Philippines: Rising cost of government

After weeks of saying the BSP is being very cautious about raising the interest rate despite the weakening peso, it surprised everyone when it raised it by 75 basis points last week. It was in reaction to the US inflation rate zooming to 9.1 percent, fueling speculations US interest rates could rise by a full percentage point later this month.

BSP Gov. Philip Medalla must have surprised even Finance Secretary Ben Diokno with his move. He obviously doesn’t want to be seen as being behind the curve.

Medalla and Diokno had been defending their cautious strategy by saying they do not want to kill our economy’s budding recovery by raising interest rates. In any case, they said, they are not losing sleep over the peso’s continuing decline vs the US dollar.

But currency analysts and traders continued to predict the peso’s fall, perhaps challenging the BSP to blink first. The peso’s decline accelerated over the last two weeks to break the 56 to the dollar mark.

The public impression of the weak peso’s huge impact on consumer prices was rejected with the claim that the pass-on effect is less than one percent. Prominent economists launched an “information campaign” to convince the public the weak peso is heaven sent.

But can you imagine the psychological impact of the peso breaching 60 to the dollar within a month or two? And what about the actual damage to consumer prices and the cost of running the government?

Diokno has a headache as it is, trying to bridge the gap between the money needed to run the government and the potential revenues that can be generated through taxes. Borrowing looks like a last desperate measure to take because we have overborrowed under Duterte.

Finance Secretary Diokno has assured the first priority of the Philippines is to meet its debt obligations. Principal payments for pandemic-related borrowings are due from 2023, according to former finance officials.

So, the one big obvious option left is to cut the cost of running the government. President Junior’s economic team was reported to be reviving earlier proposals to “rightsize” the bureaucracy to get rid of redundant and inefficient government bodies — a move seen to free up some P14.8 billion in savings.

Good luck trying to fire the unemployable people who are in government through political patronage.

It had been reported that spending for personnel services jumped by 30 percent in the past decade as the government employed new workers and paid for salary increases. We are not even talking about potential liabilities to cover pensions of uniformed personnel.

The Department of Budget and Management has backed this proposal to thin out the workforce in government to make it more “lean, efficient, and responsive.” But it clarified the next day that this does not mean rendering some current bureaucrats jobless. They can apply for jobs elsewhere in government. It seems political pressure just killed this initiative.

A friend who was a former investment banker wrote to me to point out why we should act now on our gigantic national budget deficit.

“Against a national budget of P5 trillion, we have an income of P3.4 trillion. That’s a P1.6 trillion deficit. I looked at our sources of income described in the budget and cannot find any tax that can be raised to possibly make a dent in the deficit.

“The only tax change that could be implemented and collected quickly would be a hike in VAT. From the current 12 percent if one threw political caution to the winds and raised it to 15 percent, that would raise about P100 billion extra.

“This would still leave a deficit of P1.5 trillion. Tell that to all the bright, but apparently arithmetic-challenged people in government (Congress, NEDA, DOF) who think we can tax our way out of this deficit.

“By the way, rising interest rates will almost certainly widen the deficit even further. The budget department estimated our 2022 debt service (interest costs only, not principal) at about P500 billion. That estimate was made when the US Fed’s overnight lending rate was less than 0.2 percent. Today it is 1.6 percent (eight times more).

“In the meantime the peso has depreciated more than 10 percent compared to July 2021, so dollar interest costs will increase in peso terms. Depending on how our maturities are structured, 2022’s debt service might be significantly more than the P 500 billion that was forecast when the budget was being prepared, maybe P100 billion to P300 billion more.

“In brief, no amount of fiddling with the income side is going to prevent a catastrophic deficit for 2022. We have to behave like a prudent household. When income is insufficient, we should cut our expenses, at least with an eye toward 2023 (the 2023 budget is in the process of being prepared now or should be).

“Here are the expenses that can be cut:

“Useless government bodies (salaries and operating expenses) – with determination and ruthlessness, P 500 billion (though it will create a social problem as useless functionaries have to find other income).

“Infrastructure for useless roads, useless bridges, useless airports that will still be managed by incompetent government officials, and the doomed Metro Manila subway – estimated P700 billion easily cancellable or half of the planned expenditure.

“The subway will cost P 100 billion a year in outlay for the next several years, after which it will, with 100 percent certainty, operate at a cash loss that may also equal P50 billion to P100 billion a year.

“The others are ‘cast your bread upon the waters’ projects with no clear financial or economic profit in sight. The only thing clear is kickbacks for all the officials concerned.

“That sums up to P 1.2 trillion. Cutting these from our budget is the ONLY way to meaningfully address our deficit. Cutting them will be HARD, but raising income is simply IMPOSSIBLE, and doing nothing while hoping the problem will go away is simply UNTHINKABLE.

“We have to take action now, voluntarily, before we get into a spiral that takes us down the same path as Sri Lanka.”

Source: https://www.philstar.com/business/2022/07/18/2196084/rising-cost-government