From the first Php20 million loan of the First Philippine Republic approved by the Malolos Congress in 1898, it took almost 120 years for the national debt to reach Php6.1 trillion in 2016. The Duterte administration is going to more than double that in just six years to Php13.7 trillion in 2022.
The administration likes to give the impression that debt is growing because of its COVID-19 response efforts – but the numbers don’t add up.
What’s really happening is that the government is using the pandemic as a smokescreen to finance its indulgences – infrastructure, militarism, debt, and lower taxes on the rich. The other side of the coin is that the poor and middle class are made to pay for these indulgences through more and higher consumption taxes that strain their already stretched incomes.
At a deeper level, what’s happening is that the structural weaknesses of Philippine semifeudalism are being laid bare. Domestic agriculture and Filipino industry are the foundations of the economy and drivers of development. But decades of neoliberal globalization have eroded these so much that more and more debt-financed public spending is needed to spur growth to give the illusion of progress.
Debt It Be
Debt is soaring. The Bureau of the Treasury (BTr) recently reported that the national government’s outstanding debt reached Php9.6 trillion as of August 2020, or a Php1.9 trillion increase from the start of the year. This isn’t the end of it though and debt is projected to reach Php10.2 trillion by yearend, then Php12 trillion in 2021, and Php13.7 trillion in 2022.
The situation seems a little better if we look at the debt as its equivalent share of gross domestic product (GDP). Looking at the government’s debt obligations relative to the size of the economy adds a bit more context about the country’s ability to pay.
Better, but still not good. As projected, the 59.9% debt-to-GDP ratio in 2022 will be the worst in nearly two decades since the 65.7% ratio in 2005 around the height of the Arroyo-era fiscal crisis. The ratio in 2022 will also be higher if the economy doesn’t grow as expected either from the protracted global and national economic crisis or any political turbulence around the 2022 national elections.
Debt is swelling because, using COVID-19 as an excuse, the Duterte administration is on the biggest borrowing spree in the country’s history. It is set to borrow in its six years nearly as much as the five administrations before it did over 31 years. Its gross borrowings are set to reach Php3 trillion in 2020 aside from another Php3 trillion in 2021.
By the end of its term, it is projected to have borrowed Php11.22 trillion over 2017-2022. This is nearly as much as the Php11.25 trillion in accumulated gross borrowings in the entire post-Marcos period 1986-2016. Measured as a share of the economy, the Duterte administration’s gross borrowings will reach a record 15.9% of GDP in 2020 which is over double the historical average to date of 6.5% and well above the previous peak of 11.8% in 1992.
You Can’t Always Debt What You Want
The economic managers say that this is most of all driven by the government’s COVID-19 response. But it isn’t.
A huge response is doubtless urgent in terms of public health programs, social assistance to millions of distressed families, and critical support to tens of thousands of floundering micro, small and medium enterprises (MSMEs), as well as to chronically neglected farmers and fisherfolk. However, the government’s response is actually pretty stingy.
The administration only allotted Php389.2 billion under Bayanihan 1 (RA 11469) and then an even smaller Php165.5 billion under Bayanihan 2 (RA 11494) or a total of just Php554.7 billion. The sum is equivalent to less than one-fifth (18.5%) of the Php3 trillion in projected borrowing for 2020.
Things are even worse in the proposed 2021 budget. The administration claims that there’s Php203.1 billion to respond to the pandemic but this is bloated by the Php71.4 billion budget for PhilHealth which is actually the exact same pre-pandemic amount in the 2020 budget. Taking that away, there’s at best really just Php131.7 billion for pandemic response under so-called universal health care. This is equivalent to just 4.4% of the Php3 trillion in projected borrowing for 2021.
Which actually explains why COVID-19 continues to spread. The Philippines has the worst pandemic response in East and Southeast Asia and among the worst in the world. The country also just earned the dubious distinction of rising to among the top 20 countries with the most number of coronavirus cases.
And which also explains why Filipinos are struggling today. There’s the expensive COVID-19 testing and treatment. Millions of poor and low income households aren’t getting any aid and record numbers of families are going hungry. Business confidence is likewise steeply dropping to record lows which likely means many more MSMEs closing and lay-offs rising well into next year.
If the debt isn’t for COVID-19 response, then what is it for?
(I Can’t Debt No) Satisfaction
The bloating debt is most of all for the same distorted priorities the Duterte administration had before and upon the pandemic. Stubbornly elite-driven economic policymaking continues to serve the narrow interests of capital and self-serving political agenda.
The economic crisis is crimping government revenues but imprudent expenditures are kept at record highs – resulting in record high deficits and correspondingly record high borrowings to cover these.
