Inclusive growth

With inflation slowing to 3.9% in June, Philippine monetary authorities are confident inflation for 2010 and next year will not go beyond its targets. I agree. But inflation should be the least of the new administration’s worries. With the global sentiment turning in favor of deficit reduction and against further stimulus, the risk of reigniting inflationary pressures is far-fetched. For some countries, notably Japan, deflation rather than inflation is their major concern.

Year-to-date inflation is 4.2%. Core inflation, that is if inflation attributable to food and energy items is excluded, is a comfortable 3.7%. Last year, the inflation rates for the months from July to October are unusually low: 0.2, 0.1, 0.6 and 1.6%, respectively.

With low bases, inflation for the next four months may be a bit higher, but not menacingly high. With slower world economy, likely fall in oil and oil product prices, and with modest growth — negative in peso terms — in OFW remittances, the likelihood that inflation would exceed the government’s original target of 3.5 to 5.5% is practically zero.

There is no doubt that the present stance of the Bangko Sentral ng Pilipinas to keep interest rates unchanged is the correct one. Growth — inclusive growth — should be the government’s main concern at this time, not inflation.

Keep the fiscal stimulus going

On the part of fiscal authorities, they have to guard against being too obsessed with fiscal frugality. Zero-base budgeting is a good, but it should not be an excuse for not spending enough during the next 18 months to perk up the weak economy.

I agree with the pronouncement by Finance Secretary Cesar Purisima that balancing the budget is not the priority of the new administration. Balancing the budget by 2013 or earlier is contractionary, considering the government’s limited resources and rising costs of debt servicing. It is an inappropriate fiscal policy in an environment where consumer spending is still weak and private investment is waiting for better times. Public debt, which rose from P2.2 trillion in 2000, is now expected to reach P4.83 trillion by end-2010 and P4.92 trillion next year.

I’m sure the Arroyo administration has left the new administration a hefty bill to pay for her SONA projects. Arguably, many of these projects are large scale and capital-intensive and therefore have failed to create a lot of jobs. How else can you reconcile the fast growth in the first quarter with the worsening unemployment numbers in April 2010?

The lesson here is that the Aquino III administration should not spend too much time reviewing what happened during the last two minutes of the Arroyo government. I agree that it’s important to establish a baseline — where the Arroyo administration ended and where the Aquino III administration started; what was transmitted and what was inherited. But it should also come up with its own employment generating programs quickly. The turnover should have been seamless and swift.

For example, it is important that the problem of joblessness be addressed as soon as possible. It should start with focusing on the maintenance of the existing network of roads and highways. There’s ready money for this — the P10-billion road users fund (or what’s left of it for the rest of the year).

Investing in road maintenance is a no-brainer. As a society, we do not pay enough attention to the maintenance of existing roads and bridges, and almost all types of infrastructure, facilities, and buildings. The fact is that politicians have a distinct bias for new construction. Why? Is it because there is more money to be made in new construction than in road maintenance? Or is it because one can’t name an existing road or bridge or school after one’s parents or spouse for the reason that it already has a name? But one can certainly give a new project a name — usually after the politician’s relative.

There is another strong reason why honest-to-goodness maintenance should be the focus for the near term while the Aquino government is reviewing ongoing and pipeline projects. It is that, in road maintenance, very little is lost in right-of-way (ROW) acquisition. Most large-scale projects such as airports and major highways allocate a large part of the budget for ROW acquisition. But ROW acquisition doesn’t create a lot of jobs — though it makes rich people richer and corrupt politicians and bureaucrats happy.

Wanted: A doable deficit reduction program

I estimate that the window for deficit spending in order to perk up the still weak economy will be in the neighborhood of 18 months. By 2012, the budget-to-deficit ratio should start to taper off.

What the Filipino people, foreign investors, and creditors would be looking for is a credible and doable deficit reduction strategy. Such strategy should form part of a medium-term fiscal plan that reflects the new spending priorities and sources of financing for the Aquino III administration.

The six-year fiscal plan, I’m quite confident, will require fundamental tax reform. -Core — By Benjamin E. Diokno, Businessworld