Government plots spending catch-up as 2019 budget delayed

MANILA, Philippines — Without a fresh budget to fund new projects, 2019 started at a slow pace for the government.

To make up for the slow start, the government implemented a catch-up plan to meet its spending target for 2019.

Despite the setbacks, the Department of Budget and Management (DBM) and the Department of Finance (DOF) remained optimistic that the government would meet its spending target for 2019.

Disagreements had erupted between the House of Representatives and the Senate in the last few months of 2018 over alleged “insertions” in the proposed 2019 budget.

Economic managers at the time warned that failure to pass the budget, and in turn, relying on a reenacted 2018 General Appropriations Act (GAA), would only cause disruptions in the progress of the government’s massive infrastructure program and capital expenditures.

The DBM, in particular, said GAA provisions on capital outlays cannot be reenacted, as projects funded in the prior year are already deemed obligated.

The agency also explained that no new projects can be authorized to start without authority from Congress, with a few exceptions such as large projects covered by multi-year obligational authority.

Still, the deadlock between both chambers of Congress delayed the approval of the 2019 national budget, which was only signed by President Duterte on April 15, 2019, more than four months later into the start of 2019.

Duterte also line vetoed P95.3 billion worth of projects in the GAA, trimming the 2019 appropriations to P3.662 trillion, instead of the original proposal of P3.757 trillion.

During that four-and-a-half months of delay, the government was forced to operate on a reenacted 2018 budget.

The deferment in the passage of the 2019 budget, exacerbated by the ban on public construction due to the mid-term elections, evidently caused a slowdown in government spending in the earlier part of 2019.

Finance Secretary Carlos Dominguez estimates that these events led to approximately P1 billion in underspending a day.

According to data from the Department of Budget and Management (DBM), government disbursements in the first six months of 2019 amounted to P1.59 trillion, 0.8 percent lower than the P1.6 trillion recorded in the same period in 2018.

This was likewise 7.3 percent lower than the P1.72 trillion spending target for the period.

Infrastructure expenditures, alone, dropped by 11.7 percent year-on-year to reach P311.4 billion, which was also 20.8 percent below the P392.9 billion target. 

Even then, the downtrend in infrastructure lingered until August of 2019.

Finance Assistant Secretary and spokesperson Antonio Lambino said the delay denied the government the opportunity to start some infrastructure projects in the earlier part of the year, which has the best season for construction activities.

“The best time to build is in the first quarter because of the weather. So those projects that should have started in 2019 were at a disadvantage,” he said in an interview.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp. (RCBC), said the slowdown in government underspending – which accounts for about 11 to 12 percent of gross domestic product (GDP) – resulted in slower economic growth in the first half of 2019.

He said economic growth in the second quarter averaged only 5.5 percent, 100 basis points lower than the projected rate of 6.5 percent had the budget not been delayed.

“The 45-day election ban on some of the government’s infrastructure or construction projects until about mid-May 2019 also added to some of the delays in government spending, which also led to slower economic or GDP growth,” he said.

However, Nicholas Mapa, ING Bank senior economist, clarified that the impact of the reenacted budget is not solely to be blamed for slower economic growth in the first half of 2019.

“It has largely been blamed for the slowdown in growth for 2019, but the ill effects of the almost five month delay has been overestimated,” Mapa said.

He said the contraction in government outlays for operating expenses slashed 0.16 percentage point to GDP growth, while public construction also weighed down economic expansion.

Mapa pointed out that the weaker GDP growth this year may be traced more directly to the negative contribution of capital formation, particularly on durable equipment.

“The drop in durable equipment can be traced in part to the budget delay as the government postponed the importation of heavy machinery, but the weakness in investment was noted even in consumer and corporate durable equipment purchases, reflected in poor importation of capital goods and road vehicles,” the economist said.

“Thus, the other part of the 2019 slowdown can be tagged to weaker investment momentum, likely due to BSP’s (Bangko Sentral ng Pilipinas) 2018 aggressive rate hikes,” he said.

Spending catch up plan

Considering these setbacks, the government economic cluster deemed it necessary to craft a master plan to recover from the impact of the budget delay and to enable agencies to meet their spending targets.

For 2019, the government is programmed to spend P3.76 trillion, equivalent to 20 percent of GDP.

Under the plan, key infrastructure agencies, particularly the Department of Public Works and Highways (DPWH) and the Department of Transportation (DOTr), committed to speed up the implementation of their projects for the rest of the year.

For the two agencies to deliver their respective targets, they planned to improve cooperation with other agencies for the faster approval and release of permits and other requirements.

Budget Undersecretary Laura Pascua, in a text message, said the DPWH also conducted early procurement activities and implemented a round the clock construction activity. She said both agencies enhanced their project management and right-of-way acquisition capabilities.

Other agencies, including the Department of National Defense, Department of Education and the Department of Health also assured that they will accelerate their disbursements.

It was also agreed that the government will fast-track the implementation of priority programs, such as the Pantawid Pamilyang Pilipino Program, social pension, unconditional cash transfers and the fuel marking program.

According to Lambino, these catch up measures started to bear fruit in the third quarter of the year.

DBM data showed that government expenditures in the third quarter rose by 17 percent year-on-year to P1.04 trillion. It was also seven percent higher than the third quarter goal of P968.5 billion.

This brought cumulative spending in the first nine months of the year to P2.63 trillion, which is 5.5 percent higher than the level a year ago.

Pascua said underspending also shrank to 2.1 percent, if compared to the disbursement program of P2.68 billion for the nine-month period.

“We expect (growth) to continue in the fourth quarter,” Pascua said. “Based on the projections, we may likely meet the disbursement program for the year. We think that despite the budget delay, agencies did their best to catch up.”

Lambino also expressed confidence that the government may be able to hit – or even exceed – its full-year spending program, especially with the DPWH and the DOTr on track to achieving their respective goals.

He said the DPWH has already disbursed P424.7 billion as of Oct. 23, 58.58 percent of the full-year target of P725 billion.

“Secretary (Mark) Villar assured that the P300.3 billion (balance) was attainable, although very ambitious,” the DOF spokesperson said.

The DOTr, for its part, has spent P43.7 billion as of end-September, with another P57.3 billion expected to be disbursed in the fourth quarter. Lambino said this would enable the agency to exceed the P82 billion goal for 2019.

With momentum already established, Mapa expects spending to remain robust in the remaining months of the year on the back of favorable base effects.

This, together with healthy household spending, a benign inflation environment, and a recovery in capital formation – following the series of rate cuts enforced by the central bank this year – would enable the economy to expand by 6.6 percent in the fourth quarter, he said.

However, Ricafort, for his part, said we have yet to see if the government can truly deliver its commitment to make up for the delays caused by the late approval of the 2019 GAA.

“We have yet to see if there would again be additional or catch up government spending, especially on infrastructure in November and December data, after some slowdown in October,” the economist said.

“Some of the government’s catch up spending could spill over into 2020,” he said.

Going forward, Lambino said the government is confident that there won’t be a repeat of the 2019 scenario by next year, especially with the expected timely approval of the 2020 budget.

“We can hit the ground running at the beginning of the year. Plus the infrastructure agencies have a momentum because they’ve been implementing the catch up plan so they can ride that momentum next year,” Lambino said.