‘Substantial’ fiscal stimulus needed

THE GOVERNMENT should come up with a “substantial” fiscal package to make up for the drastic drop in consumption that led to a deeper contraction in gross domestic product (GDP) in the second quarter.

“Substantial fiscal packages have shown to be useful to quell a festering recession and we need not look far with neighboring ASEAN countries employing aggressive spending measures,” ING Bank N.V. Manila

Senior Economist Nicholas Antonio T. Mapa said in a note sent to reporters.

The Philippine economy shrank by 16.5% in the April to June period and fell into a recession for the first time since 1991. Growth drivers household consumption and investment significantly declined in the second quarter, given the closures of businesses and losses in income during one of the world’s strictest lockdowns.

The government now expects full-year GDP to contract by 5.5% on the widening impact of the pandemic.

Marikina Rep. Stella Luz A. Quimbo, co-chair of the House of Representatives’ panel on economic stimulus, said the government has to reverse the trend of declining consumption by putting cash in the hands of sectors most affected by the pandemic.

“The huge drop in consumption levels ( P534 billion) in Q2 is not surprising, with so many Filipinos now without jobs. Consumption is an important driver of the multiplier effects of government spending on GDP, hence, it contributed the most to the decline in Q2 GDP,” she said in a text message.

“Filipino households tend to spend more out of every additional peso if these are transfers from the government ( e. g. conditional cash transfers) than their own income, so the multiplier effect of ayuda tends to be high,” she added.

Congress is set to approve the economic recovery measure, Bayanihan to Recover as One Act (Bayanihan II) this week.

Ms. Quimbo noted the P162 billion allocated for additional healthcare spending, wage subsidies and financial relief for critically impacted sectors under Bayanihan II is “less than ideal,” as it is a stop-gap measure rather than a comprehensive economic stimulus package. However, she said “any additional amount that the government is willing to spend is certainly welcome.”

The House of Representatives in June passed the P1.3-trillion ARISE ( Accelerated Recovery and Investments Stimulus for the Economy) package, but economic managers rejected this, saying such an amount cannot be funded without new sources of revenue. It is still pending at the Senate.

Finance Secretary Carlos G. Dominguez III defended the proposed P180-billion economic stimulus plan, saying this already anticipated the sharp reduction in GDP in the second quarter and will be maintained to keep the budget deficit in check.

In a statement on Sunday, Mr. Dominguez said the stimulus package already incorporates P40 billion worth of tax credits.

“As we said, whatever stimulus package we have, it has to be affordable and it has to recognize the fact that this (corona) virus may not be defeated by the end of this year. So we have to keep, as they say, we have to keep our powder dry for next year as well,” he said.

The P40 billion is expected to come from the reduction of the corporate income tax (CIT) from 30% to 25% through the Corporate Recovery and Tax Incentives for Enterprises (CREATE) which is pending in Congress and is targeted to be approved within the year.

Mr. Dominguez said the stimulus program also includes a P50billion infusion into the banking system, which he estimated will generate P400 billion worth of economic activity. At the same time, P5 billion will be allocated for a credit guarantee program for troubled firms, which will have a multiplier effect of 20 times. Taken together, he said this will generate between P400 billion and P600 billion in economic activity.”

Senator Juan Edgardo M. Angara said Bayanihan II is meant to provide initial help, but should be followed by other economic actions. “Kami naman sa Senado (In the Senate,) we have shown our willingness to work with our economic managers to pursue a successful recovery strategy,” he told BusinessWorld in a text message.

INCOME REPLACEMENT

Meanwhile, House Ways and Means Chair and Albay Rep. Jose Maria Clemente S. Salceda said they will continue to study the need for more income-replacement schemes, including a possible third tranche of the Social Amelioration Program (SAP).

He said there is a need to gauge how much of the decline in household consumption was due to income loss or lack of confidence, which is only considered as deferred consumption and can be revived by addressing policy and bolstering the healthcare system.

“Lost consumption due to lost income will have to be replaced with corresponding increases in government spending on subsidies. Otherwise, that will set future growth back for years,” Mr. Salceda told Business World in a text message.

“Clearly, we need to do better with providing social assistance. We have to find ways to provide our people with enough income replacement and enough substitute jobs for basic necessities,” he added.

For Asian Institute of Management economist John Paolo R. Rivera, it’s not just the amount of stimulus, but the timeliness of release and the coverage also counts.

“The point of these interventions is to at least allow people to have work and sustain consumption of essentials,” he said in a text message.

He said the government should consider beefing up the SAP in such a way that eligible households will receive it on time to make the stimulus effective and also boost consumption.

“Avoiding taxation (defined or proposed) on both essential and non-essential goods would also help stimulate consumption,” Mr. Rivera added.