Business World, 3 September 2014


President Aquino III and his men have another problem to worry about: not only is the Philippine economy showing signs of fatigue but also that government spending has done poorly in perking up the economy. In the second quarter of 2014, government final consumption expenditures were flat while public construction was down by 12.9%.

According to official statistics, the Philippine economy decelerated to 6% GDP growth in the first half of 2014, down from an arguably higher-than-expected growth of 7.2% in 2013. The first semester 6% growth is below the official full year growth target of 6.5% to 7.5% this year.

The slower growth did not come as a surprise to me since I find the government’s forecast too rosy in the first place. The 7.2% growth in 2013 was consistent with the pattern of strong growth during election years. Economic growth peaked in 2004, 2007, 2010, and 2013. And what do they have in common? They’re all election years.

The long-term growth of the Philippine economy is slightly less than 6%. The 6% GDP growth is the consensus forecast for 2014 by international financial institutions (the IMF, the World Bank and the Asian Development Bank).

What came as a surprise to many economic observers was the negative contribution of the public sector to economic growth. Government consumption and public construction are two areas where the government has direct control. On both areas, the Aquino III administration failed.

Contrary to the Department of Budget and Management’s (DBM) bold announcement that public spending has picked up, the public sector had negative contribution to economic growth in the second quarter of 2014. Government final consumption expenditure was flat, zero-growth, while public construction contracted (negative 12.9%).

For the first seven months of the year, government spending grew 6%. But this is way below the planned full-year spending growth of 15.1% in 2014.

The Aquino III administration has no one to blame for this poor spending behavior but itself. Obviously, it can’t blame Congress since it has religiously approved the President’s budget before the start of fiscal year. And it is not as if Congress has mangled the President’s budget. On the contrary, the approved budget is practically the same as what the President had asked for.

It can’t blame the Cabinet members since they’ve been on the job for more than four years. It would be a stretch to argue that Mr. Aquino’s top men are still “learning” on their jobs.

It can’t blame the past administration. That would be ridiculous.

I would put the blame on poor budget preparation. The President’s Budget contains many programs and projects that are not ready for implementation. Worse, the Department of Budget and Management (DBM) has allowed the inclusion into the budget of projects that are yet to be identified. In brief, the DBM has failed to do its job carefully and diligently.

But perhaps DBM officials have deliberately created slacks in the budget for future use. In reaction to the Supreme Court decision on the unconstitutionality of the Disbursement Acceleration Program (DAP), Budget Secretary Abad might have allowed a lot of “fat” in lump-sum appropriations within agency budgets and under the Special Purpose Funds in the 2015 President’s budget.

A glaring example is the quantum jump in the appropriations for the Miscellaneous Personnel Benefits Fund (MPBF). The President proposed new appropriations of P118.1 billion, up from P53.5 billion in 2014, for a whopping increase of 120.7%. Congress would be a fool to let this pass unexplained!

Year-to-date, revenues grew 12%. But this is below planned revenue growth of 15.6%. The Department of Finance would like the public to compare this year’s collection with previous year’s collection, knowing that such comparison is largely irrelevant. What is relevant is actual versus planned revenue collections.

The enormous gap between actual budget deficit (total revenues less total disbursements) versus planned deficit suggests the severity of unmet expectations. Agency heads are not delivering public services that they promise Congress they will deliver.

The planned deficit from January to July 2014 is P194 billion; actual deficit, as reported by the Bureau of Treasury, was P55.7 billion or less than one-third of the planned deficit.

The Finance authorities would once more represent the smaller deficit as a virtue and not an indicator of failure. Remember that the planned budget deficit for 2014 is P266 billion, which is consistent with the optimistic GDP growth target of 6.5% to 7.5%. Lower-than-planned deficit means government underspending, assuming revenues on target, which then means lower GDP.

The DOF authorities cannot attribute the lower deficit to higher than planned revenue collections. That would be lying since actual revenue collections were short of planned revenue targets.

What should the Aquino III administration do to accelerate government spending? Less talk, more action.

The government has to ramp up spending to support a recovering economy and to rebuild calamity-damaged communities like Leyte, Zamboanga, Bohol and Cebu.

Mr. Aquino has to crack the whip so awarded PPP projects will get done soon, and he has to put pressure on line departments to have more PPP projects awarded and get started.

The Aquino III administration is caught in a bind. Either it accelerates spending on programs and projects authorized by Congress in the 2014 general appropriations act or it settles for slower growth.

But the implications of slower growth are unattractive. Slower growth means lower revenues, more limited public goods and services, higher unemployment, and deeper poverty.