What are these misguided expenses? There’s the obsession with Build, Build, Build (BBB) which makes contractors and real estate oligarchs even richer, swells the pork barrel of politicians, and gives foreign investors the infrastructure they want. Public infrastructure spending is set at Php1.1 trillion in 2021.
Ambitious infrastructure spending is justified as some kind of magic bullet for growth. This has been growing immensely in every year of the Duterte administration both in absolute terms and as a share of GDP. But this still didn’t stop the economy from slowing, joblessness from worsening, and agriculture and industry from declining in the three years even before the pandemic hit.
There’s also the overspending on the military to bolster authoritarian rule and placate restive generals. Between 2020 and 2021, the budget of the defense department increases while the budgets of the health and social welfare departments see a decline from their Bayanihan 1- and Bayanihan 2-boosted spending this year.
And there’s debt service because the creditworthiness that the economic managers are so infatuated with doesn’t come cheap. This has been growing for three years now and will rise steeply next year.
In 2021, the Duterte administration will be paying the most debt service in the country’s history at Php1.8 trillion in interest and principal payments or equivalent to 8.1% of GDP. It’s also equivalent to 66 centavos out of every peso of revenue (66%) – rising from 25.5% in 2018, higher than the historical average to date of 49.3%, and the highest in a decade.
It can also be argued that most of the borrowing will in effect just go to paying off debt. Debt servicing in 2021 will be equivalent to six-tenths of gross borrowing for the year (59.3%), double the expected 33.5% this year. The economic managers argue that this is essential to enable us to keep on borrowing – but then who really gains the most from that borrowing?
The question can even be asked with regard to the supposed financing for COVID-19 response from some of the country’s biggest lenders. The Philippines is getting US$7.5 billion worth of loans from five major creditors. These are lenders that the country already owes US$26.8 billion to and who we’re actually paying US$3 billion in debt service this year and next.
The dance of borrowing to pay off debt to be able to keep on borrowing doesn’t have to be so recurring if only the government were able to raise more revenues. Unlike in the 1980s debt crisis, overseas Filipino workers today provide abundant foreign exchange that can be used when paying foreign creditors.
The most sustainable source of revenues is a strong and vibrant economy. But this can’t be created as long as so much debt goes to unproductive or ineffective purposes, and as long as real structural economic reforms for the better aren’t taken.
Instead, past governments have always preferred to raise revenues by burdening the poor and middle class with consumption taxes like value-added tax (VAT) and excise taxes. VAT was introduced in 1986 then broadened and expanded in 1997 and 2005. These are convenient for government – because the mass of low-income consumers is obliged to pay taxes as long as they consume to survive – but grossly regressive.
The Duterte administration is no exception and, if anything, consolidates its record-breaking streak by crafting the most regressive tax system in the country’s history. Its Comprehensive Tax Reform Program (CTRP) adds or raises indirect taxes on a wide range of consumer goods and services.
Yet, just when revenues are needed the most to avert a debt crisis, it is using the middle class and MSMEs as a cover to even lower direct taxes on the rich and large corporations. The TRAIN law passed in 2017 results in an estimated Php584.0 billion in revenue losses over 2019-2022 from cuts in personal income, estate and donor’s taxes. The corporate income tax cuts in the proposed CREATE law in turn means Php249.4 billion in revenues lost over 2020-2022, mainly benefiting large corporations including foreign firms.
The net result is that, more than ever, the poor and middle class disproportionately bear the burden of paying for colossal government debt while the rich accumulate even more income and wealth. The stratospherically wealthy are the best-off by this. In a more rational world, they would be paying higher income taxes and a substantial wealth tax.
Debt Up, Stand Up
Speaking to a Senate under the president’s thumb, the finance secretary last month said that the government will push for new or higher taxes from now until 2022. The compulsion is powerful because, with relentless wasteful spending, higher government revenues are needed to keep paying creditors. This is the Duterte administration’s primary concern and not real social and economic development.
In a very meaningful sense, the debt crisis is already upon us – just not yet the kind that the economic managers and creditors are worried about where debt payments to lenders are interrupted. Although the country is certainly much closer to that now than at the start of the Duterte administration.
It’s where the government isn’t spending to stop millions of Filipinos from suffering or for social services or for building the foundations of the domestic economy. With government debt reaching dizzying heights, this will only get worse in the years to come.
The proposed 2021 budget is a case in point. In the middle of the worst public health crisis in the country’s history, the public health system is allowed to deteriorate. Amid unparalleled economic decline, there is no aid for the people nor real support for distressed MSMEs. Teachers, staff and students are not getting the support to ensure quality education for all.
The country’s policymaking remains captured by self-serving political and economic interests and the only real pressure for change comes from the country’s sectoral and grassroots movements. Save for some progressive lawmakers, Congress is merely going through the motions and rubber-stamping the executive’s proposed 2021 budget – which means that the only sane voice against debt and for development comes from the people.