With serious unemployment and poverty, the government underspends half-trillion pesos

Core
Business World, 12 May 2015

Now, it can be told: President Aquino III has squandered opportunities to address unemployment, poverty, and hunger. The government’s most direct intervention to address these interlinked problems is by spending for public infrastructure, investment in human capital, and social protection.

Now on his final year in office, Mr. Aquino has yet to get the hang of planning the national budget well and implementing the programs and projects contained in the budget. All these past years, Congress had been excessively accommodative; it approved every budget that the Executive submitted to it with few changes. Hence, it boggles my mind why the President continues to underspend.

For example, during the last four years, the President has failed to spend fully his infrastructure budgets despite the constitutionally-infirmed Disbursement Acceleration Program. Not surprisingly, the citizens’ complaints on the deteriorating state of public infrastructure have reached intolerable crescendo.

The signs that all is not well with the existing public infrastructure are overwhelming. The urban transit system, the MRT, is breaking down increasingly. The operations of the Philippine National Railways have been stopped indefinitely. Traffic congestion is getting worse not only in Metro Manila but in almost all urban centers in the country.

The Philippines’ international airports remain to be among of the worst in the world. The seaports remain decrepit and unreliable. Power is in short supply and the solution is clearly beyond the present administration.

Yet, the Aquino administration appears to be unperturbed. It continues to trumpet its meager achievements — gross domestic product (GDP) growth averaging 6.0% (3.9% in 2011, 6.8% in 2012, 7.2% in 2013 and 6.1% in 2014) and low interest rate regime.

Mr. Aquino should not claim credit for the 7.6 GDP growth in 2010. Public policy works with a lag (sometimes 12 to 18 months lag), hence it would be intellectually dishonest on the part of Mr. Aquino to claim credit for the economy’s performance in 2010.

The abnormally high GDP growth in 2010 was mainly due to three reasons: (a) base effects, owing to poor economic growth in 2009 as a result of the Global Economic Recession; (b) election spending as a result of the 2010 national and local elections; and (c) massive catch-up spending by Gloria Macapagal-Arroyo as she completed her nine-and-a-half year reign. It has nothing to do with Mr. Aquino’s Daang Matuwid.

Mr. Aquino cannot claim credit for the low inflation during his watch. It is due mainly to three reasons. The first is the excess liquidity brought about by loose monetary policy of major industrial countries. The second reason is the still wobbly world economy. With a weak economy, consumers continue to be cautious in their purchases which, in turn, limits production and hence investment in new factories.

The third, and the more recent and significant dampener on prices, is the sharp fall in the world prices of oil. This results in sharp decline in the economies of oil-producing countries that slows down global growth. At the same time it reduces the production costs of most commodities. The more oil-intensive the commodity, the greater the impact of the plunging oil prices on the price of said commodity.

Clearly, it would be foolhardy for Mr. Aquino to claim credit for lower inflation in recent years and the GDP growth in 2010.

The Philippine government as percent of GDP is relatively small (about 19% and around 16% if interest payments are netted out), as a result, it has little overall effect on the performance of the economy.

Worse, in the area where government can make a big difference, government spending in public infrastructure and social investment, Mr. Aquino failed miserably. Forget about the bureaucratic buzzword ‘fiscal space’ being peddled by Aquino’s economic team.

In the real world, it doesn’t mean a thing, especially when despite the “fiscal space” the government fails to address the urgent need for it to spend money for infrastructure and investment in human capital to make up for past neglect.

In today’s low-interest rate regime, it makes good economic sense to borrow money to finance much-needed public infrastructure. Government leaders should simply follow the Golden Rule: invest in a project if the rate of return on it exceeds the cost of money. To illustrate: if the rate of return for a new Philippine National Railways is upward of 25%, and the cost of borrowing is only 6 to 7%, then proceed with the investment in the new PNR. That’s a no-brainer.

As time goes by, the degree of non-implementation of budgeted projects has grown with disturbing consequences. This leads to several questions. Has the Department of Budget and Management prepared the budgets well? If the budgets were well prepared, how come they were not implemented fully? Isn’t the DBM supposed to evaluate absorptive capacity of implementing agencies? Why give a department, say, P100-billion allocation, when in fact, it is able to spend only about half of that amount?

In the private sector, if one is given a job and he or she fails to do it, then he or she gets fired. I don’t recall any senior officer being fired for incompetence under this administration.

Mr. Aquino’s spending pattern from 2011 to 2014 is illustrative of a serious case of government incompetence. I compared programmed government spending net of interest payments with actual spending. I netted out interest payments because it is automatically appropriated, it is generally overstated to create a “buffer” for likely revenue under-collection, and, more importantly, interest payments do not really constitute government purchase of goods and services.

Government spending net of interest payments (GS-IP) is a more accurate measure of the concept of “productive part of the budget.”

In 2011, the programmed GS-IP was P1.354 trillion while actual spending was P1.278 trillion, or an underspending of P76 billion. Government underspending was P56 billion in 2012, P130 billion in 2013, and a humongous P267 billion in 2014.

In sum, total underspending from 2011 to 2014 was a huge P529 billion, more than half a trillion pesos. Imagine the number of decent jobs that could have been created and the million individuals that could have been extricated from the poverty trap, had the government spent according to what Congress has authorized the Executive Department to spend.

Imagine the roads, bridges, irrigation systems, airports and seaports, and other infrastructures that could have been completed had the government spent the half trillion pesos. And imagine its positive long-term impact on the economy.