The Surplus Fetish

Both the economics and the politics of current fiscal policy seem flawed.

Yesterday the Department of Finance trumpeted the news that the government in April posted the largest fiscal surplus in 25 years. The PDI reports today that

The Aquino administration posted a budget surplus of P26.26 billion in April… more than 10 times the P2.6-billion surplus a year ago, Finance Secretary Cesar V. Purisima announced Monday.

The fiscal performance for the month of April brought the record for the first four months to a surplus of P61 million, documents from the Bureau of the Treasury showed.

Good news, right? To use a popular phrase, the government seems to be “living within its means.” This is certainly the impression DoF wants to create. After last year’s poor fiscal performance led to a 6.3% of GDP blowout, Finance officials seem fixated on reining in the budget once again this year. So this should come as a bit of a respite from the constant talk about deficits for them.

Unfortunately when one digs deeper into the figures, a very unappealing picture emerges. Let us start off with the January to March figures for 2011. According to the department’s official website, expenditures for the first quarter declined by 12.7% compared to the same period in 2010 (Php349 B in 2011 v Php400 B in 2010).

You might argue that this Php 50 billion “underspend” was due to the elections last year and so you might be excused for thinking that costs would recede to normal levels in a non-election year. So what were the programmed expenditures for the first quarter of 2011? The answer is Php431 billion. That means that the real underspend amounts to Php82 billion!

Now why should that be shocking, you might ask. Well, consider it from the point of view of program recipients not receiving their promised benefits or public infrastructure projects that did not get funded in the first quarter. Budget experts will tell you that the non-rainy months in the first semester are critical for infrastructure projects. This is especially true this year with the early rains coming in May.

If a government is unable to spend its budget in a timely manner, it speaks unfavorably of its abilities in fiscal management. This government credited itself with getting its first budget approved by Congress early prior to the start of the year. It had plenty of room to get its ducks lined up to see spending out the door. One would expect a new administration to be quite anxious to see this happen to differentiate itself from the previous one.

Unfortunately, that didn’t happen.

From reform budget to deformed budget

The government got itself “back in the black” by contracting expenditures (experiencing “strong yet below-target revenues”). The government under-spent 18.8% of its programmed budget and incurred a much smaller deficit in the first quarter amounting to a mere Php26.2 billion down from the expected Php112 billion (note: that is why it’s January to April surplus was 61 million after posting a surplus of 26.26 billion during the fourth month).

Was this to paint a rosy picture for:

  • the bond market?
  • credit rating agencies?
  • the public at large?
  • all of the above?

One wonders at this point, what has happened to the “reform” budget? Has it turned into the “de-formed” budget? This lies at the heart of its “credible commitment” problem.

Indeed for the so-called economic managers in charge of steering the course not only of the budget but the economy at large, does this approach seem rational? Or have they been overtaken by their passions, influenced by the fetish for surpluses?

This not only makes for bad policy, it consists of poor politics as well. Not only will the government not contribute to the economic and social infrastructure needed for a thriving economy, if it seeks to pass new revenue measures next year, it will be undermined by the false impression created that these new measures are not urgently needed.

The public once accustomed to hearing that the government is in surplus will find it hard to accept the need for new taxes. Indeed, it wouldn’t make sense to the ordinary man on the street reading these news reports.

Once again, the story the government intends to weave will somehow get it entangled down the track because it does not portray the true picture. This is not what you might call “strategic communication”. If it wants the public to become apprised of the real situation concerning the structural deficit in our budget, it needs to allow spending to commence as it should.

By accepting poor policy and misreading the politics, the benign one’s fetish with surpluses could prove detrimental to the country in the end.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy ( and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • 8284

    You fool. Think about your motivations. Let the good story be fanned. Every adb delegate can decern truth vs lies.

    ADB knew gloria nearly sold the whole philippine patrimony….like you.
    Help your country for a. Change. Contribute.

  • Manuel Buencamino

    Well, the administration believes in doing things right. So it had to review previous contracts to see if they were on the up and up. And then it had to put systems into place to make sure that future contracts would be on the up and up. Now things are falling into place so I expect public spending that is on the up and up to go up and up soon.

    You know when you take over management of an enterprise that has been run to ground, where all the systems have been cast aside, the most prudent thing to do is to exercise due diligence before anything else. You cannot go in there with a presumption of regularity when you know that the Mafia was running the place before you took over.

    • True, but they had six months in 2010 to prepare for 2011. That is ample lead time, don’t you think? We shall see if the pattern continues or corrects itself as you predict.

      The problem however is that we have already entered the rainy season. Not much construction can take place during this time.

      But to be fair, this type of fiscal slight of hand happened under the Inglorious One too. Another practice which the Benevolent One seems to have continued.

