The International Monetary Fund has warned of another global crisis should the U.S., still being the world’s largest economy, not be able to raise its borrowing limit, which eventually could lead to a default in payments to creditors or a decrease in its spending that would include health care.
The U.S. Congress controls how much its Treasury may borrow. Its current debt limit is at $14.29 trillion. But as early as February this year, the government’s debt limit broached its limit, prodding the Treasury secretary to urge Congress to raise the ceiling.
During the last months, a fierce debate had arisen, with one side taken by the Republicans that raising the debt ceiling must come with an all-encompassing reform in the budget, i.e., huge slashes in spending, something which the Democrats are not in agreement with.
Since the U.S. government had been spending more than it was earning in tax revenues, it had resorted to borrowing heavily since 2004 to fund the state’s extravagant health care costs, two wars and its pump-priming program to save the economy from the housing-turned-financial crisis in 2008.
Increasing debt cap and curbing deficits
While calling for the debt cap to be raised, the IMF has also suggested for the U.S. to take "gradual" measures to curb its budget deficit. Economists have noted that increasing debt will not be a solution to the current gap between federal spending and earning.
Since 2004, federal spending has doubled to outstrip tax revenues. At a time when the government’s health care cost had been rising because of an ageing population and more expensive technologies, the global financial crisis severely weakened the country’s productivity and gave rise to lower tax collections.
If Congress does not raise the debt ceiling, Treasury debts would be reassessed and could be downgraded from its top AAA rating, which is regarded as the gold standard for creditworthiness. A downgrade could be "extremely damaging" for the US and world economy, warned IMF.
If rating agencies downgrade US bonds, it might also have a negative impact on some money-market mutual funds and insurance companies whose standards require them to invest in the highest-rated bonds.
The risks on the global economy, says the IMF, would largely come from the loss of confidence in the US to manage its debt. Given the central role of US Treasury bonds in world financial markets, Asian markets are already responding negatively to the impasse on the proposed rise in the U.S. debt cap.
Some economists, however, are saying that the current discussion on the debt cap in the U.S. Congress is more political grandstanding than any. Simply put, Congress will have to approve an adjustment in the ceiling, just as this has been adjusted more than 40 times since 1980.
Drawing lessons for P-Noy’s team
For the Philippines, as with several other similarly classified countries, the threat and consequences that comes with the U.S. debt issue would undoubtedly be felt. This would ultimately mean adjusting once again growth targets in line with global pace. However, unlike China, Japan or Brazil which have substantial ownership of U.S. Treasury bonds, we should be able to slow down while taking shelter from another global financial storm without much fear.
What we could do at best would be to learn from what is happening, particularly about managing debts, and keeping a balanced fiscal budget. If the mighty America can find itself in default condition, a similar state in our country could not be far-fetched if our government treads dangerous waters.
Fortunately, P-Noy and his team have been focusing on fiscal discipline as a pillar of governance during the first year and going into the second year.
Through improved fiscal consolidation, the government was able to trim its deficit in 2010 at P314.4 billion, or 3.23 percent lower than the P325 billion programmed deficit for the year. According to P-Noy, this lower deficit was due to the implementation of combined measures to improve collections and wise spending.
For the first five months of 2011, the government posted a deficit of P9.54 billion, or 94.11percent lower than the P162.107 billion deficit in the same period in 2010. Aside from increased revenues and sound spending, strict observance of the principles of zero-based budgeting helped in this case.
Revenues grew by 16.30 percent from P500.01 billion in the first five months of 2010 to P581.50 billion in the same period of 2011.
Disbursements, on the other hand, were lower by 10.73 percent from P662.12 billion in the first five months of 2010 to P591.04 billion in the same period of 2011 due to more prudent planning and sound spending of agencies. Government disbursed P1.52 trillion in 2010, or about 94 percent of the P1.62 trillion programmed for that year.
Political will for needed tax reforms
The country is at the brink of just one upgrade by sovereign rating agencies, a clear testament of this administration’s “matuwid” fiscal discipline efforts. But as these same rating agencies have been saying, the country needs to expand its tax base and increase tax rates to significantly boost its revenues and cut debt levels.
Tax reforms need not run counter to P-Noy’s pledge of “no new taxes.” An example is the urgent need to reform the existing excise tax structure for cigarettes and alcohol products, or the so called “sin products.” The present structure is not only outdated but continues to provide unfair and arbitrary protection particularly to specific cigarette brands, an incentive in place for the past 14 years.
At the end of the day, if the government wants to spur growth, it will need to increase revenues to finance infrastructure, education, social services and health care to keep this nation of 90 million on the path of growth.
Other existing tax incentives extended to certain sectors and industries that are not producing the desired economic benefits for the country should also be reviewed and removed.
Reforms will always be objected by vested interests. This is the challenge facing P-Noy’s economic team, and they would need the support and political will of the president.
Survey on top UAAP and NCAA teams
Register your support for your favorite UAAP and NCAA teams. Visit www.CollegiateChampionsLeague.net, the official website of PCCL (Champions League) and join the survey to identify the top four teams after the first round competitions.
Deadline for submission is August 7, 2011.
