Underspending: a bad habit that’s hard to break

Core
Business World, 19 April 2016

The recently released budget numbers showed an administration that’s having a hard time breaking a bad habit: underspending. Not surprisingly, the release of the 2015 fiscal numbers was delayed. On the aggregate, based on the original program, the administration underspent by a whopping P390 billion, or 14.9% of the total budget.

Underspending for infrastructure and other capital outlays reached epic level: 32.9%. At a time when the slowing Philippine economy needs to spend more to make up for past neglect in physical infrastructure and to restore massive damages to public properties as a result of recent major natural and man-made calamities, the Aquino III administration failed to spend for projects worth P169 billion.

It’s a sin not to spend the budget for essential public infrastructure. In the near term, infrastructure spending will boost economic activity and create a lot of jobs; in the long term, it will support and sustain strong growth.

Even the International Monetary Fund has raised the alarm level. On Saturday, an IMF steering committee — the International Monetary and Financial Committee (IMFC) — urged member countries to boost “growth friendly’ spending.

The IMFC said in its statement: “Downside risks to the global economic outlook have increased since October, raising the possibility of a more generalized slowdown and a sudden pull-back of capital flows.”

The committee said a more “forceful and balanced policy mix” was needed to stimulate growth and avoid deflation and emphasized that monetary policy alone was not enough. “Growth-friendly fiscal policy is needed in all countries,” IMFC said, adding that accommodative monetary policies should continue in several advanced economies and structural reforms should be implemented with policies that support demand and help displaced workers.

The Aquino III administration should be blamed for having pursued a conservative fiscal policy in the face of huge demand for ‘growth friendly’ public infrastructure. Had it pursued a more expansionary fiscal policy, combined with an accommodative monetary policy, economic growth could have been faster and more decent jobs could have been created.

For five successive years, the Philippine government has consistently missed its rather conservative budget deficit targets. In 2011, the planned deficit-to-GDP target was 3.3%; actual number was 2.0%. In 2012, the planned deficit-to-GDP ratio was 2.5%; actual number was 2.3%. In 2013, the planned deficit-to-GDP ratio was 2.0%; actual number was 1.4%. In 2014, the planned deficit-to-GDP ratio was 2.0%; actual number was 0.6%. In 2015, the planned deficit-to-GDP ratio was 2.0%; actual number was 0.9%.

These deficit targets and actual performance rates are not trivial. They represent lost opportunities, foregone benefits and missed jobs. In 2015, this translates into P390.3 billion unspent, of which P168.9 billion were for public infrastructure and other capital outlays — the kind of ‘growth friendly’ expenditures that the IMF is talking about. From 2011 to 2015, the amount of underspending of the Aquino administration adds to about a staggering trillion pesos!

In the face of huge public needs for better public infrastructure and heftier investment in human resources, such monumental underspending is not a badge of honor; rather, it is and a badge of apathy and incompetence.

The harsh truth is that the Philippines has the reputation of having the worst infrastructure in the ASEAN-5 community. Traffic congestion in the metropolis is intolerable. The Metro Rail Transit system is falling apart. Its major airport has the notoriously distinction of being one of the worst on planet Earth. Its highways, bridges, and ports are crumbling. Power supply is hopelessly unreliable, inadequate, and expensive (see graph, table).

It is not enough that Congress approves the national budget on time every year, a distinction the Aquino III administration is proud of. However, prompt approval is a necessary but not sufficient condition for success.

It is even more important that the budget is prepared well. The reality is that a poorly prepared budget cannot be implemented well. Add to that an inept Executive Department and you have a sure formula for poor budget implementation.