Debt addiction returns

A pragmatic review of the fiscal situation will reveal the increasing reliance of the government on debt to finance the budget, as revenue collections stagnate while spending, a significant portion of which is allocated to non-productive programs, rises.

The debt situation, although described as manageable, highlights underlying vulnerabilities to the aim of fiscal sustainability.

While billed as a budget to expand the economy, a substantial part of the yearly allocation goes to social amelioration projects — a euphemism for handouts — and local projects aimed at appeasing political allies, neither of which contributes to development.

The situation is worsening; the government said it is ramping up borrowing to plug a widening budget deficit due to the recent reduction in the revenue target, as growth decelerates.

The borrowing goal has been jacked up to P2.6 trillion from the previous target of P2.55 trillion.

Economic officials admitted that a 0.2-percentage-point increase in the fiscal gap ratio to the gross domestic product (GDP) translates to P50 billion in additional borrowings.

At the end of the first quarter, the debt-to-GDP ratio rose to 62 percent, which approximates the pandemic level when borrowings were ramped up to combat the health and socioeconomic crises caused by Covid-19.

Independent economists said the situation will not improve since revenues will continue to underperform, “in part because reforms are now more difficult to enact following the midterm elections.”

Gross domestic borrowings went up by 41.3 percent to P186.1 billion, consistent with the government’s reliance on local debt. The government is planning to raise P690 billion in financing from the country’s banks in the third quarter.

The country’s outstanding debt reached a new record of P16.92 trillion as of May due to new loans.

Reliance on domestic borrowing, which now comprises 69.6 percent of total debt, crowds out private sector borrowing and, as a result, increases interest rates for regular loans.

The claim of a “prudent debt management strategy” made in the context of a sustained increase in domestic borrowing suggests a reliance on debt to finance government operations and development projects.

A fiscal watchdog questions the sustainability of the government’s budgetary framework amid global economic uncertainties, including rising interest rates and commodity price shocks.

The emphasis on investor confidence in domestic securities glosses over the risks of over-reliance on local financing.

The increasing amount of public money allocated to debt servicing diverts funds that could otherwise be invested in critical areas, such as infrastructure, education, and healthcare.

A high debt-to-GDP ratio, coupled with slow economic growth or revenue shortfalls, could limit the government’s fiscal space to respond to future crises.

Experts point to the need to enhance the efficiency of public spending, particularly on infrastructure, to reduce the need for excessive borrowing.

In contrast to the focus on “ayuda” and pork barrel projects, spending on infrastructure and development projects multiplies economic benefits for Filipinos, who become more productive as a result of increased mobility and a better quality of life.

Debt addiction has again inflicted those who should be responsible for initiating reforms to make the government more efficient in raising funds to stimulate growth.