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The 2019 budget: Building a bright future for the Philippines

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The 2019 budget: Building a bright future for the Philippines

By Benjamin E. Diokno

AS SOON as we assumed office, we adopted measures to put an end to underspending. We put in place a number of budget reforms, including limiting the validity of appropriations to one-year from two years.

These measures worked, cutting underspending to only P96.3 billion in 2016, and P85.2 billion in 2017. This downward trend continues.

As of May 2018, actual spending exceeded the program by P15.2 billion due to the frontloading and fast-tracking of existing programs and projects.

To further modernize our budgeting system and move it to the realm of international good practices, we are shifting to an Annual Cash-Based Appropriations wherein obligations or contracts for programs, activities, and projects entered into are limited to those that can be fully delivered by the end of the fiscal year.

In the preparation of the budget, the review of the Department of Budget and Management considered the agency’s implementation capacity and a project or program’s implementation-readiness. The shift is expected to increase the efficiency of government operations through better agency planning. Agencies will be measured not on contracts awarded (or obligated) but on the actual delivery of public goods and services.

FISCAL PROGRAM
Given the country’s stage of development and decades of underinvestment in physical infrastructure, the government will continue to adapt an expansionary fiscal policy.

Revenues are targeted to reach P2.846 trillion in 2018 and P3.208 trillion in 2019, equivalent to 16.2% and 16.5% of GDP, respectively. The revenue levels include the additional P89.9 billion and P181.4 billion from the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law in 2018 and 2019, respectively.

For 2019-2022, the Comprehensive Tax Reform Program includes Package 1B and Package 2+ which is expected to generate an average of P268.3 billion, equivalent to 1.2% of GDP, in additional revenues per year. This will help revenues grow by an average of 12.7% per year to reach P4.588 trillion or 17.6% of GDP by 2022, compared to P2.473 trillion or 15.7% of GDP in 2017.

For 2019, the Development Budget Coordination Committee (DBCC) is adjusting the deficit slightly upwards to 3.2% of GDP, from the previous 3% target in order to accelerate investments in social services, particularly education and social protection, as well as to fast-track countrywide infrastructure development through the “Build, Build, Build” Program. This tax-expenditure mix will allow us to meet our goal of being an upper middle-income economy by 2022.

For 2020 to 2022, the deficit target will revert to 3% of GDP, as we remain committed to long-term fiscal sustainability.

As a result, disbursements will increase by an average of 12.3% annually to reach P5.362 trillion or 20.6% of GDP by 2022, from P2.824 trillion or 17.9% of GDP in 2017. This expansionary fiscal policy is expected to sustain the growth momentum with GDP expanding by 7% to 8% from 2018 to 2022.

Our fiscal strategy remains prudent and sustainable.

Despite a slight deficit adjustment in 2019, the country’s debt-to-GDP ratio continues on a downward trajectory, although marginally higher by an average of 0.2 percentage point when compared to our original program. The debt-to-GDP ratio is still projected to decline from 42.1% in 2017 to 38.8% by 2022. By contrast, it was a high of 74.4% in 2004 and 52.4% in 2010.

This declining debt-to-GDP trajectory will be supported by a financing strategy that will continue to favor domestic sources; the gross borrowing mix of 75:25 over the medium-term will be maintained. It will result in better debt management by balancing the need to explore new markets for the country’s financing requirements and the need to minimize exposure to foreign exchange fluctuations.

MACROECONOMIC ASSUMPTIONS
The Philippine economy grew by 6.8% in the first quarter of 2018, making the Philippines as one of the best performing economies in Asia. For 2018 to 2022, we are maintaining our growth target of 7% to 8%

INFLATION
From year-to-date, inflation averaged 4.3%, which is within the 4-4.5% forecast for the year despite hitting 5.2% in June 2018. Potential second-round effects from increase in prices will be mitigated through a set of measures provided for under the Tax Reform for Acceleration and Inclusion (TRAIN) Law and other measures such as the (1) unconditional cash transfers; (2) Pantawid-Pasada Program; (3) measures to be implemented by the Department of Trade and Industry such as setting standard retail prices for basic agricultural goods and expanding price monitoring covering more stores; and (4) “Tulong sa Bayan” project, providing affordable quality rice. Additionally, we are strongly pushing for the passage of the rice tariffication bill which could reduce the price of rice anywhere from P4 to P7 per kilo.

DUBAI CRUDE OIL PRICE
Dubai Oil averages at $67.98 per barrel YTD. Current oil prices surged to levels last seen in 2014 as tensions between the US and Iran could affect global supply. The Dubai Oil Price Assumption is raised to $55-70 per barrel this year, but maintained at $50-65 per barrel for 2019-2022 in line with forecasts that the world oil prices would decline in the years ahead.

EXCHANGE RATE
The exchange rate averaged at 51.94 P/US$ from January to June this year. The peso depreciation is mainly due to oil price surges and the expected US Fed rate hikes as well as market concerns on the widening of the country’s current account deficit. Over the medium term, the peso-dollar exchange rate assumptions is raised to P50-P53 per dollar.

364-DAY T-BILL RATE
The 364-day T-bill rate, which is the bellwether rate for budgetary purposes on interest rates, was pegged at 4.24% in May, pushing the YTD average to 3.9%. Over the medium-term, the DBCC set the forecast range up to 3.0-4.5% from 2.5-4.0%. The trend in T-bill rates will continue to be influenced by the policy actions by the BSP and the US Fed.