      • Cocoy

        As far as i understand the situation, no one could really know how bad it was until they got inside and poke through.

      • That’s true. I don’t dispute any of that.

        All I am saying is, given that the administration had six months in 2010 to review all of these contracts, it could have been more prepared this year if indeed that is the real reason why expenditures were held back.

        For me the subtext of the announcement is that Daang Matuwid is working and that the president was/is right to rule out new taxes. It could be a prelude/setting the stage for the narrative of the president’s second SONA.

      • Manuel Buencamino

        “True, but they had six months in 2010 to prepare for 2011. That is ample lead time, don’t you think?”

        How long should due diligence take for an enterprise of this size? I say give him until Dec 2011 and then we’ll see

      • The essence of Zero Based Budgeting is that you start from zero projects and work your way up. So only contracts and projects deemed above board get loaded on to the expenditure program.

        Diokno provides a more detailed picture of the projects foregone in today’s Businessworld: farm to market roads, irrigation, school buildings and health projects. The amount of employment foregone at a time when unemployment and poverty is rising.

        This is the Austerity of Hope in my opinion.

    • UP nn grad

      Bottom-line (and it actually makes sense from a clinical point of view) Presi-Noy took away budgetted money so he can claim that the budget deficit is improving. The political side of the calculus is that the money was taken from farm-to-market, schools and other rural projects. One side of the mouth said “..K-12… will help the children”, the hands dipped into the pool of money and took money away.

      Repeat — makes sense — holding the budget deficit is a GOOD.

      You’ll see it in econ textbooks and treatises. But doy, you seen any books about BFF’s in those textbooks and treatises? Nada, right?!!! Ganuon lang iyon.

      Pick your poison… too bad ang walang boses… lulon na lang.

      • UP nn grad

        The picture quite graphic. When presiNoynoy talks to Makati Business Club, he says “No New Taxes”, he also says “Look, No Hands”. He keeps his hands raised so Makati-Dudde audience see for sure the gobyerno-hands not dipping into any Makati-Dude wallet or checkbook. No New Taxes — cool. Like the guy with glass-concrete mansion can’t afford to pay extra taxes, but a promise is a promise is a promise, whacha in power for, Best-Friend-Sir?!.

        When PresiNoynoy says K-thru-12 / infrastructure/provincial airports / clinics (see his campaign promises for health and education)…. people listen to the jaw yakking away. I can hear benign0 kibitzing — “Sayaw!! Sayaw pa!!!” — provinces not noticing the hands dipping into approved budget.

        • UP nn grad

          mga IGI-DI-YOT, tulad mo!… sabi ni girl friend.


          • UP nn grad

            mga igi-di-yot pero mga mababait… sitting ducks. I said. Sitting ducks… just like before, mukhang Bumalaka-bumalaka pareho pa rin, huwag naman sana —- different faces, huwag naman sanang pareho pa rin because the sitting ducks ay lulon na lang ang pag-asa o kaya may makatrabaho sa Egypt o sa Lebanon o sa barko! One Big Fight! Bumalaka!

    • J_ag

      A breath of fresh clean air at the Agriculture Department. No fuel subsidies for the famring and fisheries sector.

      Why? because the DA does not have accurate data on farmers and fisherman.

      Can you imagine that? No wonder the Daang Matuwid is finding out that whatever is left of the bureaucracy is skeletal.

      Across the board the government is impotent.

      In another year the preparation of the mid term eelctions is going to start and after that period the run for the new president is going to begin right after the elections in 2013. PNoy will be a lame duck by then. Jinggoy will be in a good postion to run. Watch him in the next couple of years.

      • UP nn grad

        … wait… the Malacanang line is “… the DA does not have accurate data on farmers and fisherman because of the previous administration.” Do not forget the line “””BAD-BAD-BAD— the previous administration. Noynoy and BFF’s — castrated — because of Pandak-GulllLLL-OOO-Rrrya..”

      • GabbyD

        what kind of information on farmers/fishermen do you think they should have? why would they have that?

      • UP nn grad

        The full story, though, is this — Noynoy’s BFF’s (these are good BFF’s — bureaucrats/technocrats, as opposed to “let’s go target shooting, sir!!!”-BFF) designed a program specifically for farmers and fishermen. When these bureaucrats concluded that they can’t really target the cohort, Malacanang handed the money to the poverty-programmes (from the Gloria days). So needy farmers and fishermen still get pesos. Kariton-pushers and pedicab drivers, jueteng-runners and mga tindera-sa-palengke — some get money, too.

        At least with this particular pool of money, Malacanang still released the funds (Hep-hep-hep hooray for Noynoy, fabilioh!!!)

  • Bert

    Well, there are fiscal managements and there are fiscal managements and there are two possible outcomes that might result out of that fiscal managements-deficits and surpluses.

