Drag

Delay in the passage of the 2019 national budget is already costing all of us.

Budget Secretary Ben Diokno is not releasing the pay hikes for state workers due at the start of this year. Without an enacted budget, he says, releasing the additional pay will be illegal.

The delay will tamp down consumer demand at least for the first months of the year. This will be  drag on our economic performance.

What would be incurable is the delay in the implementation of key infrastructure programs brought about by the non-enactment of the 2019 budget. Diokno is trying to minimize the damage by appealing to the Commission on Elections to exempt the strategic infrastructure projects from the usual election ban.

Meanwhile, the bicameral committee trying to reconcile the House and Senate versions of the budget bill is still at work. The Senate is trying to reallocate or altogether remove an estimate P70 billion in congressional insertions that the senators consider to be pork. The congressmen are trying to restore as much of it as politically possible.

The bicameral committee could go on for a few more sessions. An obviously exasperated Senate President Tito Sotto suggested we give up on the process and simply reenact the 2018 national budget. Doing so, however, will be disastrous for the domestic economy. Diokno estimated in a recent forum that reenactment of the budget could lop off as much as two percent from our 2019 GDP growth.

6 percent

Our economic managers are keeping 7 percent growth a “fighting target.” The greater probability, however, will likely be less than that.

Two credit rating agencies see strong headwinds keeping our economic growth in the vicinity of 6 percent. The lower estimate is due largely to global factors adversely affecting our economic performance. Among these are: lower trade volumes attributable in part to the looming trade war; the incalculable effects of a messy Brexit not only on Britain itself but also on the entire Eurozone; the weaker growth expected of China, heretofore the major growth driver for the global economy; and, softening of demand for key emerging economy exports.

Because of the lag effect, the interest rate hike imposed by our monetary authorities last year will likely fully affect the economy this year. Higher interest rates, prompted by the need to push back in inflationary surge, will have a cooling effect on domestic economic activity. That will add to the factors slowing down our economic growth.

On the other hand, we do expect a substantially lower inflation rate in the next few months. This will help shore up our growth numbers.

The BSP expects inflation to fall within the 2 percent to 4 percent target range. Inflation rate for all of 2018 was 5.2 percent due principally to the spike in global oil prices and food supply issues in the domestic economy.

 In the face of inhospitable global economic conditions, we have to rely largely on domestic counter-cyclical measures to ensure a healthy growth rate.

A 6.1 percent GDP growth rate is not bad at all. It is higher than what the mature economies can manage. But for an emerging economy such as ours, a higher growth trajectory means a lot in terms of palpably reducing poverty incidence and setting the foundations for investment-led growth.

On hindsight, the best conditions for high growth were present in the years from 2012 to 2016. During this period, interest rates were low, oil prices were at rock bottom and the financial institutions were awash with liquidity.

But we had a do-nothing government at this time. The chance to easily move to a higher growth plane passed us. Our opportunity costs were immense.

Strategy

Our present economic strategy is anchored on massive investments in modernizing the nation’s infrastructure backbone.

This strategy is rooted in age-old economic wisdom: investments in infra have the highest multiplier effects on the domestic economy. Building up our infra creates jobs, activates the domestic supply chain, motivates domestic industry to invest in new capacity, improves land values, and promotes an economic dynamic favorable to more inclusive development.

The infrastructure program is the key element in our breakout strategy. It is an ambitious program that will require trillions in investment. Those trillions will somehow have to be raised both through improved revenue flows and affordable international financing. The comprehensive tax reform program coupled with strong support from international finance institutions makes this possible.

Investing in infra also provides us the best possible counter-cyclical measure to offset a more hostile global economic environment. Unfortunately, investments in infra depend on a timely and far-sighted budgeting process.

The delay in the passage of the 2019 national budget should be assessed in this context. While our legislators squabble over congressional insertions and hidden pork, an otherwise workable strategy to escalate our domestic growth is held in abeyance.

So many analysts have claimed our politics is toxic to our development. Nothing validates that claim more than the present situation where battling each other in pursuit of narrow interests while the national budget is held hostage.

Reenacting last year’s budget is not an option. We need a new spending bill that supports the new investments in infra important to keep our growth going.

One reason the budget deliberations are dragging on are claims the spending bill is “pork laden.” To be sure, there is a need to clean that up and prevent scarce public funds from being waylaid by smart politicians.

But the costs to our growth momentum might have surpassed that concern.