Corona comma, public finance, and more
Paraphrasing, induced coma is when physicians set a patient in a temporary comma so that the rest of the body can rest and focus its energy on healing its potentially lethal sick part (often the brain). Comparing to the term first used by nobel laureate Paul Krugman, corona coma is when the economy is set on a shutdown and its people on a lockdown so that the Covid-19 can be isolated and eliminated. such are the cases when the government implemented community quarantines of different variations like ECQ, MECQ and GCQ. While the corona comma Philippine style has not eliminated Covid-19, it certainly adversely affected the economy and the government/public finance.
With people losing jobs and income plummeting, government needed to spend more pesos to ease the suffering. For example, government subsidy is up to P170 billion in the first half of 2020 compared to P27 billion in the same period of 2019; that is up by 530 percent! Overall government expenditure in the said periods is up to P2 trillion in 2020 compared to P1.6 trillion in 2019; that is up 25 percent. As the corona comma squeezes out consumption, investment, and expenditure in general, there are less for government to tax and less to accumulate revenue. For example, government revenue is down to P1.45 trillion in the first half of 2020 compared to P1.54 trillion during the same period in 2019; that is down by 6 percent.
Corona comma consequently caused the deficit-to-gross domestic product (GDP) and debt-to-gdp ratios to increase. This is via the numerator effect. For example, the increase of expenditure and decrease of revenue increased the government budget deficit to P560 billion in the first half of 2020 compared to P43 billion in the same period of 2019; that is up by 1,200 percent! Because deficits are funded by borrowing, the debt is increased by approximately P560 billion. The increase of the numerators of the deficit-to-gdp and debt-to-gdp ratios then result in the increase in the entire ratios.
Going back to the GDP, the combination of Covid-19 and corona comma resulted in the contraction of the GDP by 9 percent in the first half of 2020 compared to the same period in 2019. These consequently caused the deficit-to-gdp and debt-to-gdp ratios to increase further. This is via the denominator effect. Hence, the decrease of the denominators of the said ratios results in the increase in the entire ratios.
Ultimately, the deficit-to-gdp ratio went up to 6.5 percent compared to 0.5 percent in the first halves of years 2020 and 2019, respectively. The bad news is that 6.5 percent is twice as much as the generally accepted safe threshold of less than 3 percent. On a comparative basis, one can look at the budgetary fiscal responses of grouped economies or the increase in deficits through direct budgetary effects excluding additional guarantees and funding. These
The Department of Finance with Bayanihan laws I and II seems to think that the deficit-to-gdp and debt-to-gdp ratios have gone up enough. However, some members of Congress proposing addition stimulus packages on top of the Bayanihan laws think that the Philippines can still afford higher ratios. The question is whether the benefit of additional stimulus packages is greater than or less than the cost of worse public finance position.
are 4.6 percent for G-20 economies, 8.3 percent of advanced economies, and 2 percent for emerging market economies where the Philippines belong (source: Bank of International Settlements).
Finally, the debt-to-gdp ratios are projected to have gone up to 52 percent compared to 42 percent in the first halves of years 2020 and 2019, respectively. The ratio in which countries are deemed to have unsustainable debts is at a debt-to-gdp ratio of greater than 85 percent, hence the Philippines is way from that. But the ratio in which countries and especially developing economies become under special watch of multilateral institutions is 60 percent, hence the Philippines is 8 percent away from that.
The adverse effect of corona comma on public finance comes from “all” directions. It comes from an increase government expenditure and decrease in government revenue, i.e. numerator effects. It also comes from the contraction of GDP, i.e. denominator effect. The Department of Finance with Bayanihan laws I and II seems to think that the deficit-to-gdp and debtto-gdp ratios have gone up enough. However, some members of Congress proposing addition stimulus packages on top of the Bayanihan laws think that the Philippines can still afford higher ratios. The question is whether the benefit of additional stimulus packages is greater than or less than the cost of worse public finance position.