Debt benefits

January 22, 2022

by Sonny Africa

How big is the country’s deficit and debt problem? The national government (NG) deficit reached Php1.3 trillion in the first 11 months of 2021 and was at 8.3% of GDP as of end-September 2021. Total outstanding NG debt was at Php11.9 trillion or 63.1% of GDP as of end-September.

These are historically large amounts and so easy to raise alarms about. But if current borrowing is used productively, this debt burden is actually not necessarily unmanageable.

There is still much room to be flexible with respect to fiscal targets. Deficits and debt are medium- and long-term problems. These can be mitigated by substantial short-term government spending that stimulates growth and revenue generation. The rebound from reopening can be turned into rapid and sustainable recovery if decent jobs are created, incomes raised, and consumption picked up.

For instance, public spending can be wielded to create multiplier effects that causes output to expand. More rapid recovery will also mean improved revenue generation down the line to pay for this. This also means that in effect rolling over this debt by borrowing more domestically should not be a problem.

Interest rates have fallen to record lows. Although this may reverse as monetary policy tightens worldwide, for now this makes it even easier for social rates of return to exceed the interest rate on borrowing.

The economic managers narrowly look at deficit and debt indicators as ends in themselves. This is the reason why the medium-term fiscal program prioritizes reducing the NG deficit to 7.7% of GDP in 2022, 6.1% in 2023, and 5.1% in 2024 with little regard for urgent spending needs.

This is incorrect. They should be seen in the context of the real state of economy and the fiscal measures needed to fix it – in which case a reasonable degree of deficits and debt is actually justifiable.

The government can always create the fiscal leg room that it needs. The next administration can do this by increasing public revenues not just to repay debt but also to invest in social and economic development. This revenue generation however has to be in an opposite manner to what the Duterte administration is doing which is make the tax system more regressive through the laws Tax Reform for Acceleration and Inclusion (TRAIN) and Corporate Recovery and Tax Incentives for Enterprises (CREATE).

The tax system has to be reoriented away from indirect consumption taxes which are an excessive burden on poor and middle-class Filipinos with so little incomes to begin with, especially so after the debacle of lockdowns and economic collapse since the onset of the pandemic. Direct taxes should be increased specifically on the wealth of Filipino billionaires and the incomes of large corporations. Not tapping accumulated wealth and giving tax breaks to big corporations when the country needs so much public spending and investment is irrational.

Fiscal sustainability is critical but revenues should be raised according to the country’s concrete social and economic conditions. Tax policies should also be designed to benefit the majority rather than burden them.

The neoliberal obsession with so-called fiscal recovery is misguided and counterproductive. It is counterproductive because it depresses growth, job creation, household incomes, and revenue generation. It just makes recovery even more protracted and difficult, and forestalls the structural social and economic reforms that are so long in coming. ###