In this issue, we continue to look at indicators of the health of the economy.
In these unprecedented times, it pays to know critical trends to prepare and cope with this crisis.
We can start by looking at lending and subsequently at spending.
Bank lending growth slowed to almost stationary in November 2020. The Bangko Sentral ng Pilipinas (BSP) said that level of outstanding loans of universal and commercial banks, net of short-term deposits with BSP, continued to decline to 0.3 percent in November from 1.8 percent in October.
Borrowings
On the part of the government borrowing, the amount of outstanding debt paper issued locally increased to a record high of P6.69 trillion at the end of 2020, traceable to an equally record sale of “premyo” bonds.
Outstanding treasury bills and bonds jumped 31 percent from P5.13 trillion in end-2019, based on data from the Bureau of the Treasury.
The government relied heavily on domestic borrowings to fund programs and projects against COVID-19.
This heavy borrowing raises concerns about the size of the budget deficit.
Last year, the budget deficit increased to P1.36 trillion or 7.5 percent of the country’s Gross Domestic Product (GDP) from only P660.2 billion or 3.4 percent of GDP in 2019.
To bridge the higher deficit brought about by the COVID-19 pandemic, Finance Secretary Carlos Dominguez III said the government had to increase its borrowings.
He said the government’s total financing last year amounted to P2.63 trillion, more than 2.5 times higher than the P1.02 trillion raised in 2019.
Massive Budget Deficit
On top of this financing, the government availed of a P540 billion emergency short-term loan from the Bangko Sentral ng Pilipinas.
Reducing the budget deficit requires that economic growth rely once more on revenue recovery and reduction in expenditures on goods and services, which may be politically and socially challenging to do.
Some groups in the private sector have been calling for legislation that would improve business firms’ financial status.
However, a law that reduces government revenues will further add to the national government’s massive budget deficit.
For instance, the Philippines’ Management Association (MAP) is recommending the safe reopening of the economy and immediate approval into law of the proposed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act to assist businesses affected by the pandemic.
PH Government from officialgazette.gov.ph
Sufficient Funds
MAP is joining at least 30 business organizations in signing a statement of support for CREATE and joint letters calling for the enactment of CREATE.
When approved into law, CREATE will reduce the corporate income tax (CIT) rate to 25 percent from 30 percent.
For small businesses, the government will reduce the CIT rate to 20 percent.
To counter doubts about the availability of funds for the forthcoming massive vaccination program, the Department of Finance (DOF) gave the assurance that the government has sufficient funds to procure enough doses of COVID-19 vaccines to inoculate around half of the population.
In a statement, Finance Secretary Carlos Dominguez III said that the government had P75 billion to purchase vaccines for at least 50 million Filipinos. Yes, this is part of the deficit mentioned earlier.
Key To Economic Reversal
But vaccination is the key to the turn-around of the economy.
This focus justifies incurring the considerable deficit. Consider these computations: each day of general community quarantine (GCQ) amounts to 700 million foregone wages. Socioeconomic Planning Secretary Karl Chua estimated it would cost the economy P21 billion in foregone income if the country goes back to modified enhanced community quarantine (MECQ) level.
Government Spending
When it comes to government spending, Martin Feldstein, one of the most influential applied economists of the last half-century, said: Increased government spending can provide a temporary stimulus to demand and output.
Still, in the longer run, higher government spending crowd out private investment or require higher taxes that weaken growth by reducing incentives to save, invest, innovate, and work.