Gov’t faces challenges in bringing down fiscal deficit

The government might find it challenging to meet its targets in bringing down its fiscal deficit in the near term if it does not ramp up fiscal consolidation plans, analysts said.

“By and large, although the country has narrowed down its budget deficit… it is still theoretically high considering that the ideal deficit has fallen short of the target,” Colegio de San Juan de Letran Graduate School Associate Professor Emmanuel J. Lopez said in an e-mail.

“If this will be a trend for the rest of the year till 2028, it is doubtful the government can achieve the deficit target cap of 5.1% of the gross domestic product (GDP),” he added.

The National Government’s (NG) budget gap narrowed by 6.32% to PHP 1.51 trillion in 2023 from PHP 1.61 trillion in 2022. However, it was 0.85% above the PHP 1.499-trillion deficit ceiling.

Government revenues rose by 7.86% year on year to PHP 3.82 trillion and exceeded its program by 2.55%. On the other hand, state spending went up by 3.42% to PHP 5.34 trillion, surpassing its program by 2.06%.

The NG’s deficit as a share of GDP stood at 6.2% as of end-2023, a tad higher than its 6.1% target but lower than 7.3% at end-2022.

Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said the year-on-year improvement of the deficit-to-GDP ratio signaled “fiscal prudence” despite high inflation and interest rates.

“In this fiscal trade-off, fiscal consolidation won out (lower deficit ratio with a slight breach of the program deficit target) over the fiscal objective to support growth and offer some relief to higher interest rates and inflation,” he said in an e-mail.

“We think that this ongoing fiscal trade-off and other dynamics will not change materially in 2024 and expect a fiscal deficit outlook of PHP 1.58 trillion that corresponds to a lower ratio of 5.5% of our projected 2024 GDP,” he added.

This year, the NG’s deficit ceiling is capped at PHP 1.39 trillion or 5.1% of GDP. The government seeks to bring this further down to 3% by 2028.

Finance Secretary Ralph G. Recto earlier said the government’s fiscal performance remains “robust” and is on track with its consolidation plan.

Meanwhile, Ateneo de Manila University economics professor Leonardo A. Lanzona said the government’s fiscal consolidation efforts have been “uncertain and disappointing.”

In an e-mail, he noted that the targets were deliberately downgraded as the government recognized “the limits on fiscal space and growth expected during the year and the need to stabilize its fiscal position.”

“However, the government has exceeded its targets as the economic performance dipped and the social problems due to inflation grew. Thus, the budget deficit naturally narrowed, but is still higher than the government target,” he added.

Mr. Lanzona said the government does not have enough fiscal resources to both “grow the economy and meet its social responsibilities.”

Mr. Lopez said the government should manage its fiscal spending in the near term.

“Practically the government is spending more than its earnings, therefore increasing its borrowing from outside sources to achieve the desired fiscal spending,” he added.

The Philippines’ efforts to bring the deficit down would depend on economic growth, Mr. Asuncion said.

If GDP expands at a better-than-expected pace, Mr. Asuncion said it may be possible to meet the 3% deficit target “sooner than later.”

“We think this is within the realm of possibility if the easing of monetary policy interest rate settings comes sooner than later,” he added.

The economy grew by 5.6% last year, much slower than the 7.6% expansion in 2022. It also fell short of its 6-7% growth target.

This year, the government is targeting 6.5-7.5% GDP growth.

To further bring down the deficit, Mr. Lanzona said there must be an “effective and massive” tax reform.

“A truly progressive income tax reform that focuses on wealth will be needed. Since these taxes are not based on consumption, these will have no impact on inflation as this will only entail a redistribution of incomes from the rich to the poor,” he added.

Mr. Recto earlier said he does not plan to introduce new taxes, for this year at least.

Instead, the Finance department has been tweaking and fine-tuning ongoing tax proposals, such as the rationalization of the mining fiscal regime and the Passive Income and Financial Intermediary Taxation Act. — By Luisa Maria Jacinta C. Jocson, Reporter