180-DAY LIBOR
The London Interbank Offered Rate (LIBOR) is maintained at 2-3% for 2018-2022.

KEY BUDGET DIMENSIONS
The FY 2019 budget will amount to P3.757 trillion, equivalent to 19.3% of GDP.

By Expense Class. Personnel Services (PS) expenditures will be allocated with P1,185 billion, taking the largest share, equivalent to 31.5% of the 2019 budget. This is primarily to cover the increase in the pay of government employees and the Military and Uniformed Personnel (MUP) pursuant to E.O. No. 201 s2016 and J.R. No. 1 s2018, respectively, the higher pensions of the Military and Uniformed Personnel, and the new positions in the health, social welfare departments and other agencies to absorb the contract of service and job order employees.

Capital Outlays will have the second-largest share, representing one-fifth of the proposed budget at P758.4 billion to cover the requirements for flagship infrastructure projects under the Build, Build, Build Program of the government.

Maintenance spending, meanwhile, will be allotted with P557.5 billion or 14.8% of the proposed budget, mainly for the implementation of major banner social programs, namely K-12 program (DepEd), Pantawid Pamilyang Pilipino Program (DSWD), Universal Access to Quality Tertiary Education (CHEd) and Universal Health Program (DoH).

Government-owned or -controlled corporations (GOCCs) will be supported with some P187.1 billion, accounting for 5% of the total appropriations. This is composed largely of the requirements for the premium subsidy of health insurance premiums under the National Health Insurance Program of the PHIC (P67.4 billion), Tax Reform Cash Transfer Project (P36.5 billion) and irrigation projects of the NIA (P36.9 billion).

Transfers to LGUs will also receive significant allocations, amounting to P640.6 billion and accounting for 17.1% of the proposed total cash-based appropriations. These consist largely of the Internal Revenue Allotment (P575.5 billion), Local Government Support Fund (P34.3 billion) and Special Shares of LGUs (P27.3 billion).

Debt burden will comprise 11% of the budget up by 1.2 percentage points from the 9.8% distribution this year due to higher financing requirements, interest, and foreign exchange rates.

By Sector. The allocation by sector is consistent with the administration’s priorities in infrastructure and human capital development. This is reflected by the biggest allocations for the social services and economic services sectors, amounting to P1.377 trillion (36.7% share) and P1.068 trillion (28.4% share), respectively. General Public Services sector will be allocated with P709.4 billion (18.9%), Debt Burden with P414.1 billion (11%) and Defense with P188.2 billion (5%).

In terms of growth of the sectors, the defense sector and public order and safety under the General Public Services will increase by about 16.5% and 19.5% due to the provision of the salary increase of the Military and Uniform Personnel (MUP) including the related pension requirements.

By Department. With the shift to cash-based budgeting, the more appropriate comparison is the 2019 Proposed Cash-Based Budget and the Equivalent 2018 Monthly Disbursement Programs. Education is still considered the administration’s top priority with the combined budget of P659.3 billion.

Public infrastructure is also emphasized through the public works and transport departments at P555.7 billion and P76.1 billion, respectively. It is worth noting that out of all the key departments, the DoTr saw the largest growth at 89.3%.

The promotion of security and peace and order in the country also remains a top priority of the Duterte administration. This is reflected in the 30.9% increase in the budget of the Department of Interior and Local Government, amounting to P225.6 billion in 2019. Similarly, the budget of the Department of National Defense grew by 34.4%, amounting to P183.4 billion in 2019.

Social Welfare, composed of the budget of the Department of Social Welfare and Development (DSWD) and the budget for unconditional cash transfers, is fifth with an allocation of P173.3 billion, higher by P8.9 billion or 5.4%. This will support the poverty-reduction efforts and social protection programs of the government. Further support for social programs is given through a budget of P141.4 billion for the health care programs under the Health department and the PhilHealth to provide affordable and accessible health care to Filipinos.

Rounding out the top 10 are the Department of Agriculture (DA), the Judiciary, and the Autonomous Region in Muslim Mindanao (ARMM).

EXPENDITURE PRIORITIES
Education continues to get the lion’s share of the 2019 budget, with a total funding of P659.3 billion, a 12.3% increase from last year’s P587.1 billion.

Infrastructure is also considered a top priority of this administration and for this purpose, we will propose an amount of about P909.7 billion for FY 2019, equivalent to 4.7% of GDP.

Under the infrastructure program, road networks will receive the largest share of the infrastructure budget at P346.6 billion, equivalent to 38% of the total infrastructure program. Meanwhile, construction of school buildings will have a budget of P37.6 billion in 2019.

Likewise, construction of flood control systems and irrigation systems will be allocated with P132.1 billion, and P26.3 billion, respectively. Railway projects will have a budget of P24.6 billion in 2019.

The administration’s banner social programs — Pantawid Pamilyang Pilipino Program, National Health Insurance Program, Universal Access to Quality Tertiary Education, Free Irrigation for Farmers, Basic Educational Facilities Program and Rice Subsidy for Military and Uniformed Personnel — will receive a total allocation of P283 billion.

The FY 2019 Budget was crafted with the people’s welfare in mind.

After all, the budget is born from the taxes of the people.

This budget guarantees a better and more comfortable life for most Filipinos. It is a budget that will support strong, sustainable, and equitable growth, a budget that will make the Philippines better, fairer, safer, greener and more beautiful than what it was the year before.

 

Benjamin E. Diokno is the Philippines’ Secretary of the Department of Budget and Management.