Economy 4 MIN READ

Infra spending: Expanding and transmitting economic growth

A ballooning debt-to-GDP ratio can become a problem when not managed properly. One way to deal with it is to spend on infrastructure, which can be a catalyst for growth, especially in the countryside.

July 13, 2022By Marc Bautista, CFA

In the discussions on how to reduce the debt-to-GDP ratio of the country, people get invariably drawn to talking about reducing the numerator (the debt) almost immediately, when in fact, increasing the denominator (Gross Domestic Product, or GDP) works equally well.

But because of that, the immediate reaction is to push for higher taxes to increase revenues and reduce the debt requirement. The primary problem with that is that higher taxes tend to pull down economic activity and, thus, GDP. And of course, if GDP comes down, the debt-to-GDP ratio goes up once again since the divisor is now smaller.

Coupled with that is the possibility of avoiding debt and scrimping and saving to reduce the debt burden on top of higher tax rates. The result might be both an economic slowdown and an impairment in basic government services and investments for the future, sacrificing the needs of the population on the altar of prudence from a household debt perspective (see also: Government debt is not like household debt).

On the other hand, assuming conditions are favorable, pushing up GDP through fiscal stimulus programs that are practically large investments by the government may make more sense. Such spending can be recovered via future tax revenues.

Continue infrastructure program

This will increase GDP while at the same time increasing future revenues that can help reduce the need for more debt, thereby decreasing the overall debt-to-GDP ratio. One such program is the infrastructure program that is being continued from the previous administration.

Consider the country’s 2021 economic heatmap. Guess which region of the Philippines is the biggest contributor to GDP? Which ones are the 2nd and 3rd, respectively?

People normally guess correctly that the biggest is the National Capital Region (NCR), or Metro Manila. Only a few can guess what the 2nd and 3rd regions are, mistakenly believing that the Cebu Region (Central Visayas) is the 2nd top region in the country.

Now look at the chart below.

You will find that CALABARZON—or the areas comprising Cavite, Laguna, Batangas, Rizal, and Quezon—is the 2nd biggest contributor after NCR, with Central Luzon taking 3rd place, while the Cebu region is 4th.

What distinguishes ranks 2 and 3 from rank 4? It’s basically the proximity to Metro Manila, the top region, that once you connect Metro Manila to the adjoining regions, economic growth naturally spills over to these adjacent regions. And obviously, you connect these regions via infrastructure projects.

Catalyst for growth

What exactly happens when you connect these regions to a top region? One, this brings down the cost of moving people and goods from the center of growth, thus expanding the growth outwards. This means people and businesses can now go from Metro Manila and back to the neighboring regions at lower costs, bringing opportunities and growth into these regions.

The real estate surrounding the major roads and highways starts to improve in valuation, as people and businesses find it convenient to establish themselves in these areas, away from expensive Manila, but near enough to make travel cheap. More businesses are set up, while schools, hospitals, etc. expand to serve the growing population, making it more attractive for even more people to move in and resettle.

Just from the increasing real property taxes (aka “amilyar”, from the Spanish “amillaramiento”, meaning an assessment of a tax), the LGUs will be earning more in real estate taxes. Additionally, as more and more businesses grow, the tax base of the government expands, bringing in more revenues down the line in a virtuous cycle.

Investing in the future

Riding on the succeeding waves of growth and tax revenues, at some point, it should be easy to see why government deficit spending can eventually be recovered by the offsetting revenues in the future. That is the effect of building infrastructure to connect centers of growth to the surrounding areas. It is really an investment for the future.

What’s the lesson here? Infrastructure to connect one place to another in the Philippines is an absolute priority to stimulate economic growth for the general population. Just think about this. Why is it that Philippine tourist spots are more expensive for local travelers? Why do they prefer to go to Thailand or Bali instead, rather than to local tourist destinations?

It’s because of the problem of accessibility. And that’s what infrastructure spending addresses, because it helps bring down the cost of moving goods and people, creating lots of opportunities for the population of the impacted areas.

Expanding the heatmap of growth

The heatmap attests to the fact that the three top regions alone account for almost 60% of the Philippine economy. Think of that when you think of infrastructure that interconnects the country and pushes economic growth upwards.

Infrastructure spending is a good way to reduce our debt-to-GDP ratio. It’s spending that should pay for itself when played right.

MARC BAUTISTA, CFA, is Vice-President and Head of Research & Business Analytics at Metrobank, in charge of the Bank’s macroeconomic, industry, and financial market analysis and research. He loves teaching finance and investments, portfolio management, statistics, financial derivatives, economics, etc. in a university setting. He plays guitar in a rock band and loves to learn other languages, especially Spanish, promoting its recovery as a heritage language in the Philippines.

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