Economic team vows to maintain fiscal discipline despite populist measures

ECONOMIC managers said they will maintain fiscal discipline and resist pressure to implement populist policies after President Rodrigo R. Duterte approved measures to introduce free university tuition and increased salaries for security forces.

Mr. Duterte signed Republic Act No. 10931, which introduced free tuition in state universities and colleges, despite the advice of his economic team.

“The new law mandating free tuition and miscellaneous fees for all public tertiary institutions still has no clear funding mechanism. I assure you we will not compromise on fiscal discipline and court runaway debt to please populist demands,” Finance Secretary Carlos G. Dominguez III said in a video message during the Economic Journalists Association of the Philippines Economic Forum yesterday at the Ayuntamiento in Manila.

Other measures include the salary hike for military and other uniformed personnel despite the already high pension costs ssociated with these services, which the Development Budget Coordination Committee flagged as a fiscal risk, as well as the pending free irrigation bill.

Budget Secretary Benjamin E. Diokno said these commitments, especially pensions, were the “elephant in the room” that needs to be addressed.

Mr. Diokno noted that if no reforms are introduced to the pension system, its seed fund will require some P8 trillion. Pensions for retired military and other uniformed personnel are currently tied to the salaries of ther counterparts on active duty, meaning benefits will escalate with every salary increase.

“We didn’t start that. Right now our estimate is that will amount to something like 8 trillion pesos. No president after (Fidel V.) Ramos tried to deal with it. Nowhere in the world do we have that kind of system. We are going to have address that issue or else it will become a full-blown crisis,” he said.

“We will address that before the end of the year,” added Mr. Diokno.

The populist measures came as the government spends massively on infrastructure. Mr. Dominguez said that overall, the economic team will remain prudent while still considering ways to increase the budget deficit ceiling beyond the current 3% cap.

“We intend to maintain the regime of fiscal discipline even as we are prepared to widen the deficit margin a little more,” Mr. Dominguez said.

With the economy seeing investments taking a greater share of the pie, aided by the government’s infrastructure plan, the impact is reflected in the current account balance, which swung into a deficit in recent months.

On the deficit – which has resulted in the peso depreciating to 11-year lows – Bangko Sentral ng Pilipinas Governor Nestor A. Espenilla said that it will be contained to a maximum of 1% of gross domestic product (GDP).

“I think we have to analyze the current account deficit in the proper context. The current account deficit today is lower than 1% of GDP, and we have no intention of seeing the current account deficit go higher than 1% of GDP,” Mr. Espenilla said, while noting that the deficit is no cause for concern, as it is mainly driven by the import of capital goods – a signal that economic activity will pick up.

The central bank projects an upwardly-revised $500-million balance of payments deficit this year, equivalent to 0.2% of gross domestic product (GDP). In July, the deficit widened for the fourth straight month to $678 million.

“These investments, if properly executed, should enlarge productive capacity, and our ability yto export and produce goods and services. So if you look at it… it should correct over time,” said Mr. Espenilla.

“So long as these investments are good, we shouldn’t be in trouble and the situation should remain manageable,” he added.

Socioeconomic Planning Secretary Ernesto M. Pernia meanwhile presented the government’s 75 flagship infrastructure projects, all amounting to an initial P1.58 trillion.

Mr. Pernia said that the government aims to prioritize those projects that can be completed within this presidential term. This approach has led to a preference for funding projects from the government budget and Official Development Assistance, leaving the operations and maintenance component to be left to public-private partnership concessions.

However, Mr. Pernia said that the team is still open to all possible sources of financing.

“We need to make sure that the project’s financing sources will achieve our objective of speed of execution in processing, as well as the terms especially when it comes to tariffs to be charged to the users. We have not closed any doors in terms of financing sources,” he said.

The government plans to raise infrastructure and social spending to about 7.1% of gross domestic product (GDP), or P8.4 trillion, until the end of its term, in a bid to boost the economy to growth of 7-8% next year until 2022, from 6.9% in 2016.

Mr. Espenilla said monetary policy is “appropriately calibrated and well communicated with the balance of safeguards to price stability and providing support to economic expansion.”

As far as the macroeconomy is concerned, Mr. Espenilla said: “Inflation is firmly under control, the economy grows robustly, the public sector deficit is under control, GIR (gross international reserves) is very ample, almost (covering) nine months imports of goods and services, the external debt position is very low – only 24% of GDP from a peak of 60% in 2005.” – Elijah Joseph C. Tubayan