THE government should consider reducing its planned spending as another route to temper inflation, ANZ Research said, as softer domestic demand could ease price pressures.
In a special report published yesterday, ANZ Research said the government can pursue a different approach to reduce consumer price growth apart from addressing supply concerns for food and fuel.
“A tighter fiscal stance via reduced spending would go a long way in durably lowering inflation and resolving other imbalances, including a wider current account deficit and sustained high credit growth,” ANZ chief economist Sanjay Mathur said in the report.
Inflation has averaged 5% in the nine months to September, well above the original 2-4% target range. It touched a nine-year peak of 6.7% in September, which ANZ said was roughly 65% driven by food prices.
Mr. Mathur said the government’s decision to suspend the second tranche of fuel excise taxes for 2019 plus the proposed rice tariffication law – which will remove import quotas to bring in cheap rice from overseas – are expected to temper inflation in 2019.
“However, whether these developments will be sufficient to durably lower inflation is unclear at this juncture,” ANZ added.
“The role of domestic demand is evident from the broadening out of inflation from goods to services in recent months, presumably via higher wages.”
A “more neutral” fiscal stance should bode well for the country, with ANZ noting that a reduction in government expenditure worth 0.2% of GDP is “unlikely to have a significant impact” on overall growth prospects.
“In our view, the expansionary fiscal policy is diminishing the impact of monetary tightening, which in magnitude mirrors that in Indonesia,” ANZ said. “Therefore the risk is that sustained fiscal spending eventually over-burdens monetary policy, forcing a more aggressive response than needed.”
The International Monetary Fund concurs, saying in September that the Philippines should target a more modest budget deficit by shaving off allocations for “non-priority” spending and in the process reduce risks of overheating.
The IMF said the Philippines should keep the fiscal deficit at 2.4% of gross domestic product (GDP), unchanged from the 2017 level and lower than the government’s 3% ceiling for 2018. The budget deficit was 2.3% of GDP during the first half.
The government has been pushing for a wider budget deficit to accommodate increased spending on infrastructure, with big-ticket items under the “Build, Build, Build” program in mind.
Budget Secretary Benjamin E. Diokno said the programmed deficit ceiling remains “reasonable,” noting that cutting spending targets mid-year could even do more harm as agencies may become reluctant to disburse funds.
Apart from trimming state spending, ANZ also flagged the need to plug the current account deficit and temper credit growth, which comes at a time of heavy importations as well as rising interest rates. — Melissa Luz T. Lopez