Fiscal responsibility in a time of crisis

Dindo Manhit, President, Stratbase ADR Institute

The national government’s fiscal program is ultimately expressed by the national budget, in this case, the 2021 General Appropriations Act. Under both boom and recession situations, budget discipline is expected in order to observe fiscal responsibility so that governments can manage economic cycles.

A 2019 International Monetary Fund working paper, “Anchor Me: The Benefits and Challenges of Fiscal Responsibility,” showcased the Philippine fiscal experience and suggested two things: a rule-based fiscal responsibility framework, and that numerical limits should be placed on budget deficits, debt, expenditures, or revenue to promote “countercyclical policy, long-term debt sustainability, accountability, and transparency.”

In a recent media roundtable activity, IMF managing director Kristalina Georgieva laid down the organization’s priorities for 2021, primarily the need for “sustainable and inclusive policies”; key to this is “helping countries reduce high debt burdens and cope with volatile capital flows.”

Correspondingly, the Stratbase ADR Institute published its first occasional paper for the current year. “The 2021 National Budget: What Promise Does It Bring to the Filipino People?” The paper discussed the sectoral and departmental distributions of the 2021 GAA and emphasized fiscal concerns, and noted, for instance, that: “Amid a public health crisis, it would have been expected that the Department of Health (DOH), as a critical agency, would receive a significantly higher budget if only to accomplish its mission. Instead, what turned out to be glaring is that the budget for the DOH and PhilHealth cumulatively represents only 4.7 percent of the total 2021 national budget and increased by only 14.6 percent. By ignoring current realities in the fiscal plan, questions about the seriousness of the government to meet the objective of containing COVID-19 and its effect loom large.”

Thus, the fiscal outlook seems bleak for the pandemic response and the improvement of the DOH’s capacity in fulfilling its mandate as the primary agency responsible for the country’s health care system.

According to the Philippine Statistics Authority, the GDP shrank by 9.5 percent in 2020. This is the worst annual contraction on record.

On top of that, the national government’s fiscal program for 2020-2022 expects lower collections in 2021. Total revenues may reach only P2.72 trillion, which is 13.2 percent of the GDP, though 7.8 percent higher than the projected P2.52 trillion in 2020. Meanwhile, disbursements in 2021 are projected at P4.47 trillion. Hence, the deficit is expected to amount to P1.75 trillion, or 8.5 percent of GDP. With such discrepancy, the government is forced to resort to deficit spending.

The debt-to-GDP ratio is likewise expected to increase due to higher financing requirements. According to data from the Bureau of the Treasury, as of September 2020, the country’s debt-to-GDP ratio had increased to 51.2 percent, higher than what was recorded in 2019 at 39.6 percent. It is important to note that per Department of Finance data, the government continues to secure funding to support its COVID-19 response efforts, swelling to $13.36 billion as of Dec. 15, 2020. Financing sources include the Asian Development Bank, World Bank, Asian Infrastructure Investment Bank, Japan International Cooperation Agency, Korean Export-Import Bank–Economic Development Cooperation Fund, and US dollar-denominated global bonds.

For the short-term, deficit spending will prove to be a crucial move for economic recovery. However, problems may arise in the long run. At the end of the day, the funds to pay back these borrowings will come from taxes collected from the people. With the ballooning debt that government is obligated to pay until 2049, the natural tendency of the government is to impose new or higher taxes.

Also, one may argue that the risk of corruption is a reality whenever a crisis forces the government to skip slow procurement regulations to quickly disburse huge public funds to save lives and rebuild infrastructure. Nevertheless, we must continue to demand strict fiscal discipline, transparency, and close oversight from the government, to protect the trillions of people’s funds from corrupt forces lurking for an opportunity.

This article was originally published in the Philippine Daily Inquirer.

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