3% deficit-to-GDP ratio unlikely to be achieved

MANILA, Philippines — While possible, the target of incoming finance chief Benjamin Diokno to bring down the share of the budget deficit to gross domestic product (GDP) may not be a walk in the park as the new government will have its hands tied due to the pandemic.

In its latest economic monitor, international think tank Pantheon Macroeconomics said Diokno, who serves as the central bank governor until June 30, may not be able to fulfill all his promises once he takes the helm of the finance department.

Earlier this month, Diokno said the economic team of president-elect Ferdinand Marcos Jr. targets to bring down the deficit-to-GDP ratio to three percent through a fiscal consolidation plan.

“Our target is that by the end of the term of president Marcos, the deficit-to-GDP ratio will be in the neighborhood of three percent. That is where we were before the crisis,” Diokno said.

While the goal is possible, Pantheon Emerging Asia chief economist Miguel Chanco argued that “Diokno appears to have set some unrealistic expectations on how this target will be reached.”

“This looks to us like an admirably realistic goal, one that is unlikely to necessitate any shock therapy in the short run that risks severely disrupting the economy’s recovery,” Chanco said.

“But he has tied his own hands, pledging both not to raise tax rates or wield a knife to the government’s spending plans,” he said.

The country’s deficit-to-GDP ratio swelled to a record 8.6 percent last year as the government spent more while failing to collect enough revenues due to the pandemic.

The Department of Finance targets to trim the deficit-to-GDP ratio to 7.7 percent.

Before COVID, the ratio was at 3.4 percent. As of the first quarter, it improved to 6.4 percent.

“Ultimately, his hope is that a recovery on auto-pilot and steps to improve tax administration will be enough to realize this path toward fiscal consolidation,” Chanco said.

“We reckon that one of Diokno’s red lines will have to break, with expenditure likely to see most of the adjustments,” he said.

Chanco maintained that Diokno would be constrained by the need to unwind the pandemic-era blowout of the budget.

The Marcos administration will be facing a challenging fiscal position given ballooning debt and elevated inflation, among others.