    Doy seems to favor the the former.

    History, specially the most recent one, has teached us some lessons already.

    As to whether which between over-spending and underspending/deficit and surplus, are detrimental to the country in the end, we’ll see.

    Not to mention that the corruptors and the grafters are waiting in the wings.

    • Bert, what I favor is budget transparency and sustainability. That means if we are structurally in deficit, we need to fix the problem, not avoid it through “expenditure contraction” because our budgeted spending on social and physical infrastructure are low as it is. With contraction, even more so.

    • UP nn grad

      Bert: do not forget that there are corruptors and grafters in place …. inside the henhouse. Puwedeng-puwedeng magpayaman habang nasa loob… sa iba nga, iyon lang ang alam na paraan. This ( carnivores inside the henhouse ) is why BFF-number-One has to start saying BFF does not mean diddly-squat kung ubod na ang nakurakot.

      • Bert

        Oh, sure, UP n, you’re absolutely correct, there are indeed carnivores still in the henhouse, actually we’re all carnivores, whether we’re in or out of the henhouse, so they say, heheh. But, you know, it’s really up to the farm owner/overseer if he’ll just look on and do nothing when the carnivores started devouring the chickens. We’ll see.

        • UP nn grad

          and your reply once again shows that ProPinoy-regulars — some of them — are not paid hacks.

  • GabbyD

    ” Well, consider it from the point of view of program recipients not receiving their promised benefits or public infrastructure projects that did not get funded in the first quarter. Budget experts will tell you that the non-rainy months in the first semester are critical for infrastructure projects. ”

    huh? the article said that lower expenditures during the time period is due to lower interest expenses.

    –> “The reduction in expenditures was in large part due to a 17.98-percent reduction in interest payments.
    The P22.4-billion reduction in interest payments was attributable to the Department of Finance’s liability management program, which managed to stretch maturities on loans to as long as 25 years.”

    • The 22.4 billion peso interest savings in the article apply to the month of April only. The January to March expenditures contraction of 81.9 billion was in part due to interest avoided (10.5 billion), but mostly due to real expenditure contractions (71.4 billion).

      • UP nn grad

        Wow!!! P71.4Billion expenditure contraction.

        With projects he has refused to funded to that amount, surely Persti Noynoy can brag “… I am balancing the budget. No tax increase is needed.”

        May mga napapa-ubo.

        Just like this conversation:
        (1) Tay, ang laki-laki ng butas sa suwelas ng sapatos ko, Tay. Tay, hindi ba sabi mo, regalo mo sa birthday ko ay bagong sapatos. Tay,… tay… nuong Pepbrero pa ang birthday ko, Tay! At si nanay, ubo ng ubo nuon pang Marso, tay, matagal ng kailangan ng gamot.

        (2) The Presidente — Aba, anak, dapat, masaya ka. Tingnan mo iyong ating bank-account sa MakatiBusinessClub-chart-of-accounts, mayaman na tayo, anak!!! Iyong ubo ng nanay mo, maliit na bagay lang iyan.

        NO NEW TAXES, ano ka ba. Tatanga-tanga kasi kayo, hindi ninyo alam “ a promise is a promise.

        • UP nn grad

          Hello, bert. Kumusta mga anak? At iyong mga pamangkin sa probinsiya?

          • Bert

            Hello, UP n,

            Ang mga anak ko at pamangkin pati iyong mga nasa probinsya ay medyo ayos-ayos na ngayon. Medyo nabawasan na kasi mga magnanakaw sa paligid at tumino-tino na mga kasambahay ko. Sa ngayon ina-ayos ko pa mga bagay-bagay sa buhay namin. Matagal kasi akong wala, at iyong naiwan na ale na namamahala sa bahay namin ay napabayaan ang lahat maliban sa kanyang sariling pamilya kaya ang aking mga anak at pamangkin, pati sa probinsya, ay nagkasakit ng ubo at pulmonya, at nagkabutas-butas ang mga sapatos. Mayroon namang pera sa bahay para gamitin sana sa birthday nila kaya lang binulsa na lang ng ale na namamahala sa bahay kasi mas mahal ng ale ang sarili niyang pamilya kaya ang nangyari ay kawawa talaga ang aking pamilya, huhuhuhuhu, hkbi.

            Ngayon kayod marino ako para ayusin ang lahat na santambak na problema sa bahay. Mayroon na akong naipon na perang pampagamot sa mga bata at ginagamot na sila, kapag nakaipon pa ako ng marami-rami ay ibibili ko naman sila ng sapatos.

