Rising budget deficit, debt at the top of post-COVID problems

MANILA, Philippines – Withdrawing support to vulnerable sectors amid the green shoots of economic recovery as well as reducing the budget deficit and rising debt would be the main challenges as the Philippines emerges from its economic slump. pandemic, according to the state-lead think tank Philippine Institute for Development Studies (PIDS).

“As the Philippines is likely to remain in a gray area where relief and stimulus spending will be needed to support the economy, at least for the next year, the important areas for public spending will still be infrastructure, which has suffered a severe downturn. reduction during the pandemic and education, outside of health and social protection, “said Margarita Debuque-Gonzales, principal investigator of PIDS, in the article” Navigating the COVID-19 Storm: Impact of the Pandemic on the Philippine Economy and Macro Responses of Government ”published Monday. .

“Such investments will help minimize the loss of human and physical capital suffered during the height of the pandemic. They will not only strengthen aggregate demand, but also prevent economic scars, ”Gonzales said.

Output losses

Earlier estimates from the state’s planning agency, the National Economic and Development Authority (Neda) had shown that strict COVID-19 lockdowns in the past, which prolonged high unemployment, reduced government revenues and delayed return to in-person classes for schoolchildren would cost the Philippine economy up to 41.4 trillion pesos in production losses through 2060.

Socio-Economic Planning Secretary and Head of Neda Karl Kendrick Chua had said that while the return to pre-pandemic growth potential, including record poverty and unemployment rates, could be delayed by 10 years, foreign investment and other reforms underway in Congress could accelerate the recovery.

For Gonzales, “in a post-pandemic world, the country’s policymakers will need to strategize on how to keep the economy stable after the once-in-a-lifetime shock.”

“A suitable outing must be organized,” she added.

The Bangko Sentral ng Pilipinas (BSP), for example, was to “[determine] the right time to reverse liquidity and credit support measures so as not to dampen growth, ”she said.

Gonzales noted that monetary authorities have extended liquidity support and regulatory relief to calm domestic financial markets amid the protracted pandemic, in addition to legislative measures such as the Strategic Transfer of Financial Institutions (Fist) law. and the unified initiatives of government financial institutions underway for troubled businesses for the Economic Recovery Bill (Guide).

Policy Toolkit

“While monetary and fiscal financing arrangements can be useful in times of emergency, they need to be put back into the policy toolbox when conditions normalize. Extending such agreements would only increase the risk of perceived fiscal domination and decrease both monetary and fiscal independence and credibility, and ultimately weaken inflation control, ”Gonzales explained.

On the fiscal side, Gonzales said the government “would have the enormous task of reducing the country’s budget deficits after much-needed pandemic spending, especially health spending, and permanent tax cuts.”

Gonzales was referring to the Business Recovery and Tax Incentives for Businesses Act (CREATE), touted by President Duterte’s economic officials as the “biggest stimulus package for businesses in the country’s history” because it reduced the corporate tax rate to 25%. percent while reducing the micro, small and medium-sized enterprise (MSME) levy to 20 percent, retroactively to the middle of last year, from 30 percent previously, which was the highest in the Association of Nations from Southeast Asia.

The government hoped that the tax savings businesses made from CREATE would be reinvested as the economy recovered.

“While additional public investment is needed to heal the economic scars of the pandemic, the longer-term goal should be to gently place the country on a downward debt path – towards more sustainable levels, ideally through to higher growth rather than inflation and in the same way. unfair measures, ”Gonzales said.

The budget deficit has swelled since last year as the government had to increase its COVID-19 war chest amid a protracted pandemic, while tax and non-tax revenue collection weakened due to the worst Post-war recession recorded in 2020, which shed millions of jobs and shed thousands of businesses.

Last year, the budget deficit more than doubled to 1.37 trillion pesos or 7.6% of gross domestic product (GDP), from just 660.2 billion pesos or 3.4% of economic output in 2019, before the pandemic.

While the emerging 2021 deficit estimated at 1.6 trillion pesos will be narrower than the scheduled 1.8 trillion pesos, it will remain the largest in history. To finance the widening budget deficit, the government also increased borrowing, so that the debt-to-GDP ratio hit a 16-year high of 63.1 percent in September.

The combination of a debt-to-GDP ratio above the 60 percent level considered by debt watchers to be manageable among emerging markets like the Philippines, plus a huge budget deficit, had posed risks to credit ratings. Philippines.

But as the economy recovers from the pandemic-induced crisis, the Cabinet-level Development Budget Coordination Committee (DBCC) expects the budget gap to gradually narrow to 7.7 percent of the budget. GDP next year, 6.1% of GDP in 2023 and 5.1% of GDP. in 2024. At the same time, the debt ratio was expected to end in 2021 at 59.1% and peak at 60.8% in 2022 before falling to 60.7% in 2023 and 59.7% in 2024.

With the fiscal consolidation strategy currently being developed by the Ministry of Finance (DOF), DBCC wanted to return to pre-pandemic deficit levels of around 3% of GDP beyond 2024.

DOF officials said the next fiscal consolidation strategy could possibly include new or higher taxes that the next administration could implement to generate more revenue.

DBCC expects 2019 pre-pandemic revenues of 3.14 trillion pesos to be exceeded from next year, with an estimate of 3.3 trillion pesos; 3.62 trillion pesos in 2023; and 405 trillion pesos in 2024.

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