Grow now, pay later

THE SLIGHTLY POSITIVE GDP growth our economy achieved in the second quarter was primarily the result of government’s extraordinary efforts to spend our way out of the global economic downturn.

Investment spending and exports both fell steeply (by almost 10 and 16 percent respectively). Private consumption grew at a greatly reduced pace of 2.2 percent, or at about the same rate that our population grew, suggesting that average spending per person or per household had actually remained flat. But government consumption spending grew by a brisk 9.1 percent, and government construction by more than three times as fast at almost 30 percent.

It was, therefore, government that primarily created the demand for goods and services that managed to hold our economy’s overall growth rate in the positive range. In other words, we were saved from recession by fiscal stimulus, the widely prescribed medicine for all economies battered by the financial meltdown that brought down most of the large economies of the world.

Unlucky neighbors

Our neighbors have not been quite as fortunate. Thailand, Malaysia and Singapore have officially been in recession this year, suffering deep contractions (-4.9, -3.9 and -3.5 percent, respectively) in the second quarter, with contraction already lasting more than two quarters. The Japanese economy has dipped even more sharply (-15.2 percent). The giant economies of China and India managed to grow briskly at 7.9 and 6.1 percent, respectively, albeit almost down to half of the 10- to 12-percent growth they had been accustomed to lately.

Our recession-hit neighbors were clearly battered by the steep drop in exports to the large economies hit by even deeper recession. Singapore’s net exports (exports minus imports) have amounted to 29 percent of its GDP, while the corresponding figures for Malaysia and Thailand are 20.3 and 7.6 percent. Our own net exports-to-GDP ratio has been a tiny 0.4 percent, making it no surprise why our domestic economy was largely shielded from the drying up of the export markets.

Stimulus, RP style

But as indicated above, it was government spending that managed to keep us out of recession. Our own fiscal stimulus package was the vaunted Economic Resiliency Program (ERP) amounting to P330 billion. As itemized by former Neda Secretary Ralph Recto, P160 billion of this had been allotted to the hiring of more teachers, policemen and soldiers, repair of government buildings, patrol cars and ambulances, and support for agriculture. P100 billion was to come from investments by SSS and GSIS in private sector ventures in build-operate-transfer (BOT) and similar public-private partnerships in infrastructure. P30 billion was spent on additional SSS, GSIS and PhilHealth benefits, while the balance of P40 billion was supposedly in the form of cuts in the income tax.

Whether or not the additional government spending actually went to their intended purposes is not clear. For example, the supposed hiring of more government workers has not been apparent in the July Labor Force Survey, wherein jobs in the public sector have not shown any appreciable increase. The problem with the measurement of government’s contribution to output is that it is measured from data on inputs (i.e., the amount of the budget spent), not on what the spending achieved—and this is true everywhere.

Future payback

The problem with our government spending-driven growth is that it is a case of “grow now, pay later.” And the future payback can be rather painful unless government dramatically improves its effectiveness in collecting the proper taxes. The problem is already showing up in the ballooning budget deficit. The government has just announced that its deficit for the first eight months of the year has reached P210 billion, just P40 billion shy of the already twice-adjusted target deficit for the year. At the rate it is going, the deficit will go well beyond P300 billion by the end of the year.

What is particularly disturbing about this trend is that the widening deficit is not just due to the hiked spending, but due to reduced tax collection as well—even as GDP had continued to grow positively! In January-July 2008, tax revenues had reached P602 billion; in the same period this year, it was only P569 billion. If government had at least maintained its level of tax collection efficiency, revenues should have gone up to P611 billion (that is, 1.5 percent over last year’s figure to be commensurate with GDP growth). Meanwhile, government spending has grown from P705 billion last year to P832 billion this year.

What all this means is that government is once again getting deeper in debt, and it is quite likely that the next President will inherit a fiscal crisis similar to what we found ourselves in just a few years ago, and which took the infamous EVAT to save us from. We can only hope that our next President will manage to get us out of this impending problem without again penalizing honest and obedient taxpayers with even more and higher taxes—while letting the traditional evaders continue on their merry way.

Comments welcome at chabito@ateneo.edu. –Cielito Habito, Philippine Daily Inquirer