Gov’t, not pandemic, caused record deficits and debt – IBON

March 5, 2022

by IBON Foundation

Research group IBON said that the Duterte administration’s policy missteps caused and worsen the government deficits and debt. The over-reliance on militarist lockdowns caused the worst economic collapse and revenue losses in the country’s history, the group said. The resulting deficit and debt to finance this were also bigger than they should have been because of fiscal mispriorities which hampered rapid recovery.

The Bureau of Treasury recently reported that the national government’s budget deficit for 2021 is a record high Php1.67 trillion and, at 8.6% of gross domestic product, the biggest in at least 36 years. National government outstanding debt is projected to reach Php13.4 trillion by end-2022 or more than double the Php5.9 trillion the Duterte administration inherited from the Aquino government.

The government opted for among the longest and harshest lockdowns in the world to contain the pandemic instead of spending on rational public health measures. This caused the biggest economic contraction the country has ever seen in 2020, also resulting in the biggest revenue collapse ever with a Php281.5 billion or 9% fall in 2020 from the year before.

Revenue losses would already have been less and the deficit smaller with less lockdowns, IBON said. The administration, however, made things worse with its narrow-minded tax reforms and its misguided spending priorities in 2020 and 2021.

It mindlessly still pushed for the CREATE law estimated to result in Php251 billion in foregone revenues in 2020 and 2021 from corporate income tax cuts benefiting large corporations most of all. The resulting increase in the government deficit means a corresponding increase in government debt, IBON pointed out.

As if there were not more urgent immediate needs because of the pandemic, the Duterte administration acted as if it was business as usual and still insisted on spending Php1.84 trillion for infrastructure and Php2.17 trillion in debt servicing (interest and amortization).

The immediate multiplier effect from import- and capital-intensive infrastructure is weaker than if the same amount was used for emergency cash transfers, which households would spend locally and right away, and for helping small domestic enterprises, who would stay in business and hire workers. Debt servicing, meanwhile, does not have a multiplier effect.

IBON stressed that the economy and revenues would not have collapsed as much and would recover faster if the government had spent more on ayuda and supporting small businesses. Instead, by hindering rapid recovery, it is accumulating more deficits and debt than it should.

IBON also said that more debt could even be justified if only this was going to be spent properly to spur recovery and revenues thus enabling the economy to grow out of debt. As it is, borrowings are mainly going to debt service and to filling in the revenue gap caused by the extreme lockdown-induced economic collapse.

There was Php2.6 trillion in gross borrowings in 2021. Debt interest payments and amortization amounted to Php1.2 trillion, while IBON estimated a revenue shortfall of around Php800 billion*. Combined, this is already equivalent to some Php2 trillion or 80% of gross borrowings, said the group. In effect, IBON said, this leaves just the small balance of Php600 billion for increasing expenditure to stimulate growth.

This balance is clearly not enough and non-interest national government expenditures only increased by 10.4% in 2021 from the year before. This is the smallest increase under the Duterte administration, IBON pointed out, just when a substantial fiscal stimulus is so needed to alleviate suffering, spur economic recovery, and induce revenue generation. The average annual expenditure increase in 2017-2020 was a much higher 14.5% with a peak of 21.7% in 2018.

With such a non-existent stimulus, the group said that the economic rebound in 2021 was shallow resulting in just Php3.01 trillion in revenues which is still 4.2% below the Php3.14 trillion level in 2019.

IBON noted Php5.3 trillion gross borrowings in 2020 and 2021. The group said that more of this should have been spent on ayuda and producer subsidies, and less on infrastructure and debt servicing. The economic rebound would have been bigger, revenues would have recovered faster, and there would have been less need for borrowing.

IBON stressed that the next administration should leave the old thinking of the current economic managers behind. The group said that it should focus on growing faster out of debt especially in a way that alleviates the suffering of poor and ordinary Filipinos, instead of profiting a few corporations and creditors. ###

* Computed as the difference between actual revenues in 2021 and revenues if the 10% revenue growth in 2019 was maintained in 2020 and 2021