            Pansamantala kinukulit ako ni Doy na bakit daw ako nagi-ipon ng pera samantalang pwede naman daw akong manghingi sa aking mga anak at pamangkin para sa pambili ko ng mga gamot nila. UP n, pakisabi nga kay Doy na may pangako ako sa mga anak ko na hindi ako hihingi sa kanila dahil kaya ko namang dumiskarte ng sarili kong diskarte para maayos ang problema na hindi na kailangang manghuthut at magnakaw.

            Salamat sa iyong pag alala, UP n.



          • UP nn grad

            malinaw din naman, nauunawaan.

            nauunawaan ko halos lahat pero ang sama ng loob ay eto. May pera nang handa para duon sa mga pobre. Nakatabi na ang pera — nakabudget na.

            Nangako din naman sa amin ah, hindi ba? Hindi naman humihingi ng pambili ng Lexus o Porsche, ang hinihintay dahil naipangako na ay napakasimple — eskuwelahan para sa mga bata. Bakit naman ang pinarusahan ay iyong mga medyo taob sa mga ngayong taon. Ayaw na ngang umangal, pero maunawaan sana naman kung bakit medyo may sama ang loob. Alam ng mga tao hindi sila BFF at hindi naman kami ang kaniyang kainuman at wala nga kaming pambiling pangregalo sa kaniya at sa kaniyang mga ibang kaibigan. Siguro nga, ganuon iyon.

            Best friends forever huwag kakalimutan ang mga kumakamot sa iyong likod….

            lulon na lang… mga walang boses, lulon na lang. Pareho pa rin.

          • UP nn grad

            Ayyy… misteyk, sabi nuong kumpare ko.

            Ang nangakong tumulong, si Gulorrr-yyyaaa ( paa-lis na, hindi naman niya pera, nangako, heh heh eh). Pero hindi naman mga tanga lahat ang nasa gobyerno, may auditor-auditor din naman, at inulit iyong pangako sa budget na huling pinirmahan. Tinalikuran ni Noynoy ang tingin ko…. sabi ng kumpare ko, eh pangako nuong kaaway, huwag akong magugulat, parang panahon ni Cory at yong mga proyekto ni Ferdinand Marcos. Iyon daw … malay ko, hindi ko kilala si Ferdinand Marcos, ang rinig ko, bilyon-bilyon ang ninakaw nuon at maraming namatay sa martial law.

            Ay, nako… mga walang boses nga naman, lulon na lang. Masuwerte na lang marami-rami na rin sa angkan ko ang tinalikuran na ang Pilipinas. Siguro naman, babalik din sila dahil ginto din naman ang pangako ni Presidente, hindi ba?

            Ano nga ba iyong No-New-Taxes… eh bakit iyong taxes na naibayad at nakolekta ng ng gobyerno, kinuha pa ni Presidente. Sabihin mo mang itinabi muna, ganuon din iyon, kinuha pa rin ni perwisyong presidente, anu ba naman ang nangyayari sa Pilipinas?

            Halikinu-kini-kina, Fabilioh, weh!
            Bumalaka bumalaka sisbumba,

            Ari ni Yoh!, Ari ni YoH, rah rah rah.

            One Big Fight!

      • GabbyD

        ah, yeah, so this paragraph makes sense:

        “Budget Secretary Florencio B. Abad, however, said government agencies needed to ramp up spending as P1.09 trillion, or some 66.3% of this year’s P1.645-trillion budget, had already been disbursed.
        “Agencies have a lot of catching up to do,” Mr. Abad said, adding that President Benigno S. C. Aquino III has scheduled a Mid-Year Budget Execution Assessment in July.”

    • Diokno makes an excellent point in today’s Businessworld that this year’s budget actually shrank compared to last, when you factor out interest payments. The 1.9% growth is less than inflation. So it has already contracted in real terms. On top of that the government of PNoy has contracted it further by 19% in the first quarter.

      This is not Daang Matuwid, nor is it the Social Compact. If I were an investor, I would think twice about putting money in the PH. The government is actually contracting the economy.

      It should not be worried about upsetting the bond market too much. The 90-day T-bill rate is less than 1%. It ought to be worried about the equities market which could downgrade our growth prospects on the back of this dismal fiscal performance.

      • GabbyD

        aminado si Abad that the spending isnt happening as scheduled.

      • Oo nga, pero “in fairness” hindi niya kasalanan ‘to. The DBM had already front-loaded the expenditures for the year in the first half. It is the line-agencies that are having a hard time releasing the funds.

        In other words, mahinang bureaukrasya ang may kasalanan. Natutulog sa pansitan. Two possibilities here: either the anti-corruption efforts have been causing delays due to due diligence requirements as MB says, or government inefficiency has prevailed once again.

        This is how a reform budget gets turned into a deformed one. Remember, Congress already approved the budget last year and PNoy signed it. So all these expenditures are authorized. There can be no excuse for the executive to hold back.