January-May Deficit Shows Philippines on Verge of Renewed Fiscal Crisis

Published on July 4, 2009

By IBON FOUNDATION
Posted by Bulatlat.com

MANILA — The January to May 2009 fiscal deficit of the national government that reached an alarming P123.2 billion ($2.5 billion) signifies that the country is on the verge of a renewed fiscal crisis. Among others this underscores the need to revisit the country’s debt policy to a maximum of outright debt cancellation to free up domestic resources for dealing with the raging crisis.

This five-month deficit is nearly seven times the budget deficit of P18.8 billion during the same period last year. It is also half of the latest full-year target of P250 billion and already far above the earlier full-year targets of just P40 billion announced in October 2008 and then of P101.3 billion declared in January 2009.

According to Ibon, this foreshadows soaring debt service, depressed spending on social services and eventually higher taxes, as what the country experienced in 2002.

A deficit of this size this early in the year is alarming especially because the impact of the global crisis has yet to fully play out in the domestic economy including on revenue collections. As it is, the government deficit trend is worryingly similar to that in 2002 when it reached a record P210.7 billion, which was equivalent to 5.4 percent of GDP. The first quarter deficit in 2002 of P61.2 billion was equivalent to 6.8 percent of GDP while the first quarter 2009 deficit of P119.7 billion is ominously similar at 6.9 percent of GDP.

The record fiscal deficit in 2002 ushered in a long period of soaring debt service and declining spending on social services that culminated in the implementation of the repressive RVAT in November 2005. Interest and principal payments on debt amounted to P2,963 billion over the period 2002-2006, and by 2006 were taking up nearly P0.90 of every P1 in revenues collected. These payments were made at the expense of social services and the five-year period saw the share of education in the national budget falling from 16.9 percent to 13.8 percent and that of health from 2 percent to 1.5 percent.

The fiscal crisis that started in 2002 was used to justify the imposition of new taxes through RVAT in 2005. The new RVAT law increased the tax burden on Filipinos by some P290 billion over the years 2006-2008.

Revenue collection fell in absolute terms in 2009 compared to the year before. Total revenues in the first five months of 2009 of P456.2 billion was 5.4 percent down from the same period last year. Drastically slowing economic growth amid the global turmoil and a moderating of global oil prices is part of the reason for this, which could even be worse in the coming months.

But the fundamental reason for chronic revenue shortfall is government’s liberalization policy itself, which defaults on the collection of corporate, foreign and trade taxes. As it is the government’s tax effort has barely kept pace with nominal growth in gross national product (GNP) and has at times even lagged behind. Revenue increases in the 2006-2008 period have been largely due to the new RVAT law (P290 billion, including the effects of the global oil price hikes) and unprecedented but one-shot privatization (P128 billion). If these are factored out of revenues then the government’s revenue effort, or revenues measured as a percentage of GNP, actually declines to around 14 percent in 2008 or the lowest in over two decades.

If revenue performance for the rest of the year remains the same as in the January to May period, the national government could face a deficit of some P287.9 billion by the end of 2009. If economic growth remains flat this year, which is a conservative estimate because a contraction is very possible, then this implies a deficit of 3.8 percent of GDP– less than but approaching 2002 levels. Outstanding NG debt in any case already increased in 2008 at the fastest rate of growth in five years and as of March 2009 stood at P4.229 trillion ($88 billion). These are the early signs of intensified fiscal distress.

According to Ibon, the more basic reason for the government’s fiscal troubles is that it is dealing with this according to distorted priorities. Economic managers are quick to push for new taxes, higher government fees and charges, and cutbacks on social services spending. Yet the most important sources of deficit pressures are un-addressed: graft and corruption, trade liberalization, foreign investment incentives, unproductive debt service, and military spending, the research group said. (Bulatlat.com)