BACK TO SQUARE ONE

The Philippine Star
03/30/09

All the hard work that our bureaucrats have been expending the last seven years would seem to have just gone to pfft when the government reports today its fiscal performance for the first two months of 2009.

In a year when the government is supposed to have already balanced the budget or at least narrowed the deficit substantially, the administration of President Gloria Arroyo may even record the worst ever fiscal performance of her term, with just a few more months to go.

Two years back, talks about balancing the budget by 2008 were still very much the norm. This was the time when the fiscal gap had shrunk to P12.4 billion, the lowest since 1998, and when economic growth was at its highest in three decades.

Budget blowout

Fast forward to today. This year's deficit, originally projected at P102 billion and adjusted last month to P177.2 billion, may widen to as much as P257 billion, as our tax agencies seemingly irrevocably doomed to fail in meeting their targets again.

With the Bureau of Internal Revenue and Bureau of Customs reporting collections substantially lower than their targets for January and February, the signs of a budget blowout have become more ominous.

Poor revenue collection coupled with huge debt payments were blamed for the country's chronic fiscal situation that fanned the deficit from 1998 until it peaked in 2002. From 2003 until 2007, the shortfall followed a declining cycle as government finances improved along with the economy and boosted by the implementation of the value-added tax enhancements.

Now that the economy is slowing, the government is again being pushed into the cycle of increasing its debt to sustain a spending plan amid times of weak tax and tariff collections.

Proper perspective

To be fair to the government, though, let's put all of these things into perspective.

Growth is slowing here, just like everywhere else in the world. In fact, in a universe of slumping economies, our 4.6 percent growth last year edged out most of our richer neighbors and the world's superpowers like the U.S., Japan, Singapore and parts of Europe that already went into recession.

And since we're coming from a period of stability that has brought down the debt ratio to nearly half of a substantially improved GDP, Arroyo's economic managers have recommended increased spending to help spur economic activity.

The thrust of government spending, especially in infrastructure, will create jobs and attract investments, and that will in turn, encourage and sustain consumers demand. Private consumption is more than 60 percent of the GDP and is arguably a bigger factor to the Philippine economy than exports.

Unlike a decade ago when the government was trying to compress its expenditures, this time around, the order of the day would be to support the economy by spending. And this strategy is apparently supported by international credit rating agencies (whom we try to please as much as possible) and the financial markets.

So spending appropriately isn't an issue.

Poor collections

This leaves us then training our guns on the revenue side, an area which hasn't substantially improved even during the time of plenty. Because BIR, and to some extent even Customs revenue, are influenced by both GDP and inflation, the growth in collections should be at the very least equal to the GDP plus the inflation rate.

So in 2007, GDP grew 7.2 percent and inflation averaged 2.8 percent, which sums up to 10 percent. BIR collections grew only 9 percent. Last year, GDP expanded 4.6 percent and inflation averaged 9.3 percent, totaling 12.9 percent. Growth in BIR revenues of 9.1 percent hardly accelerated and was still below the sum of GDP and inflation.

Customs, in a way, has to grapple with a different dynamics because it's more vulnerable to external developments than the BIR. Since world prices of oil and rice have dropped, the value of these imported commodities had also declined considerably, shrinking the base at which the tariffs are valued. A weaker peso though should have offset some of Customs' concern.

In the first two months of the year, both agencies already said they missed their targets, which according to the grapevine were already massaged so as not to spook the market considerably. The word is that authorities distributed bigger portions of the BIR and Customs targets in the next three quarters so as not to stoke panic.

Back to more borrowings

Privatization revenue is also expected to drop this year. Deflated asset prices and difficult economic conditions will make it hard, if not almost impossible, to sell government assets this year – unless they do a fire sale.

With collection and privatization prospects dimming, the government will be left with no choice but to increase borrowings. More debt tends to increase borrowing costs. And so, we find ourselves once again in the depths of the debt-deficit cycle, back to where we where seven years ago.

Well, another way of looking at the ballooning budget deficit is to sweep it under the rug and shrug off what is happening to the all-around scapegoat that is the global financial crisis. Then, let the next Philippine president, should there still be one, tackle the problem.

Meantime, there is a growing concern that government’s mostly borrowed funds may flow merely in the guise of priming the economy. It may just flow for party-time … for the few … for cha-cha … and for 2010 elections.

KFC-Champions League poster calendar

Philippine Collegiate Champions League (PCCL) is extending its thanks to AIR21, its official logistics and delivery partner, for completing the delivery nationwide of the KFC-PCCL 2009 poster calendar. Those who have not yet received their copies may visit the official website www.CollegiateChampionsLeague.net for more details.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, SalcedoVillage, 1227 MakatiCity. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.