Fiscal consolidation, resource mobilization needed to reverse P3.2-T COVID-related debt

The Department of Finance (DOF) is ready to present to the incoming administration a fiscal consolidation and resource mobilization plan that the Department says is “critical” to helping the government continue its productive spending, grow out of its pandemic-induced debt, and provide substantial buffers to respond to lingering and future economic shocks.

This new series of measures aims to reverse in a span of 10 years the additional P3.2 trillion debt incurred by the Philippine government due to the COVID-19 pandemic.

Finance Secretary Carlos Dominguez III said that the implementation of a fiscal consolidation and resource mobilization plan is imperative to “ensure that the government can continue to effectively manage its increased budget deficit while spending on investments in infrastructure, education, and healthcare for economic growth and recovery.” The larger deficit is a result of lower revenue collections due to reduced economic activity during the pandemic and the increased spending to protect lives, beef up the country’s healthcare capacity, procure vaccines, and provide subsidies to vulnerable sectors, he said.

The government also continued its priority programs, such as the ‘Build, Build, Build’, in order to create jobs and set the stage for early economic recovery, spent for the rollout of its distance learning program for public school learners, and provided special risk allowances and free rides to medical frontliners during the pandemic-related nationwide mobility restrictions.

Dominguez warned that inaction on fiscal consolidation could force the government to cut spending on necessary socioeconomic programs or to finance debts with additional borrowings, resulting in cascading effects on interest payments that could also ultimately force budget cuts and stifle economic growth.

He said that “not pursuing a fiscal consolidation and resource mobilization program may likely lead to serious and spiraling consequences to our financial and economic health.”

“We are optimistic that the incoming administration and our next set of legislators will recognize the importance and urgency of these measures and implement them at the soonest time possible,” said Dominguez in his opening statement during a press briefing where the DOF presented the plan.

“Pursuing the fiscal consolidation and resource mobilization program as proposed will help us continue to spend on socioeconomic programs, maintain our credit ratings, and grow out of our debt,” Dominguez said. “Taking action now is our responsibility to future generations.”

Dominguez said the plan “is doable and is designed to secure the gains that we have made under the Duterte administration and to ensure that the government can continue to make economic investments and pursue programs for recovery, maintain its high credit ratings, grow out of its debt faster, and cushion the Philippine economy from future external shocks.”

“The next administration is coming in with a strong mandate. We are confident that the soon-to-be President will put it to good use by pursuing critical reforms such as this much-needed program,” he added.

OIC Undersecretary Valery Joy Brion, who heads the DOF Domestic Finance Group (DFG) said that “by the end of 2022, the Philippine government will have borrowed P3.2 trillion more than initially planned in December 2019, prior to the outbreak of the COVID-19 pandemic here in the Philippines. Our debt-to-GDP level stands at 63.5 percent, slightly higher than the internationally prescribed best practice of 60 percent of GDP.” As early as next year, the Philippine government will begin principal payments for loans incurred over the past two years, she said.

According to Brion, the country’s high debt level arising from these expenditures has put a strain on the country’s finances, prompting the need for the implementation of a fiscal consolidation and resource mobilization plan starting next year.

Brion said that the new administration has three options: 1) borrowing more; 2) cutting spending; or 3) raising revenues and improving tax administration to maintain productive spending in infrastructure, health, education, and other investments for the future.

Borrowing more cannot be a viable option as this would further push up the country’s debt level and risk downgrading its investment-grade credit ratings, she said. Interest payments would also balloon, reducing the resources available for productive spending.

Cutting spending, except for wasteful expenses, is also not a recourse because it will imperil the country’s economic recovery and lead to reduced budgets on education, health, infrastructure, and other socioeconomic priorities.

Both widespread budget cuts and financing debts with borrowing would lead to slower economic growth, spiraling debt levels, and eventually, fiscal and economic crises.

Thus, the best way is “to raise more revenues and improve tax administration” Brion said, “and for the government to channel resources from unnecessary and non-priority expenses to productive spending.”

“Mindful of the impact of COVID-19 on Filipino households, we are proposing packages of measures that are: (i) fair, that is, a broad-based tax system where all Filipinos contribute their fair share; (ii) efficient, covering areas that should be taxed anyway, such as the digital economy, where tax laws and administrative policies need to catch up; and (iii) corrective, where revenue measures will result in improved social outcomes, such as achieving the health objectives of sin taxes and curbing the social ills of gambling through taxation,” Brion added.

Bureau of the Treasury (BTr) data show that to prevent having to use borrowings to pay the country’s P3.2 trillion in incremental debt, the government needs to raise at least P249 billion every year in incremental revenues for the next ten years. The measures proposed by the DOF are estimated to yield an average of roughly P284 billion every year for the national government.

Dominguez said that “ultimately, the fiscal consolidation and resource mobilization plan is necessary to enable us to sustain our long-term investments in education, health, infrastructure, and job creation to secure a comfortable life for the present and future generations.”

The DOF reiterated that it stands ready to brief the incoming administration’s economic team on the details of its proposals.