Economic recovery with long term objectives intact

(Continued from last week)

The program of economic recovery that sustains the country’s long term economic directions is the challenge confronting us now . It is easy to fall into the trap of fulfilling only ameliorative intention.

Unless a sensible program of return to growth and to long-term objectives is kept, there is danger that problems of poverty and economic decline could worsen. That must be avoided.

Two deficits: fiscal and international payments. Two deficits of large proportions loom that economic managers must address if they are to manage a reasonable economic recovery.

The first is a fiscal deficit in the budget to finance large, unexpected subsidies. These are the sudden scaling up of social amelioration expenditures to counter the loss of incomes and displacements of workers and businesses. This is largely raising of cash-and-food programs, emergency wage subsidies, including new expenses to administer them for those who need help.

This unexpected rise in consumption expenditures in the budget happens in the midst of suddenly dropping tax and revenue incomes of the government.

Second is a Balance of Payments (BOP) deficit. Indeed, this is not yet easily and fully quantified, but will likely be large. The world pandemic has uniformly reduced economic activity across the world, leading to huge drops in traded goods and services. This was further aggravated by the unresolved trade war between the large economic powers. Fighting the pandemic will also raise the need for new imports related to health and medical materials.

The COVID-19 pandemic has threatened the stability of OFW remittances. They will fall. For how long and by how much would depend on how soon the world economy recovers. For now, some 90,000 OFWs are affected with job loss. Many linked to tourism services have already lost their jobs. Some of them would have to be rescued which requires additional government spending.

The two major pillars of strength of the economy, OFW remittances and services and BPO services have suddenly been directly hit by the pandemic shock.

To meet the twin deficits. The government is poised to access support from emergency credit assistance from the multilateral institutions to provide a lifeline to the problems facing the recovery program.

Support from the ADB and World Bank are being planned. The ADB program provides a loan of $1.5 billion and the World Bank, $0.5 billion. IMF assistance could be needed.

These are likely to be quick disbursing that would go toward helping government programs (to be counter-parted by domestic effort) thus augmenting the social amelioration programs in addition to financing the economic recovery.

It is important to emphasize that the additional resources are being made available as loans. In due time, such loans are extended with the prospects that they also have to be serviced and paid.

This means the loan should eventually induce programs that adds to the net productivity of the economy. They must help return the economy to growth.

There’s the rub! The loans are lifelines to enable economic growth. Return to growth means raising the nation’s capacity to produce new production and broadening more economic and industrial opportunities.

Bold and meaningful economic reforms.  There are reforms that are cosmetic and reforms that are deep and meaningful.

Our leaders must opt for meaningful reforms – the ones that will move the nation’s economy in step with the successful economies in the world.

Will they be up for the challenge?

Tax reform. A few meaningful reforms have of late been made. But they still are not enough. Along the tax front, the country had been caught with a slow-paced legislative work on the Phase 2 of TRAIN (Tax Reform for Acceleration and Inclusion) reforms.

This is the one that known by the other acronym, CITIRA (the proposed Corporate Incentives and Investment Rationalization Act). Passing the CITIRA will reduce the corporate income tax and align the investment incentives affecting domestic and foreign investments.

This delay has caused uncertainties in the climate for FDI (foreign direct investments) attraction in 2019. That uncertainty saw a lot of distraction in new investments and commitments into the country as well as departures and closure of some FDIs already in the country.

A companion to this act is the one designed to simplify different forms of capital taxation. The tax rates and bases of different forms of capital income are put under a more harmonized tax structure to improve tax administration as well as promote better financial intermediation. This is the reform on the taxation of passive capital income or PIFITA (the proposed Passive Income and Financial Intermediary Act).

High priority to infrastructure projects. The priority given to the construction and early finish of infrastructure investments should continue. It was a pity that the lockdown included their temporary stoppage too.

Not only do they create jobs. They are the key toward raising the nation’s capacity for improved economic capacity. For decades, infrastructure investment has lagged in the public sector, creating a lot of unnecessary bottlenecks to progress.

Moreover, the construction activities are generators of jobs on sites. They also create multiplier benefits to additional employment because each construction job is connected to a supply chain within the rest of the economy.

To speed up the nation’s infrastructure program, some reliance on PPP (public-private partnership) arrangements in addition to traditional channels of project financing would need to be strengthened.

Two very important reforms. Two major reforms that are extremely essential decades ago are more needed now.

Unfortunately, it takes far-seeing leadership to understand their full and beneficial implications. These have been difficult reform issues for the reason that they are easily subject to narrow and petty interests.

There is much more consensus about their desirability, but political leaders keep holding them down. To make great headway toward growth in jobs and economic diversity and strength, these reforms are needed now more than ever.

These two reforms are (1) Amending the restrictive economic provisions in the Philippine Constitution; and (2) Improving the labor market by creating greater flexibility in hiring of labor.

My email is: [email protected]. For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.p h/gpsicat/