Sluggish government spending likely to drag growth this year

Philippine economic growth may slow to 5.4% this year, dragged by sluggish government spending, Bank of America (BofA) Global Research said.

BofA Global Research in a report dated Feb. 26 said government spending may continue to slow this year, which could bring gross domestic product (GDP) growth to below the government’s 6.5-7.5% target.

“Given the lack of fiscal space, we see government spending lagging overall GDP growth in 2024, as in 2023,” it said. “While the 2024 budget implies slightly improved spending growth, it is seen to lag nominal GDP growth. Moderate spending growth may persist until 2025.”

Philippine GDP growth slowed to 5.6% last year from 7.6% in 2022 and fell short of the state’s 6-7% target. Government spending posted flat growth of 0.4%, much slower than 4.9% in 2022.

Government spending also contracted by 7.1% in the second quarter of last year, hurting growth and prompting the Finance and Budget departments to order agencies to accelerate spending and improve budget use.

“With only private consumption and sporadic investment spending seen as GDP growth drivers in the near term, our GDP growth forecast for 2024 and 2025 is at 5.4% and 5.5% (respectively,) and below the 6.5-7.5% growth expectation,” BofA Global Research said.

In 2023, private consumption expanded by 5.6%, much slower than 8.3% in 2022. Private consumption accounts for about three-fourths of the economy.

BofA Global Research said easing inflation, reduced unemployment, and higher minimum wages would likely support private consumption that would be a key driver of economic growth.

Headline inflation sharply slowed to an over three-year low of 2.8% in January from 3.9% in December and 8.7% a year ago, marking the second straight month it fell within the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target range.

The country’s unemployment rate fell to a record low of 4.3% in 2023, translating to 2.19 million jobless Filipinos.

Lawmakers are currently considering bills to hike minimum wages in the private sector by PHP 100, despite warnings that this could fan inflation.

BofA Global Research said investments may rise this year amid easing interest rates and continued implementation of infrastructure projects.

For 2023, gross capital formation rose by 5.4%, slower than 13.8% a year ago.

To tame inflation, the BSP hiked borrowing costs by a total of 450 basis points from May 2022 to October 2023, bringing the key rate to a near 17-year high of 6.5%.

BSP Governor Eli M. Remolona, Jr. earlier said the Monetary Board may consider cutting borrowing costs this year, but not within the first half amid risks to inflation.

TAX CUTS
Meanwhile, the research firm said tax cuts on passive income meant to deepen financial markets may have to wait until 2028 amid lack of fiscal space.

“The government now proposes to defer tax reform on passive income to 2028, which may have helped deepen debt and capital markets in the near term. There is less fiscal space in 2024 than there was pre-pandemic, when these tax cuts were first proposed,” it said.

Senators have yet to approve the Passive Income and Financial Intermediary Taxation Act, which the lower chamber passed on third and final reading in 2022.

The Department of Finance has since proposed to the Senate to adjust the timing of implementation of Package 4 of the Comprehensive Tax Reform Program, as these reforms were proposed before the pandemic when the government had fiscal space to accommodate the revenue loss.

“The debt-to-GDP ratio has since increased from 42% in 2019 to nearly 63% in 2023. The proposed tax cuts on passive income and financial transactions would have eroded government revenue further,” BofA Global Research said.

On the other hand, the government seems to be able to fund its budget deficit with both domestic and foreign borrowings, the research firm said.

It also noted that government revenue growth has been healthy despite no new taxes. This makes the fiscal deficit on track toward its 2028 deficit-to-GDP goal of 3%.

The government’s outstanding debt as a share of GDP further eased to 60.2% at the end of 2023 from 60.9% at the end of 2022. It was also below the 61.2% target under the government’s Medium-Term Fiscal Framework.

Meanwhile, the government’s budget deficit as a share of GDP stood at 5.71% in the third quarter. During the first nine months, the budget deficit narrowed by 2.89% to PHP 983.5 billion. — Keisha B. Ta-asan