Constituent policy

Budget, taxes, debt a risky mix

MANILA, Philippines — Fiscal policy refers to how governments use spending and taxation to influence a country’s economic conditions. It is an essential component of an administration’s development plan; its spending priorities and the corresponding mobilization of resources have short- and long-term consequences for employment, inflation, investment, growth and economic progress.

On one side of fiscal policy is spending. Public spending is an important lever for stimulating employment. According to the latest labor force survey, about 4.27 million people in the Philippines worked for the government or public corporations. This represents more than nine percent of the country’s employment. National accounts also show that government spending was around 15.3% of gross domestic product in 2021.

While the scale and impact of public spending is apparent, the new administration must be strategic in how it prioritizes its programs and allocates its resources accordingly. The National Expenditure Program (NEP) of the Department of Budget and Management (DBM) outlines the total new appropriations worth P5.268 trillion for the financial year 2023, with P3.002 trillion allocated to departments and agencies and P1.257 trillion as special purpose funds. When evaluating the proposed budget, consider whether these allocations strategically respond to the current state of the country’s economy and development, particularly in the context of pursuing a post-pandemic recovery.

The other aspect of fiscal policy is taxation: how effectively does the government fund resources to finance its delivery of programs and services? After enacting significant tax reforms under the previous administration, the government was able to collect total revenues worth 3,005 billion pesos in 2021, representing a 15.5% effort between revenue and GDP. However, a post-COVID recovery strategy will necessarily involve stimulating the economy and providing social safety nets. Expenditure therefore exceeded revenue by 1,670 billion pesos for a deficit ratio of 8.6% of GDP.

When the government spends more than it collects in revenue, it must borrow either domestically or from foreign creditors. Due to recent above-average deficits, outstanding debt rose to 13.206 trillion pesos in June 2022 from a pre-pandemic level of 8.22 trillion pesos at the end of 2019. The ratio of debt rose from 42% of GDP to 64% of GDP.

Although borrowing is not inherently bad, it is only sustainable if the government can improve its ability to service its debts, either by increasing its revenue effort or by accelerating economic growth. The DBM’s fiscal consolidation and resource mobilization plan aims to achieve these two objectives simultaneously by pursuing the pursuit of tax reforms that will make the country’s tax systems simpler, fairer and more efficient.

Given the importance of fiscal policy, it is useful to monitor the country’s current fiscal and economic conditions, as well as the spending priorities and tax policies proposed by the new administration. Due to time constraints, however, our team decided to focus on the current fiscal and economic health of the country for the first part of our report, and the 2023 national spending program for the second part.

The big economic picture

Prior to the COVID-19 pandemic, the Philippines had experienced sustained economic growth over the past decade. But due to pandemic-induced lockdowns, supply chain disruptions and global uncertainty, the Philippines has experienced its worst economic downturn since World War II (or as far as data is available).

Over the previous decade (2010 to 2019), the revenue effort averaged 14.5% while the expenditure effort averaged 16.6%, resulting in a deficit ratio average of 2.1%.

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The Duterte administration pushed an expansionary fiscal policy strategy based on infrastructure spending, which it dubbed Build, Build, Build. In order to fund its development strategy, the previous administration also enacted the Tax Reform for Acceleration and Inclusion or TRAIN law. The TRAIN Act included reforms to personal income tax, excise duties and VAT, as well as other tax administration reforms, as well as funds for cash transfers to households the poorest. This resulted in an increased effort in terms of public revenue, although also accompanied by a greater effort in terms of expenditure.

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However, following the COVID-19 pandemic, economic activities have been restricted and the economy has largely contracted. This had two major implications for the country’s fiscal situation. First, since economic output has fallen, the tax base has also shrunk. This resulted in lower total revenues for 2020. Second, in order to mitigate the long-term adverse effects of the pandemic on health and the economy, the government had to pursue an expansionary fiscal policy. Bayanihan I (RA 11469) was signed into law on March 25, 2020 and Bayanihan II (RA11494) on July 27, 2020, to reallocate funds for health spending and pandemic response, as well as to provide direct grants or Ayuda To those concerned.

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Since 2020, the economy has recovered somewhat, although we continue to feel the impact of COVID-19. The percentage of Filipino families living below the poverty line fell from 12.1 in 2018 to 13.2 in 2021. The budget deficit fell from 3.4% of GDP in 2019 to 8.6% in 2021. In As a result, the country’s outstanding debt rose to P13.206 billion in June 2022 from a pre-pandemic level of P8.220 trillion at the end of 2019. This represents an increase in the debt to GDP from 42% to 64% during this period.

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Right to know, now! (R2KRN)Coalition/Rappler.com

This piece is republished with permission action for economic reform and the right to know, now! (R2KRN)Coalition. The R2KRN Coalition is a network of lawyers campaigning for the passage of the Freedom of Information Act and the promotion of the practice of freedom of information in the country.