Government to adopt long-term austerity measures to close deficit

Government is determined to close the consolidated public sector deficit in 2004 and the National Government deficit in 2006 but this would mean that austerity measures would have to be implemented throughout the period.

The National Economic and Development Authority (NEDA) said it is still possible to close the gap despite the projected P225-billion budget deficit in 2001, but only if the tax measures planned by govenrment pass Congress this year.

A top NEDA official said that 2001 is the last year that the country could afford to do without the new tax measures which would have to be implemented by 2002 in order to make a difference in time to meet the 2004 and 2006 targets.

The official said the political crisis was resolved early enough so that the after-effects on the economy could still be contained despite the impact of political instability on the foreign exchange rate.

However, the official said this would require the consistent implementation of austerity measures which would effectively rule out new pump-priming activities that could drain the budget.

Past a certain point, the official pointed out that cutting back on public spending would mean slower growth but he said government is optimistic that the private sector would make up for the slack.

According to the official, government could concentrate on high-impact programs that the private sector would not fund but even these projects would have to be evaluated carefully to weed out those that government can’t afford to undertake.

With the country’s finances in total disarray, the national budget deficit is expected to hit to P225 billion in 2001 and economic officials said the Arroyo Administration has little choice but to impose more taxes while implementing deep budget cuts in order to pare it down to manageable levels.

NEDA Director General Dante Canlas told a press conference earlier that the most recent estimates of the Department of Budget and Management (DBM) showed accounts payable and off-budget items amounting to P70 billion from the previous administration.

According to Canlas, there were "below-the-line" items that were not normally counted in the budget deficit but were nonetheless obligations that have to be met through the national budget.

"These are mostly government guarantees for build-operate-projects," Canlas said. "In the Metro Rail Transit project alone, the losses absorbed by the government was already substantial."

Canlas said the Department of Finance (DOF) has already lined-up possible tax measures to be implemented to beef up the government’s revenues, including the possible expansion of the value-added tax and the excise taxes on alcoholic beverages and automotives.

"The previous administration left the finances of the public sector in a precarious state," Canlas said. "The large budget deficit in 1999 and 2000 and the attendant increase in the total debt of the National Government pose risks to our recovery."

Total debt according to Canlas, rose from P1.4 trillion in 1998 to P2 trillion by end-September 2000. Given the country’s low domestic savings, foreign debt also increased from $47.8 billion in 1998 to $52.2 billion as of June 2000.

"The problem with this is that when the government borrows to finance the deficit, it absorbs funds that otherwise would finance private investments in plants and equipment," he pointed out. "This would require the present administration to adhere to a responsible budget deficit-reduction program."

According to Canlas, the Arroyo administration would focus its short-term tax policy to increase revenues through improvements in tax collection but over the long term, more sustainable tax measures such as the expansion of the tax base, would have to be implemented.