President Bongbong Marcos has inherited an economy that is barely able to make ends meet. In fact, it depends on debt to fill its budgetary gaps. That said, the Marcos Jr. administration can’t afford to make a mistake nor can it adopt populist policies that erode national revenues. At this point, every centavo counts.
Buoyed by a debt-to-GDP ratio of just 42.1%, government international reserves of $83 billion, and a budget deficit of only 2.4% when President Rodrigo Duterte inherited the reins of government in 2016, Mr. Duterte went on a borrowing and spending spree to fund infrastructure and his pet projects. The situation was exacerbated by the pandemic in which the government needed to borrow more to fund the country’s emergency healthcare needs and to provide lifelines for the poor.
From a public debt of roughly P5.9 trillion in 2016, debts doubled to P12.68 trillion as of April this year representing 63.5% of GDP. In other words, the Philippines owes P63.5 for every P100 worth of goods and services it produces. Our debt-to-GDP ratio surpasses the government’s limit of 59.1% and the international standard of 60%.
The Duterte administration will pass on to Marcos Jr. the highest ratio of maturing debts since Erap bowed out and GMA took over. It will be recalled that when Erap was ousted, 17.9% of debts were falling due within the year and 22.5% were falling due in the medium term.
The situation is worse now. As of the beginning of 2021, 33.4% of all debts will be falling due within the decade of which 6.8% or P834 billion is payable within this year.
Over dinner with Finance Secretary Ben Diokno last week, our cadre of economists from BusinessWorld were assured that the situation is still manageable. After all, 73% of our debt stock comes from local creditors while only 27% come from foreign sources, said the finance chief. Our foreign debt-to-GDP ratio is the lowest among the five biggest economies of ASEAN.
I asked the secretary if he is likely to increase taxes or create new levies. He said no. He would rather focus on tax collection efficiency. Tough call, I thought, considering the President would have to lead by example and settle his own tax liabilities first.
Our bloated debt situation leaves the Marcos administration with no choice but to cut spending whilst sustaining investments in infrastructure and social services. It leaves it little room to borrow to sustain economic growth. And here lies the conundrum.
The economy needs to grow by at least 6% until 2028 for us to ensure our capacity to pay while decreasing our debt-to-GDP ratio. How can Marcos grow the economy while simultaneously cutting down on spending? It will be a delicate balancing act.
The IMF recommends adjusting personal income taxes, particularly wealth tax for billionaires. Records show that Filipino billionaires saw their wealth increase by over 35% during the pandemic while 3.7 million Filipinos fell into extreme poverty. Only 143,000 families control 70% of the country’s economic output.
Government can raise up to $6.3 billion a year if a 2% tax is imposed on wealth of over $5 million, 3% for wealth of over $50 million, and 5% for wealth of over $1 billion. This will be sufficient to cover our revenue gap.
Taxing the richest 1% of the population will not choke our consumer-driven economy as it would if the poor were to be taxed. This is why taxing billionaires makes sense. The problem is — most billionaires belong to political dynasties and/or have political influence. Will our politicians impose taxes on themselves and their benefactors? I doubt it. The likely scenario is that the middle and lower classes will be made to foot the bill.
The dinner with Secretary Diokno was also attended by incoming Department of Budget and Management Secretary Mina Pangandaman. I asked her if the allegation of a presidential candidate was true that some P700 billion out of our P5-trillion national budget is pilfered through graft and corruption. Pangandaman said it was fairly accurate.
If the Marcos Jr. administration is able to cut pork barrel and frivolous budget insertions, the budget can go a longer way towards pump priming the economy and debt service. In other words, fiscal discipline will be a must. But will our legislators be willing to cooperate? They were unwilling to sacrifice their pork barrel funds before — what makes us think that they will be willing now? It will be a test of political will on Marcos’ part.
Notwithstanding the tight finances, Marcos’ economic team is confident that the economy can grow its way out of its debts. Per the government’s forecast, the economy is expected to expand by 7-9% this year and by 6-7% in 2023 and 2024. These projections, however, are subject to adjustments given external factors such as the Ukraine war, the Chinese lockdown, and tensions in the Taiwan Strait. It is also contingent on successful reforms to improve agriculture and manufacturing outputs.
Adding pressure to the incoming administration is the budget deficit. Last year, the country registered the largest budget deficit in recent history at 8.6% of GDP. This is due to the reduced revenues brought about by the pandemic and increased spending on infrastructure and healthcare. The goal, according to Mr. Diokno, is to bring this number down to 3% by 2028. All the more reason to clamp down on pork barrel funds and channel our resources to where we get the most bang for the buck.
It is going to be a tight balancing act for the Marcos Jr. administration. It must raise tax revenues without further burdening a population besieged with high inflation. It must cut spending without choking economic expansion. It must spend on infrastructure and social services without widening the budget deficit. It must raise funds without acquiring more debts.
Now the real work of governance begins.
Andrew J. Masigan is an economist