval that was responsible for the economy’s comparatively low take-up of the government’s higher spending capacity; underspending has been a recurrent feature of the fiscal landscape in recent years. Underspending took place in the “normal’ GAA years of 2017 and 2018.
Of course, there can be no disputing that the 90-day election ban on government spending was a major factor in the Philippine economy’s less-than-6-percent growth in a spending program’s life. The law on election-year government spending probably needs a revisit.
But was Secretary of Socio-Economic Planning Ernesto Pernia on solid ground when he estimated that “a full percentage point (of a growth) was lost because of the delay in the passage of the Budget (and said that) “we could have hit close to, if not smack into, 7 percent”? I don’t think so.
Given its performance in recent years, the Philippine economy almost certainly could have achieved higher-than-6-percent GDP growth in 2019. But “close to, if not smack into, 7 percent” growth? Probably not. The operational-environment factors discussed above—corruption, bureaucracy and absorptive capacity—would have militated against such a performance by the economy.
The four-month delay in the approval of the 2019 GAA definitely was a major factor in the lower-than-expected growth in last year’s GDP. But it was only one factor, albeit a major one. Other factors, including the ones discussed here, need to be held partly responsible.