2022 budget stalls recovery, worsens inequality

August 23, 2021

by IBON Foundation

The proposed 2022 national government budget is the second budget in a row that fails to respond to the pandemic, said research group IBON. The Duterte administration is not spending enough to stimulate the economy and, moreover, is not even spending on health, ayuda, and small businesses which are the most important things to recover quickly and stop deprivation from worsening. The group said that the misguided fiscal conservatism of the economic managers is counterproductive and needs urgent correction.

Administration hype that the ₱5.02 trillion budget is a “record high” is meaningless because literally every national budget is higher than the one that came before it (with the exception of the 1992 budget that was slightly less than from the year before), said IBON. The proposed 2022 budget is again too small to boost aggregate demand just when the economy needs it the most after what will have been nearly two years of community quarantines from March 2020 until the end of 2021.

The group said that there is no stimulus. It is only 11.5% larger than the 2021 budget which is just about the average 11.3% increase in the annual government budget recorded over three-and-a-half decades since 1987. This comes after a mere 4.6% increase in the 2021 budget from actual spending levels in 2020.

Two straight years of non-existent stimulus will be the biggest reason for the inability of the economy to rebound quickly from the unprecedented lockdown-driven economic collapse in 2020, said IBON. The incomes of millions of families have fallen and nearly 18 million households now do not even have any savings anymore. Some 100,000 micro, small and medium enterprises (MSMEs) have closed and nearly 500,000 are still only operating partially.

IBON said that more proactive fiscal policy is needed in 2021 and 2022 to fix this huge economic scarring but the government’s refusal to loosen its purse strings prevents recovery. Easing quarantine measures and hoping for vaccinations to pick up are not enough as three straight quarters of slowing quarter-on-quarter gross domestic product (GDP) growth since the end of 2020 have clearly shown. There was even a 1.3% contraction in the second quarter of 2021.

As it is, the absolute level of economic output is unlikely to rebound to 2019 levels before 2023 and of GDP per capita before 2024, the group said. The prospects for growth rates to return to over 6% are dim in the medium-term and will weigh heavily on the next administration. Inequality will meanwhile worsen because the poorest families and smallest enterprises are disproportionately affected by the economic crisis.

IBON said that a real fiscal stimulus is urgent to alleviate poverty and revive employment, investment and growth. The Duterte administration was able to manage a 23.6% increase in the 2017 budget on the back of huge increases in infrastructure and military spending. A similar increase for 2022, but with stress on health measures to contain the pandemic, help patients and frontliners, ayuda for families, and support to small businesses, implies a ₱5.57 trillion budget instead.

Such a proactive COVID-19 response justifies deficit spending, additional borrowing that takes advantage of investment grade credit ratings and low interest rates, and revenue generation from a more progressive tax system taxing the rich and large corporations. The group said that spending on the economy to spur growth will also itself boost revenue collections as economic activity is restored.

IBON said that the economic managers need to overcome their narrow-minded focus on vague “fiscal consolidation” as a metric of good economic performance. Social protection, social services, and economic recovery are the paramount concerns. The Duterte government also has to squarely address the underspending and irregularities so usefully pointed out by the Commission on Audit (COA).