By Elijah Joseph C. Tubayan, October 1 2018; Business World


Image Credit to Philippine Star

THE GOVERNMENT will maintain its fiscal deficit ceiling at about 3% of Gross Domestic Product (GDP) despite concerns expressed by the International Monetary Fund (IMF), noting that higher-than-expected government revenue will keep the deficit in check.

“We said the cap is 3%. To me that’s reasonable. We’re not being extravagant… As long as we keep it under 3% things will be all right,” Budget Secretary Benjamin E. Diokno told reporters on Monday on the sidelines of the launch of the Green, Green, Green program in Manila.

“Our revenue is strong…But we’ll keep the deficit manageable. 3-3.2%,” he added.

A deficit equivalent to 3% of GDP is a broadly-accepted rule-of-thumb level for prudent spending.

In the first half, revenue and expenditure both grew 20% year on year, and were 8% and 2% above target, respectively, keeping the deficit 27% below initial programmed levels.

The IMF in its periodic assessment of the Philippines “urged” the government to maintain a “neutral” fiscal deficit position of 2.4% this year and 2.5% next year, against the 3% set for 2018 and 3.2% for 2019. In 2017 the deficit was 2.2% of GDP.

The IMF proposed spending cuts, focusing on items financed by special-purpose funds, and those unrelated to its priority infrastructure projects.

But Mr. Diokno said that the special purpose funds include calamity funds, which he said were needed to respond to disasters.

“Just recently we had typhoons… so let’s see. We’ll still be under 3%. Next year 3.2%… we decided not to follow (the IMF’s recommendations),” Mr. Diokno said.

“In my experience, if you cut (spending targets) in the middle of the fiscal year the bureaucracy will be reluctant to spend because they’re afraid there will be no more money,” he added.

Special purpose funds are lump-sum provisions in the national budget that are given to various agencies for projects or allocations which are not yet identified during national budget preparation, such as pension payments, subsidies to government-owned corporations, among others.

The IMF said that easing the fiscal pressure would facilitate monetary policy tightening — key interest rates have risen by 150 basis points so far since May — to mitigate overheating risks in the economy.

Overheating is typically marked by fast, unsustainable growth. The IMF said that the Philippines is facing such risks as signalled by high inflation, rapid credit growth, and a widening current account deficit.

Mr. Diokno said that the multi-agency Development Budget Coordination Committee will convene in two weeks to review its macroeconomic assumptions after the latest developments in the economy.

“We’ll thresh it out… We review the macroeconomic assumptions. On the economic targets, NEDA (the National Economic and Development Authority); DoF (Department of Finance) for revenue. Expenditure is our department. And then foreign exchange and inflation are the BSP’s (Bangko Sentral ng Pilipinas,” he said.

Gross domestic product (GDP) grew 6% in the second quarter from 6.6% a year earlier and in the first quarter this year, to average 6.3% in the first half. Year-earlier first half growth was 6.6%. The government’s target range for growth is 7-8%.

Inflation in August accelerated to 6.4% from 5.7% in July and 2.6% a year earlier, bringing the eight-month average to 4.8%, well above the central bank’s 2-4% target range.

“We’re confident about inflation next year being within 2-4% over the full year,” Mr. Diokno said, noting the administrative orders signed by President Rodrigo R. Duterte to boost food supply and facilitate distribution, as well as the expected passage of the rice tariffication bill.

The peso also depreciated to fresh 12-year lows last month, trading weaker than P54 against the dollar, and breaching the government’s P50-53 medium-term assumption. — Elijah Joseph C. Tubayan