Why the DAP is economically irrational

July 14, 2014

by superadmin

DAP did not stimulate the economy; isn’t large enough to impact on the whole economy, and wasn’t spent on projects that immediately boost consumer and investment spending

The DAP did not stimulate the economy: it did not contribute to one-fourth of the 2011 growth as claimed, it is not large enough to have an impact on the whole economy,  and it was not spent on projects that immediately boost consumer and investment spending

By Sonny Africa

IBON Features—The Aquino administration’s budget department described its Disbursement Acceleration Program (DAP) “as a stimulus package to fast-track public spending and to push economic growth by investing on high-impact budgetary [programs, activities and projects]”.

Serious concerns have already been raised as to its legality (i.e. of being unconstitutional) and propriety (i.e. of being used as presidential pork barrel for patronage purposes). The DAP however is also economically irrational which will be consistent with the notion that the supposed stimulus effect is only a cover for various self-serving political agendas.

The practice of using government spending to stimulate or pump-prime the economy in a situation of low demand is well-established. But to generalize from this and claim that any and all government spending is a stimulus to the economy would render the practice tautological and meaningless. Certain conditions need to be met for the spending to be a genuine stimulus. The most basic is that the quantity of spending must be large enough and occur within a short enough period to actually make a discernible difference. The quality of spending also matters and this should be on items that will have the most immediate and greatest multiplier effect on the economy. Notwithstanding all the justifications that the administration has raised, the DAP did not meet either of these and the so-called stimulus argument is weak.

When the controversy first came out Pres. Aquino himself claimed that the DAP stimulated the economy in 2011 and created a momentum that continued until years after. He also specifically said that the DAP contributed 1.3 percentage points to the growth in GDP in the fourth quarter of 2011; this is considerable considering that growth in that period was just 4.0 percent as reported by the NSCB. The government has released varying, incomplete and inconsistent figures on DAP but there is nonetheless enough information to make a sound conclusion.

First, regarding the quantity. The magnitude of the supposed stimulus program is the most important factor determining its macroeconomic impact. The DAP however was not additional government spending for any of the years it was implemented and was just, as the name says, merely an acceleration of the disbursement of budget amounts that were already established.

Early reports from the DBM had total DAP spending of Php159.36 billion broken down into Php85.53 billion (2011), Php58.70 billion (2012) and Php15.13 billion (2013). But these DAP magnitudes are not additional to the spending programs for the respective fiscal years of Php1,580.0 billion (2011), Php1,829.0 billion (2012) and Php2,005.9 billion (2013); these figures are from the most recent Budget of Expenditure and Sources of Financing (BESF) documents. It is then grossly inaccurate for the administration to claim that the DAP was a stimulus package per se because it did not change these original magnitudes at all and if anything only changed how these amounts were spent (i.e. by changing the actual expense items). It did this through the various means declared unconstitutional by the Supreme Court.

Indeed even if for the sake of argument we grant the administration’s erroneous claim that the DAP was a “stimulus package” it is still clear that the DAP was not really all that significant. Total government spending – computed as the sum of government final consumption expenditure (GFCE) and public construction from the national accounts measured at current prices – in those same years was Php1,132.67 billion, Php1,376.10 billion and 1,558.24 billion, respectively. This means that the DAP was just 7.6% of total government spending in 2011, 4.3% in 2012 and 1.0% in 2013. Measured versus the economy the DAP was just 0.9% of GDP in 2011, 0.6% of GDP in 2012 and 0.1% of GDP in 2013.

So, in quantitative terms, the DAP was even at its peak in 2011 not very large and could not have had much impact on the economy. This can be compared with equivalent figures of more genuine stimulus programs. The US government’s stimulus program – consisting of the US$787 billion US economic recovery package of 2009 and US$700 billion in Troubled Asset Relief (TARP) funds, unemployment insurance, health care and others for instance – was, if spent as programmed, equivalent to about 20-30% of total annual federal outlays and some 4-6% of the US economy. Stimulus packages in other countries in 2009 were also similarly large or larger, such as: Malaysia (7.9% of GDP), China (4.8%), Spain (4.5%), Germany (3.4%), Thailand (2.8%), Korea (2.7%), Indonesia (2.5%) and Japan (2.2%).

The claim that the DAP accounted for 1.3 percentage points of the 4.0% GDP growth in the fourth quarter of 2011 would have been meaningful if true, because then it would have accounted for more than one-fourth of growth. However this 1.3 percentage point contribution to growth was not actually just of the DAP but rather of total government consumption and public construction for the period (of which the DAP was just a small part of). The contribution of DAP-related spending to economic growth is likely just one-fourth of a percentage point at most in the fourth quarter of 2011 and less than a tenth of a percentage point for 2011 as a whole.

The DAP could plausibly even have reduced the contribution of the national budget to economic growth by actually reducing the quantity released to the economy. If for instance it is true that portions of the DAP were lost to corruption then this means that rather than the money being spent in the real economy then they were actually even diverted into hidden wealth bank accounts perhaps even abroad. From an economic perspective such a leakage further diminishes the impact of the supposed stimulus package.

Second, regarding the quality. Economic stimulus is conventionally most visible and effective with public works projects that immediately boost consumer and investment spending and then have long-term benefits in terms of improved infrastructure and other capacity. The ideal is to be able to immediately circulate money in the economy in a way that eventually also yields other productivity gains. This is why education and health care are also seen as legitimate items for stimulus. Overall, it does not appear that the DAP’s profile of projects meets these objectives.

There is no available information of the criteria applied by the government in deciding which projects to fund through the DAP nor indeed which projects to in effect discontinue by realigning funds away from them. Nor is there yet available a complete listing of the projects. A cursory glance of what projects have been made public is however enough to cast doubt that a systematic stimulus-defined criteria was applied. There are certainly various infrastructure projects covering roads, bridges, schools, hospitals, rural health units, transport, irrigation, and other presumably useful expenditures.

But among the items of prima facie dubious stimulus impact are: Php30 billion capital infusion to the BSP; Php8.6 billion for ARMM peace and development interventions; Php5.4 billion in landlord compensation; and Php3.4 billion GSIS premium payments; Php1.8 billion for the Moro National Liberation Front (MNLF); Php1.5 billion for the Cordillera People’s Liberation Army (CPLA); Php1.6 billion for the Department of Science and Technology’s (DOST) DREAM project; Php1.1 billion for human resource development of BPOs; Php750 million to settle Napocor tax liabilities; Php666 million for the Department of National Defense (DND); and others.

It is important to stress that the point is not that these projects are desirable – they may or may not be – but that if they are part of a supposed stimulus package then they need to be assessed by how far they stimulate the economy in its time of need. A more complete inventory would give a better idea of how much by value went to projects with a presumed stimulus impact and which did not. It will also be important to compare the projects that were discontinued or perhaps not even started with the projects actually implemented to see if there was an improvement in the quality of spending.

The ultimate objective of any supposed stimulus package is to increase aggregate demand. The multiplier effect of any particular amount of government spending is however diminished to the extent that it is spent for foreign goods and services rather than locally (ex. did the DOST’s DREAM project purchase foreign equipment?), it is not spent by the recipients (ex. did the BSP and landlords just keep funds received in bank accounts or financial investments?), not spent on labor-intensive projects, and so on. Greater transparency by the Aquino administration on DAP implementation will help clarify the various aspects of the issue further.

From an economic perspective the issue of discretionary use of government funds by Pres. Aquino, or presidential pork barrel, is that such arbitrary decisions for political and patronage purposes will not always be in accordance with the nation’s economic and socio-cultural development needs. Worse is that they may even undermine these.  IBON Features