Core -- By Benjamin E. Diokno

Disappointing 2011 budget

Posted on February 09, 2011

Policymakers who look up to the public sector as a major source of growth in 2011 are in for a major disappointment. Planned public spending, net of debt service, is expected to contract in real terms. Direct spending for public infrastructure is expected to slow, too, as appropriations for various public works decline. This, combined with the shrinking list of public-private partnership (PPP) projects that are ready to be bid and implemented this year, will mean another slow year for public construction.

Expectedly, the fastest growing item in the 2011 national budget is interest payments -- from P276 billion in 2010 to P357 billion in 2011, or by a whopping 29.3%.

Total planned government spending, net of interest payments, is expected to increase from P1.249 trillion in 2010 to P1.273 trillion in 2011, or by a measly 1.9%. Corrected for inflation, which is forecast to range from 4% to 5%, the productive part of the budget is expected to decline by 2.1% to 3.1%.

The biggest source of disappointment in the 2011 budget is the sharp drop in the amount allocated for economic services. The budget allocation for economic services will plummet from P399 billion in 2010 to P361 billion in 2011, a decrease of 9.5%.

The budget outlays for agriculture and land reform will fall from P89.2 billion in 2010 to P66.0 billion in 2011, or by 26.1%. For a country whose population is expanding rapidly and food shortage is a real threat, the government should spend for programs that would increase food production and reverse the declining agricultural productivity.

The Philippines is faced with a serious infrastructure deficiency. Yet, its 2011 budget allocation for communications, roads, and other transport was not only grossly inadequate; it was on a free fall. The sector’s budget allocation declined from P167.2 billion in 2009 to P151.5 billion in 2010 (attributable to the sharp slowdown in public construction during the second half of the year). For 2011, it is expected to further contract to P143.5 billion in 2011.

It may be argued that the Aquino III administration’s strategy is to make up for direct public spending for infrastructure by increasing the off-budget PPP projects. But the PPP initiative will take time to take off. Foreign investors need to be convinced that the Aquino administration can follow through on its PPP commitments.

Last November 2010, the Aquino administration initially bared its PPP initiatives. It made bold commitments on honoring contracts and guaranteeing regulatory risks. Foreign investors need more convincing. In the meantime, the list of projects under the PPP initiative continues to shrink.

Last November, from a very long list of projects, the following projects were announced to be ready for PPP arrangements: the creation of the Cavite-Laguna Expressway, Ninoy Aquino International Airport Expressway (Phase II), Light Rail Transit (LRT)-2 East Extension, LRT-1 South Extension.

The Philippine government also announced that it is looking for investors who will privatize the LRT-1, Metro Rail Transit-3, and Laguindingan Airport in Misamis Oriental, and develop the New Bohol Airport, Puerto Princesa Airport, and New Legaspi (Daraga) Airport.

But it turned out that the Aquino government was not ready. In the recent roadshow in Tokyo, the list has been further shortened to four: the Metro Rail Transit-3, the Light Rail Transit (LRT)-2, the Laguindingin Airport, and the Ninoy Aquino International Airport Expressway (Phase II). The airports in Bohol, Puerto Princesa and Legaspi (Daraga) have been deferred.

The short-listed projects are yet to be bid. It will take a while before real groundwork will start, and it will take many years before these projects are completed. And it is reasonable to assume that their impact on the economy this year is going to be negligible.

The strength of the 2011 budget is on social spending. In his budget message, President Aquino said that the 2011 budget is meant to "uplift the lives of our countrymen who are in direst need of government compassion and support -- the poor, the disadvantaged, the marginalized."

Here, Mr. Aquino put his money where his mouth is. The budget allocation for social services is expected to increase from P492 billion in 2010 to P560 billion in 2011, or by 14%. The Department of Education’s budget will increase by 19.2%, the Department of Health’s budget by 13.3%, and the Social Welfare and Development’s budget by a whopping 122.7%.

The budget allocation for the defense sector will increase by 5.4% while that of the general public services sector will decline by 4.0%.

Moving forward, on the fiscal side, the Aquino government will be faced with three major challenges. First, how to raise enough revenues to be able to finance bigger, more responsive budgets.

Second, how to effectively and efficiently implement the budget. The challenge is extremely difficult for the Department of Social Welfare and Development. An agency that is so unaccustomed to handle large budgets, DSWD is now equipped with a humongous budget but faced with the enormous task of implementing the Aquino administration’s flagship program. Is the DSWD bureaucracy up to the challenge?

Finally, how to make the PPP initiative work. And if it doesn’t live up to expectation, what is the Aquino III administration’s fall back option?