By Claire Heffron
Change is coming. The Philippine’s new government has set a higher fiscal deficit for next year as it has vowed to hike public spending in what President Duterte pronounced as a, “budget for the people and by the people.” A fiscal deficit occurs when a government spends more than it earns. Duterte says, “As the needs of our people increase, government spending must similarly expand to meet such requests.”
Having acknowledged a “lack of experience” in managing the economy, will Duterte’s non-existent economic practice cause problems down the line? To generate jobs and ensure growth reaches rural areas the government will increase infrastructure spending outside of Manila. He also plans to boost revenue by revising tax arrangments.
Until now, Duterte’s lack of a clear economic plan has caused unease among some business leaders. One member of the foreign business community explained, “there is a great concern in the business community, both domestic and international, because there have been substantial improvements under Aquino. Duterte, his positions are not well known.”
However, a DBS Group Research economist said Duterte’s game plan is, “optimistic for the longer-term growth outlook. But delivery is essential. Until policies are applied, it’s all theory.”
A fast-moving economy
The government recently announced the economy was its fastest rate in nearly three years, built on strong domestic needs and investments, giving a boost to Duterte’s plans to accelerate infrastructure. However, the Philippines is in desperate need of immediate fiscal, rather than monetary, pump priming to help advance economic progress. This is where investment is used as a way to encourage economic growth.
Finance Secretary Carlos Dominguez said, “Our economy can move to a developed growth plane; we need a bolder pump-priming plan that would primarily include allowing more headroom for deficit spending.” He added there was sufficient domestic liquidity to support public borrowing.
Philippines Budget Secretary Benjamin Diokno explained that the Philippine economy requires all types of infrastructure, whether it be highways, bridges, or airports. This would be part of the government’s efforts to address the issue of underspending on public goods and services that occurred during the past two years.
A large measure of Duterte’s socio-economic strategy is to advance funds for infrastructure to speed up the operation of projects under the public-private partnership (PPP) program, including those that can help resolve the deteriorating traffic problems, especially in central Manila.
Duterte’s idea is to pump-prime the economy through increased spending on infrastructure to build new roads, railways, classrooms and farm facilities. The government is planning to grow infrastructure spending by nearly half in 2017, to around P891 billion, generating more jobs and enhancing the economy.
As an example, authorities are pushing for 24/7 construction work for all the key Metro Manila repairs and upgrades. This should accelerate growth to a new level next year and throughout his term. At the same time, Duterte’s administration will welcome unsolicited proposals for infrastructure ventures; while guaranteeing counter offers were made to ensure fairness.
The new Transportation Secretary Arthur Tugade said Duterte would pursue emergency powers from Congress for two years to tackle Manila’s notorious traffic gridlock, citing an estimated P2.4 billion of lost business each day due to street snarl-ups in the Philippines
A bumpy road ahead?
The Philippines GDP is expected to increase by 6.5 percent to 7.5 percent next year because of the sustained progression of the services and industry sectors and the probable rebound of the agriculture sector. However, a higher fiscal deficit will add pressure on the government to borrow money to pay for its programmes. Duterte has claimed the debts sustained will, “produce results.” These added debts will not endanger the country’s stable financial position, says the President. The government could gather enough taxes to cover it because the economy will continue to grow.
But this assumption will require extra efforts. While Manila’s tax rates are amongst the highest in the region, tax collection fares dismally compared to other countries because it is more complicated to administer. Critics say the government’s revenues are obtained mostly from income taxes from employees and companies, value-added taxes on consumption of goods and services and import duties.
The people’s president
Duterte’s new administration is set to offer Congress a package of reform measures to raise additional revenues without affecting the poor. These actions include the lowering of income tax rates for individuals and corporations from 32% and 30% down to 25%, expanding the value-added tax base and expanding fiscal incentives.
The Treasury is aiming to improve revenue collections through a complete tax reform, spending on the right priorities and keeping economic risks in check. With Duterte’s plans of higher spending, his critics are holding on for the results. But, indeed, change is coming.