Before the global recession, the Philippine government’s main economic policy goal was the gradual elimination of the budget deficit. Considerable progress was made towards this goal until the onset of the crisis. But a combination of economic weakness—which has hurt tax revenue—and fiscal stimulus has put the public finances under renewed pressure.
Continuing the pattern of every previous month in 2009, budget revenue was below what the government had expected in November, widening the fiscal deficit further. The year-on-year fall in revenue was 11.7% in the month, greater than the rate of decline of 4.8% in January-October. The factors that have depressed tax receipts throughout the year are still prevalent. Collections at the Bureau of Internal Revenue (BIR) have been hit by tax-relief measures, including higher allowances for personal income tax and a five-point reduction in corporation tax, and markedly slower GDP growth.
Meanwhile the Bureau of Customs (BOC) has seen its collections diminish owing to a sharp contraction in import spending and much lower oil prices. Two additional factors that contributed to the deterioration in November were the absence of any income from asset sales, which left the year-to-date total at a paltry P1.1bn (US$23m), and the impact of two major tropical storms in late September and October, which affected an area that is responsible for generating two-thirds of the country’s GDP.
Although revenue fell sharply in November, the budget deficit was contained by a 9.4% year-on-year fall in budget spending. This decline in expenditure was both unexpected, given the immediate needs of storm relief, and unusual; the only other month in 2009 when outgoings fell on a year-on-year basis was August, and even then the fall was only 0.2% and was entirely explained by lower interest outgoings. The contraction in November seems to have been a result of the rescheduling of bonus payments to government workers.
Revenue was down by 5.5% year on year in January-November, but expenditure grew by 12.7% as the government implemented its fiscal stimulus to offset the impact of global recession. This meant that the budget deficit reached P272.5bn. Given that there were no asset sales in December and tax receipts are expected to have been weak, the official hope was that dividends from government-owned and -controlled corporations would keep the deficit for the year as a whole to just below P300bn. In January 2010 the official estimate for 2009 was a deficit of P298bn.
The poor tax performance last year and an estimated P6bn-7bn in reductions in tax liability as a result of the tropical storms have prompted a rethink of tax targets for 2010. In late December the inter-agency Development Budget Co-ordination Committee agreed in principle to reduce the collection targets at both the BIR and the BOC. These were originally P875.1bn for the BIR and P309.5bn for the BOC, representing increases on the 2009 targets of 9.6% and 13.2% respectively. In early January the BIR’s target was lowered to P830bn and that of the BOC to P275bn.
The government remains hopeful that it will realise the asset sales that did not materialise in 2009 and which were forecast to yield around P30bn. These were the sales of a commercial estate in the capital, Manila, the lease of government property in the Japanese capital, Tokyo, and equity in the government-owned Philippine National Oil Company-Exploration Corporation. To enhance the appeal of the latter, the government has increased the stake that it is prepared to sell from 40% to 60%. It hopes that the disposals will be completed in the first three months of 2010, but all three have been repeatedly rescheduled.
The reduction in planned tax receipts means that the government has already raised its target for the 2010 fiscal deficit. Last year, when the 2009 forecast was raised to P250bn, the 2010 budget deficit target was set at P233.4bn, but in late December the finance minister, Margarito Teves, cited a figure of P293bn, equivalent to 3.5% of GDP, based on government assumptions of GDP growth. The uncertainty over asset sales and the possibility that the administration will permit revenue-eroding proposals by its allies in Congress (the legislature) means that there are still downside risks to this forecast. Meanwhile, it is unlikely that the government will be raising levies to compensate for negative factors, given that this is an election year.
Outlook
A budget deficit is scheduled for 2010 and another appears inevitable in 2011. High levels of public debt limit the government’s ability to pursue an expansionary fiscal policy. The government saw its access to finance improve in 2009 after premiums soared in late 2008, but it will be reluctant to undermine confidence in the sustainability of the public finances at a time of uncertain global financial conditions. Significant structural reforms are unlikely until the next president takes office in mid-2010, as Gloria Macapagal Arroyo’s administration is suffering from a diminution of its ability to push through measures that run counter to powerful domestic interests. Policy beyond mid-2010 will depend on the stance adopted by the winner of the presidential election. All of the potential candidates have avoided making clear their policy views in the early stages of their campaigns.
Tax revenue collection in 2009 has consistently failed to meet government projections, owing to economic weakness and a swathe of tax cuts that were implemented at the start of the year. Meanwhile, a lack of interest from investors has meant that asset sales have failed to make up the shortfall. The Economist Intelligence Unit estimates the 2009 budget deficit at 3.7% of GDP. In 2010 we forecast that the budget deficit will narrow to the equivalent of 3.6% of GDP, which is similar to the newly revised figure being quoted by the government. As economic growth returns to its trend rate of the past decade, the budget deficit will narrow to 2.8% of GDP in 2011, assuming that fiscal discipline is maintained by Ms Macapagal Arroyo’s successor.
Source: Viewswire