High budget deficit and wage subsidy
Last week, on Feb. 29, the Development Budget Coordination Committee (DBCC) released the full year cash operations report (COR) for 2023. The good news from it is that revenues have expanded significantly despite the absence of a major tax hike, from P3.55 trillion in 2022 to P3.82 trillion in 2023, and that the actual collection was higher by P95 billion than the target or programmed P3.73 trillion.
The bad news is that the actual budget deficit of P1.51 trillion was higher than the programmed deficit by P13 billion because expenditures have expanded significantly. Last year’s actual spending of P5.34 trillion was P108 billion higher than the programmed spending of P5.23 trillion.
The average budget deficit has increased from P609 billion/year in 2018-2019 to P1.542 trillion/year in 2020-2023. Consequently, the average financing or borrowings have more than doubled, from P830 billion/year in 2018-2019 to P2.196 trillion/year in 2020-2023 (see the table).
See also these recent reports in BusinessWorld: “Gov’t debt hits record P14.79 trillion at end-January” (March 1), “NG budget deficit exceeds full-year ceiling in 2023” (March 1), and, “Gross borrowings hit P2.19 trillion” (March 4).
I think there are three major reasons why the deficit in 2023 continued to remain high.
1. On the revenue side there was a continued decline in excise tax collection, mainly from tobacco tax revenues. As the tax rate has increased from P55/pack in 2021 to P60/pack in 2022, and P63/pack in 2023, the price of legal tobacco has become more expensive compared to illegal or smuggled tobacco and thus many smokers have shifted to the latter and government revenues from this product have declined.
2. On the expenditure side, National Government subsidies for both the needy and non-needy keep expanding. Among the non-needy are non-poor households that declare themselves as poor to continue receiving subsidies and freebies with no timetable, and the military and uniformed personnel (MUP) pension. The latter was about P164 billion in 2023 and could reach P200 billion this year, when it should be zero. Government doctors and nurses, teachers and professors, engineers and agriculturists, etc. pay for their own future pension via deductions from their monthly salaries but MUPs pay zero. And the pension is tax-free, so zero contribution as active personnel, zero contribution as pensioners. An average tax of 25% on the P164-billion pension, or P41 billion, will help because it goes back to them in the succeeding years. Plus, there are the monthly contributions by active MUPs.
3. The high interest rate policy of the Bangko Sentral ng Pilipinas contributed to the high interest payment of public debt, from P429 billion in 2021 to P503 billion in 2022 and further up to P628 billion in 2023. I will add that the high interest rate policy has cooled some investments in the country and adversely affected potentially higher GDP growth.
These three factors are beyond the policy changes or interventions made by the current economic team. The “sin products” tax rate was made by Congress upon the prodding of the economic teams of the last two administrations. The costly and burdensome MUP pension scheme was crafted back in the Fidel Ramos administration (1992-1998), and the high interest rate policy is made by the monetary authority.
Given these constraints, what can the current economic team do?
Finance Secretary Ralph G. Recto must go beyond revenue mobilization and help raise overall economic productivity. For instance, on the Metro Manila Subway, which is funded by huge foreign aid, he correctly announced that “this administration will deliver top-notch infrastructure projects to modernize the Philippine mass transportation system. We are working non-stop to get all of these done as soon as possible.”
Budget Undersecretary and Principal Economist Joselito R. Basilio rightly observed that “the lower National Tax Allotment shares of local government units for 2023 weighed down on overall growth of spending. Nonetheless, other productive expenditures, particularly infrastructure and other capital outlays, helped buoy government disbursements in 2023 and contributed to propping up overall GDP growth.”
PROPOSAL FOR GOVERNMENT SUBSIDIES FOR MINIMUM WAGE EARNERSEarlier, there was a concerted lobby for Congress to legislate another minimum wage hike and, in the process, set aside the traditional tripartite negotiations among government (through the Department of Labor and Employment or DoLE), business and labor. See these recent reports in BusinessWorld: “‘Not the right time’ to raise wages — NEDA” (Feb. 23), “Legislated wage hike won’t benefit 80% of workforce — business groups” (Feb. 29), and, “Chamber warns prices will rise if wage hike bill becomes law” (Feb. 29).
Budget Secretary Amenah F. Pangandaman made the headlines in the Philippine Star, “DBM chief: Government can’t afford wage subsidies” (March 2). She was quoted as saying, “With its limited fiscal space the government is unlikely to find the resources to subsidize minimum wage earners… pushing through with such a subsidy would undermine consolidation efforts as well as the delivery of other social services. This is currently not in the budget approved by Congress. And it might eat up the budget for social services and other infrastructure priorities.”
That is a wise and rational position. As shown in the numbers above, the government keeps on borrowing a lot because domestic revenues are not enough, so we should avoid inventing new ways of spending. Rather, we should think of spending cuts in certain sectors, or the large-scale privatization of government assets to fund new or higher spending to unburden the taxpayers.
Meanwhile, I attended a lunch meeting organized by the President of the Federation of Filipino Chinese Chambers of Commerce and Industry, Inc. (FFCCCII), Dr. Cecilio K. Pedro, for business editors and columnists last week at the Makati Shangri-La hotel.
Dr. Pedro discussed the general activities for the upcoming 70th anniversary of FFCCCII, the local business sector’s desire for world peace and commerce, to have friends and not enemies in many countries so that more business and jobs can be created here, and that wages will increase with higher demand for labor and not with legislated minimum wage hike. I agree with the gentleman.
Bienvenido S. Oplas, Jr. is the president of Bienvenido S. Oplas, Jr. Research Consultancy Services, and Minimal Government Thinkers. He is an international fellow of the Tholos Foundation.
