BURDEN OF THE BUDGET DEFICIT
The Philippine Star
07/02/10

One of the biggest challenges that President Noynoy Aquino faces during his six-year term is managing the government’s bloated budget and fiscal spending (or non-spending), including reining in the current runaway deficit.

In May, for example, the budget deficit as released by government was already much worse than expected at P30.5 billion, causing the shortfall for the first five months of the year to breach the first-half ceiling of P145.2 billion.

The January-May deficit widened to P162.1 billion, ominous already at 54 percent of the 2010 target. You can expect the deficit to further balloon when the June figure comes out this month after the Arroyo administration failed to raise additional revenue mainly from asset sales. For the month of May alone, the Department of Finance announced that spending increased by 21.3 percent from a year earlier, accelerating after a 12.1 percent rise the month before, whilst revenue collections rose only by 5.3 percent.

Even if the consensus before the May figures came out was that the 2010 deficit would exceed last year's record gap of P299 billion, or the equivalent of 3.9 percent of gross domestic product, the market still reacted negatively.

How the new administration will keep the full-year deficit below the new target of P300 billion is the big question that's bugging practically every analyst and investor keenly watching the Philippine economy and local financial markets.

And this ominous development has left not a few market participants and watchers wondering if the new Chief Executive will make good on his promise during the campaign period not to impose new taxes during the next six years.

Plugging the leaks

Aquino has promised to cure the country's fiscal ills, not by imposing next taxes, but by improving tax administration. But clearly the problem needs immediate and lasting solutions.

Is it realistic to expect his administration to raise more revenue in the next six months by just plugging the tax leakages? And will his promise of nailing tax cheats immediately after assuming power really make any headway?

The fiscal burden P-Noy has inherited from Gloria Macapagal Arroyo is made heavier by the need for the government to spend a little extra to keep the economy going while the global recovery is once again being threatened, this time from the sovereign debt crisis hammering the euro zone.

Arroyo's finance secretary, Margarito Teves, had warned that unless the new administration imposes new taxes, the budget deficit would widen to 4.4 percent of GDP in 2011 instead of the current goal of 3.3 percent.

Quoting previous media reports, Aquino has insisted on first plugging leaks in the country's tax system before imposing more taxes, further saying that just a 2 percent increase in tax collections would help fix half the country's revenue problem.

His goal, needless to say, needs a team of fiscal managers who will have the strong political will to go after tax cheats and strictly impose fiscal discipline on all agencies under the national government.

Fiscal crisis

There is now talk the Philippines will be facing a fiscal crisis in the coming years if the problem of weak tax collections persists. A nation is technically in a fiscal crisis if it defaults on debt payments and has lost access to the international debt market.

With government debt doubling over the past nine years under the Arroyo administration, a continued state of budget deficit needs to be financed through more borrowings. Thus, the possibility of the Philippines plunging into a crisis similar to what Greece and other heavily-indebted European nations cannot be ruled out.

The credit rating agencies are therefore asking Aquino to immediately make clear his economic and fiscal policies. Last month, a senior executive of Moody's Investors Services had already said the new Philippine president must immediately lay down clear-cut policies after campaigning on "a platform of transformational leadership that was heavy on rhetoric, but light on substance."

Moody's senior vice president Thomas Byrne was also quoted in media reports as saying that Aquino must remove ambiguity on his economic and fiscal policies in the months ahead if he wants to shore up further the government's credit fundamentals.

He expressed concern, though, over Philippine sovereign debt, which remained vulnerable to swings in interest and exchange rates, and shocks from shifts in business and political sentiments.

Opportunities

The good news is that the government and private financial institutions, including the research teams of local and foreign banks now expect the Philippine economy to grow stronger than initially anticipated. With the country's GDP widely expected to expand by at least 5 percent this year, hopes are high that the government will be able to collect more taxes in the second half as corporate profits are likely to rise.

And the improved economic outlook should ease the pressure on the new administration to adopt drastic measures this early to address the fiscal problem.

Reforms to be pursued

There are also other reforms left unimplemented by the Arroyo administration, according to the Department of Finance, which P-Noy should pursue. These are the restructuring of sin taxes and the excise tax on petroleum products, which could generate P40 billion; rationalization of fiscal incentives, for P10 billion; and the Simplified Net Income Taxation System, for another P5 billion.

Perhaps President Noynoy’s biggest ace is the overwhelming mandate given him by the Filipino people. He should leverage on this soonest to be able to rally his allies in Congress to pursue meaningful reforms toward fiscal consolidation.

Philippine Collegiate Championship 2010

The collegiate basketball season is now in full swing with NCAA games ongoing and the UAAP opening soon. The CESAFI, the major collegiate league in Cebu, is also scheduled to start by end July. Most of the other “mother leagues” nationwide will start their competitions in July and early August.

Keep track on how your favorite teams are performing by visiting www.CollegiateChampionsLeague.net, the official site of the Philippine Collegiate Champions League (PCCL).

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