Impossible to build fiscal buffers?

There could not have been a more inspiring message from the IMF’S April 2024 World Economic Outlook than the global economy’s avoidance of a recession in 2023. With a strong financial system, steady capital flows to emerging markets, some downtrend in inflation, the Fund equated the bottom line of these indicators to soft landing.

One way of reinforcing the resiliency of the global economy is to build fiscal buffers. Fiscal buffers allow some room in the budget by higher saving, optimal reallocation and judicious spending. The need for fiscal buffers emerged due to the sizable stimulus packages and weak revenue collection during the health pandemic in 2020-2021. They led to bloated fiscal deficit and unprecedented accumulation of public debt.

In the Philippines, one can argue that the more moderate—6.2 percent in 2023 against 2022’s 7.3 percent—though still above acceptable norms, fiscal deficit derived not from intentional, strategic fiscal consolidation plan but from what may be considered cyclical factors underlying lower public spending. During the other week’s IMF Spring Meetings, the Fund recommended in general that “government focus on consolidation to curb the rise in public debt and rebuild fiscal buffers.”

To be able to do this, public debt would have to be reduced and debt service curtailed. These are possible only if more revenues are collected and expenditures slashed. Paying less on debt is expected “to free up budgetary space for spending on developing needs, social safety nets, and climate mitigation adaptation.” Fiscal policy is to be tightened in order to help in the disinflation process. It’s imperative for countries to dial back on their previous support to mitigate the pandemic and in the process help moderate public debt. This is the only way to build more fiscal buffers.

Are we building enough fiscal buffers in the Philippines?

Quite difficult to say when the Philippines created the Maharlika Investment Fund (MIF) last July 18, 2023 and decided to keep it going. Although it was claimed that the MIF offers us “an opportunity to expand our fiscal space for the government’s priority program,” it actually pushes the Republic to borrow money to compensate for that part of public revenues that was sequestered, or will be sequestered, by Congress to fund it. We are dipping into the same pocket.

Being explored for potential investment of Maharlika funds, already raised from the contributions of the Land Bank of the Philippines, Development Bank of the Philippines and the Bangko Sentral ng Pilipinas are the expansion of Clark International Airport, housing projects in New Clark City, the Clark Integrated Public Transport System, the Poro Point Seaport Modernization program and the Clark Central Business District.

Outside the budget, these proposed projects can by all means be prioritized, and if feasible, partly funded by private money based on partnership. Funds from the state banks could have delivered additional financing for these projects. Properly tweaked, the National Development Company could have made similar investments.

It is not therefore surprising to hear the National Treasurer announcing that the national budget would require this year higher borrowing of ₱2.57 trillion with a possible bloat of debt servicing in the succeeding years. Why, we are not exactly building fiscal buffers. We are intensifying the need for them.

With public debt at ₱14.6 trillion at the end of 2023, we face the possibility of paying back ₱17.2 trillion by the end of this year. To be sure, this will breach the 60 percent to GDP threshold of debt sustainability.

Now that the Republic is aspiring for a lower growth from 6.5-7.5 percent to 6.0-7.0 percent, public revenues are expected to trend lower. But there is scope for upgrading our tax system, expanding the tax base and enhancing both tax administration and institutional capacity. We hope our fiscal authorities can also explore what is now referred to as proinnovation fiscal policy mix which is more likely to produce a more sustainable fiscal outcome in the medium term. This involves a simple tax system with broad bases and low rates with space for systematic evaluation.

Imposing no new or higher taxes this year is hardly consistent with fiscal consolidation. More efficient tax administration, the preferred linchpin of the fiscal strategy, has some limits to what it could contribute to fiscal sustainability. Avoiding new or higher taxes could indeed help mitigate the people’s living conditions today, but in the long run, in the absence of broad revenue base, delivery of social services might be compromised.

Judicious use of the budget is without question crucial.

To support tax-less fiscal strategy, government-owned or -controlled corporations (GOCCS) are now mandated to contribute higher, from 50 percent to 75 percent of their annual net earnings as cash, stock or property dividends. Our fiscal authorities also planned to “mobilize substantial non-tax revenues from GOCCS’ unrestricted fund balances to unlock the unprogrammed appropriations of the 2024 General Appropriations Act.”

True, these latest non-tax initiatives could reduce the need for higher borrowings and taxes, but the GOCCS could be undermined. To sustain their operation, it is not unimaginable that these GOCCS would also resort to request for additional government subsidies and yes, incur higher borrowings.

With positive growth to protect, there is thus no other option for the Republic except to increase its deficit from ₱1.39 trillion to ₱1.48 trillion, or from 5.1 percent to 5.6 percent of GDP. Funding it by what is called “strategic fund-raising plan” anchored on 75:25 borrowing mix in favor of domestic sources is only useful to the extent of minimizing any foreign exchange risks.

Yes, Milton Friedman once said that he was in favor of cutting taxes under any circumstances and for any excuse, but he stood by this view only “whenever it’s possible.” With rising deficit and public debt, it’s clearly not possible.

Fiscal buffers have to be built, and built now!