THE GOVERNMENT needs to set up rules that will govern spending and debt, according to a think tank attached to the House of Representatives.
“To avoid excessive spending and debt build-up, it is important to consider having a rule-based framework or fiscal responsibility framework to guide the government in setting fiscal targets, identifying strategies, and ensuring the attainment of a sound public financial system,” the Congressional Policy and Budget Research Department (CPBRD) said in a position paper.
The National Government’s (NG) outstanding debt as a share of gross domestic product (GDP) eased to 60.2% at the end of 2023, the Bureau of the Treasury said last week.
The NG’s outstanding debt hit a record P14.62 trillion at the end of 2023, up 8.92% from a year earlier, according to the Treasury.
“When the government is facing a budget deficit (i.e., expenditures exceeded revenues), it is poised to pursue expansionary fiscal policies such as increasing government spending or tax cuts to stimulate economic activity and reduce unemployment,” the CPBRD said.
“In the context of Phillips curve, however, such expansionary policies could lead to higher inflation.”
The Phillips curve posits an inverse relationship between inflation and unemployment.
“Notably, the period of divergence was clearly observed during the pandemic. Forced lockdowns drove unemployment to 17.6% in the second quarter of 2020 (or equivalent to 7.3 million unemployed Filipinos) [from 5.3% in January 2020] while inflation climbed to 1.9%.”
Headline inflation slowed to 3.9% in December due to easing prices in food and utilities, the Philippine Statistics Authority (PSA) said last month. It has since slowed to 2.8% in January.
The unemployment rate dropped to 3.6% in November 2023, translating to 1.83 million jobless Filipinos, according to PSA records.
To avoid inflationary effects, the think tank cited the UK’s fiscal policy framework which, “the government will only borrow to invest and not to fund its current expenditure; and the sustainable investment rule which states that public debt as a proportion of national income will be held over the economic cycle at a stable and prudent level.”
“Fiscal managers must look to step up efforts to fast track fiscal consolidation while also looking to support growth that is facing several headwinds in the coming months,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in a Viber message.
Bienvenido S. Oplas, Jr., president of the free market think tank Minimal Government Thinkers, said the government must avoid imposing any taxes on consumers to avoid raising inflation.
“Tax hikes are inflationary; the additional cost of taxes will be passed on to the consumers. We focus on having high growth, 6% and above, sustained for many years, because fast growth always expands business and job opportunities,” Mr. Oplas said in a Viber chat.
Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that “tax reform and other fiscal reform measures, alongside faster economic/GDP growth, for the coming months/years would help ease the National Government’s debt-to-GDP ratio to below the international threshold of 60%.”
“Fiscal responsibility will require the government to balance the short-term benefits of reducing unemployment with the long-term goal of maintaining fiscal sustainability,” the CPBRD said. — Beatriz Marie D. Cruz
