Government Finds Itself In A Quandary: Higher deficit or lower growth?

There are only two days to go before the State of the Nation Address (SONA) and the Arroyo administration still has not made up its mind on which bitter pill to swallow: higher deficit or low economic growth.

With the Arroyo administration still quibbling over the numbers, the 2003 budget is not likely to make it in time for the SONA on Monday, as the executive branch rushes last minute changes that would make it "slightly bigger" than the original P780 billion being prepared for submission to Congress.

The national budget was supposed to have been approved by President Arroyo this week but the Department of Budget and Management (DBM) said Malacañang wanted some changes that would likely increase the amount the administration would be asking from Congress.

Budget Secretary Emilia Boncodin said yesterday that the president’s approval of the 2003 budget has been rescheduled for next week after President Arroyo directed the Development Budget Coordinating Council (DBCC) to draw up different scenarios.

According to Boncodin, discussions were still going on in the Cabinet about whether the administration would prefer a higher deficit with higher expenditures to fund growth targets or a lower deficit with lower expenditures leading to lower economic growth.

"There is still a philosophical discussion going on in the Cabinet, it hasn’t been resolved yet," Boncodin said. "Anyway, it won't be the first time that the budget won't be ready for the SONA and the executive branch actually has 30 days to make the submission."

The 2003 budget was submitted by the DBCC to Arroyo early this week but the proposal was tossed back for "fine tuning. There are early indications that the 2003 budget was likely to be "slightly" higher than the 2002 budget.

In 2002, the Congress approved an allocation amounting to P754.3 billion for the government’s expenditure program. Revenues were pegged at P624.3 billion, leaving a programmed deficit of P130 billion.

According to Boncodin, the concern is whether there will be enough money to finance the budget, and if there will be enough expenditures to support sustainable economic growth.

The same concern has been repeatedly aired by the International Monetary Fund (IMF) which has been trying to get the Arroyo administration to consider the possibility of imposing new taxes in order to expand its tax base and curtail the steady decline in its revenue stream.

According to the IMF, there is only so much that the government can do by cutting its expenditure program without sacrificing critical development programs intended to spur economic growth.

Boncodin said the same concern is now being discussed in the cabinet against the backdrop of a runaway deficit that would most likely force the administration to overshoot its target by as much as 10 to 15 percent for the whole 2002.

Although the country’s economic fundamentals are strong enough to support such a deficit level, missing the target will send a negative signal to the country's creditors and will make future borrowings more expensive if not totally inaccessible.