Core
Business World, 16 July 2013
Remember Ondoy? Who can forget that devastating tropical cyclone, the second most damaging in the 2009 Pacific typhoon season, with damage of $1.09 billion and 747 deaths. Politicians have short memories. After a number of top-level meetings, nothing has been done to date, to make the Manila metropolis stronger and better prepared to face another Ondoy-like catastrophe in the future.
Absolutely nothing. Yet, the economic damage of another Ondoy could be humongous. The $1.09 billion is equivalent to about 49.0 billion in 2009 prices. And what about the value of close to one thousand fatalities? Yet, our political leaders and decision-makers are overwhelmed by such huge amounts, paralyzing them into inaction.
Such huge amounts if addressed may mean higher taxes. But our political leaders are scared to death in proposing new taxes. Finance officials, likewise, are more focused on reducing the budget deficit, and will avoid taking on such monumental spending responsibility like a plague.
A JICA-funded study estimates that the cost of traffic in Metro Manila is 2.4 billion daily. This is approximately 876 billion on an annual basis or about 8% of gross domestic product (GDP). If the cost of inaction is so hefty, what is our political leaders doing? When will the upgrading of EDSA be done? When will the urban transit in the metropolis be improved? Every day of delay translates into immense economic losses.
Debilitating power outages are back in Mindanao and could spread out in other parts of the country before the end 2015. It is as if we have not learned from our experiences during the final years of the first Aquino presidency. Is the solution in sight?
BUDGET DEFICIT, USED APPROPRIATELY, IS GOOD
Short-sighted Finance officials look at budget deficits with disfavor. They prefer balanced budget to deficit financing, even when the economy is shrinking and its future expansion is iffy. Our finance officials who are obsessed with achieving credit upgrade cheer every time the actual budget deficit falls below target, even when it means under-spending for much needed public infrastructure and essential public services.
Finance officials, knowing that the lower-than-planned deficit was due to revenue under-collection and under-spending in public infrastructure misrepresent it as virtuous. The unsuspecting, worse the acquiescent, business and economic reporters, accept the erroneous proposition that lower, rather than higher, deficits are better.
Deficit spending, used appropriately, may be advisable. Going into deficit is recommended to temper economic recession. When successful, the negative effects of a shrinking economy on employment, personal indebtedness, and overall welfare are reduced.
Deficit spending may also be resorted to when the government is boosting its infrastructure spending to make up for years of neglect. This is where the Philippines is right now. It has to ramp up public infrastructure spending in order to catch up on its ASEAN-5 peers.
We need to build airports and seaports, highways, urban transit systems, power plants and water systems, irrigation systems and post-harvest facilities.
In the short-run, such massive spending for public infrastructure will create a lot of good jobs and stimulate the development of small and medium-scale industries in the countryside. In the long-run, it will expand the capacity of the economy to produce and create wealth.
Right now, constrained by a low tax-to-GDP ratio, the Aquino administration has been conservative in its budget allocation. But first, blame the low tax effort to Mr. Aquino’s “no new tax” policy, the still weak economy, and rampant smuggling.
The tax-to-GDP ratio was 12.1% in 2010, 12.4% in 2011, and 12.9% in 2012. But to everyone’s surprise, it was even lower at 11.9% in the first quarter of 2013. Didn’t the economy grow 7.8% in the first quarter of 2013? The implication is that taxes have become less responsive to economic growth. This raises a lot of questions which I will address in another article.
Public infrastructure spending was pathetic in recent years. The national government spent 166 billion for public infrastructure in 2010. The sum dipped to 152 billion in 2011, Mr. Aquino’s first full year in office. We may grant that the new administration needed one year and a half to review projects and to put a new, corruption-free system in place.
In 2012, public infrastructure spending rose to 191 billion, up by 25.7%. Finally this year, the plan is to spend 237 billion, up by 24.1%. From January to May, less than 100 billion worth of public infrastructure has been spent. It remains to be seen how much of the budgeted amount will be disbursed, given its poor implementation record in the past.
Given the above numbers, are we spending enough money for public infrastructure? The short answer is NO. The budgeted amount is simply too low. Given the huge infrastructure backlogs, the consensus among international funding agencies and economists is that we should be spending the equivalent of 5% of the nominal GDP yearly. This suggests an annual infrastructure budget of at least 500 billion.
What’s the Philippines’ public infrastructure-to-GDP ratio during the last few years? It was 1.49 in 2006, 1.92 in 2007, 1.90 in 2008, 2.24 in 2009, 1.83 in 2010, and 1.49 in 2011. On average, the Philippines was spending less than 2.0% of GDP, way below the ideal 5.0%. At a time when the Philippines should be investing more because of a weak economy (high unemployment, unchanged poverty incidence), the government was skimping on essential public services.
Apparently, the focus was on narrowing the deficit rather than job creation and stronger economy in the future. Was the concern purely financial or was it also the absorptive capacity of a slow-moving bureaucracy?
BORROW DOMESTICALLY TO FINANCE PUBLIC INFRASTRUCTURE
But in the face of a still narrow tax base, where should the government get the money to finance the much need public infrastructure? Borrowings, preferably domestic. Apply the golden rule: if the return on investment is higher than the cost of money, then GO (proceed with the project). Given past neglect, the list of worthwhile projects should be long.
And given the record low interest rates, this is a no-brainer.
But why domestic borrowings rather than foreign borrowings? Domestic borrowings don’t involve foreign exchange risk, foreign borrowings do.
With the inflow of loan proceeds, foreign borrowings will lead to the appreciation of the peso which, by and large, is bad for the Philippine economy. Also, foreign loans have built-in delays. Yet, the economy needs the stimulus now, not much later.
Despite the recent strong GDP numbers, the Philippine economy faces serious unemployment and poverty problems. The present level of public spending in infrastructure remains inadequate and spotty. The Aquino administration has to act boldly by spending more for public infrastructure nationwide, in urban centers and rural villages.
Interest rates are not expected to return to “normal” levels soon, but they cannot be expected to remain low in the long run. In this sense, Mr. Aquino has squandered a large part of his first three years in office for not investing in short run, demand increasing and long run, supply increasing public infrastructure much sooner.
