THE BUDGET DEFICIT may only return to its pre-pandemic level by 2025 under the government’s fiscal consolidation plan, according to early estimates by the Finance department.
Gil S. Beltran, Department of Finance (DoF) undersecretary and chief economist, said the National Government could bring down its budget deficit to the 3.2% of gross domestic product (GDP) ceiling by 2025 if the remaining tax bills under Comprehensive Tax Reform Program will be passed.
“Our estimates show that if we can get all these measures passed, it’s now 2021, by 2025, we will be back to our usual deficit [in] 2019… We can even do better if the economy rebounds quickly,” Mr. Beltran told reporters in an interview last week.
In a Viber message, Finance Assistant Secretary Maria Teresa S. Habitan said the DoF is hoping the last two bills, the proposed Real Property Valuation and Assessment Reform Act and the Passive Income and Financial Intermediary Taxation, will be signed into law by the end of 2021.
The two bills are part of the common legislative agenda of Legislative-Executive Development Advisory Council (LEDAC) that are targeted to be passed by yearend.
Both measures have been approved by the House but are still pending at the Senate committee level.
The proposed Real Property Valuation and Assessment Reform Act aims to establish a single valuation system for local government units to improve their collections, while the Passive Income and Financial Intermediary Taxation will help simplify the tax structure for financial instruments.
While the fiscal consolidation plan is an “evolving” plan and still subject to revisions, Finance Secretary Carlos G. Dominguez III said in the same interview that the government can bring down its deficit either by lowering the budget or raising more revenues.
“One is perhaps to reduce our expenditures as Indonesia did… The other way is to increase our revenues. But I’m telling you it’s going to be very difficult; this fiscal consolidation period is going to be rather difficult. But the good thing that’s going for us is that interest rates are low,” Mr. Dominguez said.
The government incurred a budget deficit of P1.371 trillion last year. This is equivalent to 7.6% of GDP versus 3.4% of GDP seen in 2019.
The state runs on a budget deficit as it spends more than the revenue it generates. It capped the fiscal gap to internationally accepted threshold of 3.2% before the crisis hit, but the economic team adjusted this to accommodate a deficit equivalent up to 9.3% of GDP this year amid high public spending and lower tax collections.
Under the medium-term fiscal program adopted in May, the budget gap is expected to go down to 7.5% of GDP in 2022, 6.3% in 2023 and 5.3% in 2024.
On the debt levels, Mr. Beltran said they are expecting the debt stock to still hover within 60% of GDP and go back to the pre-crisis debt ratio by 2025, roughly the same timeline for the budget deficit.
“It could be earlier if the next administration will be quick, it they’re as quick as this administration, then we can even do it in 2024,” Mr. Beltran said.
“We expect the economy to surge upward, as soon as the lockdowns are taken out because the factors of production are there, it’s just that they cannot move. Once you remove the blockades, the checkpoints and the restrictions, the economy will boom significantly,” he added.
The National Government’s outstanding debt climbed to P11.2 trillion as of end-June, accounting for 60.4% of GDP, higher than the 54.6% debt-to-GDP ratio in 2020 and much bigger than the pre-pandemic level of 39.6% in 2019.
The economic team expects the debt ratio to hit 59.1% this year, peak at 60.8% in 2022 before slowly easing to 60.7% in 2023 and 59.7% in 2024, the Finance chief told reporters last month.
Mr. Dominguez said the DoF team led by Mr. Beltran and Ms. Habitan started working on the fiscal consolidation plan with the first draft submitted a week ago.
“The fiscal consolidation plan is an ongoing project which we have started about a month and a half ago. As it becomes clearer to us, maybe once a month, we will come up with more and more detail on that fiscal consolidation plan,” he said.
“We have to see how the plan evolves, as I said, depends on how long this pandemic will last. Fortunately, we are in a relatively good position, not an absolutely good position, a relatively good position,” he added.
Asian Institute of Management economist John Paolo R. Rivera said policy makers should consider the “intended and unintended consequences” of a contractionary fiscal policy on the economy, and how monetary authorities will react to this.
Raising taxes as part of the plan will be a challenge for the government, according to Mr. Rivera because of its economic, social and political implications at a time of crisis.
“Raising taxes will definitely burden everyone who has already been burdened by the ongoing pandemic and it might be difficult to make people understand this given the several news regarding alleged non-use and misuse of public funds. Also, given the political landscape of the country and that elections are also upcoming, rocking the boat might be the last thing politicians want to do,” he said.
“Rather than passing the burden to the public through taxation, government needs to generate income through other means, cost saving, and cutting waste,” he added.
He said the plan should also include legislation on the efficient use of public funds to boost the economy’s recovery. — Beatrice M. Laforga