MY TWO CENTS’: The Truth About the Budget Deficit

My Two Cents by John Tria
My Two Cents by John Tria

A lot of talk has been generated about the recently reported budget deficit.

The Bureau of the Treasury (BTr) reported Wednesday that the national government registered a P­­­­­105.9 Billion deficit for January to April 2018 on the back of strong revenue collections in the face of a surge in government spending courtesy of economic pump priming activities like Build Build Build.

While it may be too easy to prejudge this as irresponsible government spending, itcis useful to view the context: the actual deficit is lower by P61.2 Billion than the P167.1 Billion programmed deficit. This programmed deficit is lowercthan expected, and is a pittance when you look at a 3 trillion peso annual budget.

Moreover, when a government of a rising economy tries to boost the economy, spending is necessary. Government spending is still the biggest mover and shaker in most economies. When we increase spending, a deficit is expected and sbould considered temporary. When it is actually decreasing over time, it is a good sign.

Debt watchers note this because it means that tax collections and new revenue measures like TRAIN meant to plug spending gaps are actually collecting the taxes needed to head off excessive borrowing.

Finance Secretary Carlos Dominguez explains “The reason we didn’t exceed our target deficit is because we exceeded our total revenues by P58.2 Billion as of the first four months of 2018. Tax revenues from January to April was impressively higher than last year’s collections for the same period,” Dominguez said. “We have to put this in the proper context.”

The reality is that deficit spending is the regime in almost all economies seeking to jumpstart growth by boosting consumption and investment.

Unless they can really collect impressive taxes, developing countries that report a budget surplus are at a risk of underspending on critical things like infrastructure, which the World Bank broadly defines as spending less than 5% of total Gross Domestic Product.

In the past administration this was the case, and the criticism levelled against it which observers note was the main reason for persistent inequality and a poverty level that barely reduced in its six years in power.

Its economic growth numbers were impressive but could have been better if poverty was reduced and infrastructure improved to spur even better growth. Credit ratings, however, were good and this helped companies borrow more since credit was cheaper.

However, this past practice of avoiding necessary spending needed to be corrected if an inclusive economy were to be achieved. Underspending might make your books look good, but can cause an economy to become less inclusive.