WB: Growth may flatten due to Noy’s underspend

The World Bank (WB) expects a low growth scenario for the economy this year and next mainly as a result of the still weak global market and largely due to the Aquino administration’s underspending of the budget.

The WB in its latest Philippine Quarterly Update said its growth forecast this year was reduced to 3.7 percent, adding that significant downside risks could push growth further down to as low as one percent.

It cited weak government spending for the downscaled growth forecast for this year. “National government spending remained weak in the third quarter despite some efforts to accelerate disbursement,” it said.

The WB report stated spending declined by 5.3 percent through October, resulting in a budget deficit of only 0.8 percent of GDP as opposed to above three percent of GDP in the same period last year.

It said that growth could fall to

around one percent similar to 2009 with a significant contraction in private and external demand.

This, however, can be cushioned by a large enough fiscal stimulus equivalent to around 1 to 1.5 percent of GDP (as was the case in 2009), according to the WB.

The fiscal stimulus and a possible postponement of tax policy reform given the uncertainties would lead to a higher deficit above three percent of GDP in 2012 before gradually declining towards two percent of GDP beginning 2013.

While the temporary surge in deficit is broadly sustainable, efforts to raise revenues, especially from excise taxes, are very much needed to ensure adequacy of future fiscal space in the event that a prolonged global slowdown requires further expansionary policy, it said.

As in 2008-09, the level and quality of employment would be adversely affected but these might not be fully reflected in official statistics, the report added.

Manufacturing jobs will likely take a big hit but total employment rates may not change much given net job creation in the informal sector. At the same time, the underemployment rate may not rise as workers take in more jobs to maintain household income levels, it said.

Capital outlay was 30 percent below programmed levels and priority Private-Public Partnership (PPP) projects have stalled given government decision to review all projects for efficiency and cost considerations, it said.

The WB said hitting the maximum 3.7 percent growth projection still hinges on the successful implementation of the government’s disbursement acceleration program and an acceleration in private consumption and investment, which its said have began to grow faster in the last quarter.

“In addition, lower growth in the fourth quarter of 2010 should provide the added base effect boost,” it said.

Significant downside risks largely stem from the weaker external environment and less than satisfactory public spending, according to the WB.

The WB added that growth next year is expected to improve to 4.2 percent in line with regional forecasts but the growth projection hinges on improvement in exports, acceleration of PPP projects and private sector investment, and a full recovery of public spending with possibly a medium-size fiscal stimulus.

The WB report added higher public spending is expected to be financed by higher tax revenues stemming from improved tax administration and higher excise taxes by next year.

“A quicker resolution of the Euro Zone’s debt crisis would bode well for the Philippines in terms of higher exports and foreign direct investment (FDI) flows,” it added.

If the fiscal turmoil in Europe deteriorates and results in another recession, the Philippines could moderate its impact with appropriate fiscal and monetary stimuli, it said.

It added that the Aquino administration’s efforts to improve transparency and accountability in public spending is largely responsible for the temporary setback in economic growth.

It said, however, that once institutional reforms are in place, spending is expected to fully recover at cost-effective levels with more resolute impact on the country’s growth and development.

“On public financial management, the government remains committed to improving the efficiency of public spending,” it said.

It noted that to raise more revenues, the executive has submitted a bill to congress proposing to raise excise taxes of tobacco and alcohol products.

“Through a gradual alignment of tax rates with inflation and a gradual shift from the multi-tier system to a unified system, this reform is estimated to generate 0.6 percent of GDP in the first year,” it said.

The bill proposes to earmark a portion of the revenue intake to the government’s universal health care program. To plug future leakages in tax revenues, the executive is working with congress to pass the fiscal responsibility and fiscal incentive rationalization bills.