Budget 2013: The Bottomline

If the State of the Nation Address of the president is meant to rally the country behind him, the budget statement is meant to inspire confidence in markets both financial and political.

As far as this year’s budget statement goes, does it draw confidence from its intended audience? Who are the winners and losers? This being an election year (the midterm elections are scheduled for May 2013), are there any red flags or curious things to watch out for?

Let us first examine the figures.

Beginning with the bit aimed at financial markets, the government with its fiscal program for 2013 seeks to spend just over two trillion pesos, a jump of about 160 billion or 9.9% from 1.84 trillion in 2012. This level of expenditure will be financed by revenues that are expected to rise from 1.6 trillion in 2012 to 1.8 trillion in 2013, a growth of 14%, and borrowing or deficit spending that is set to go down from 280 billion to 240 billion in the same period, a decline of about 14%.

Expressed as a share of GDP (the value of all goods produced within the country), expenditures will rise from 16% of GDP in 2011 to 16.9% in 2013. Revenues are also set to rise from 14% of GDP to 14.9%. The deficit is set to go down from 2.6% of GDP in 2011 to 2% in 2013.

Relative to the budget position of rich countries, the fiscal program in the Philippines is sure to inspire confidence in bond markets as the deficit-to-GDP ratio will be less than half that in the OECD whose deficit-to-GDP ratios averaged 6.3% in 2011 and are projected to be 4.2% in 2013.

Given that the government’s total debt-to-GDP ratio went down to just under 51% in the first quarter of 2012, it is likely that it might go down further to below 50%, which would be crucial in gaining the coveted investment grade rating from credit agencies. Compared to the rich countries of the OECD whose debt-to-GDP ratios averaged 97% in 2010, the Philippine public sector looks a lot more solvent indeed.

So now let us turn to political markets and see how next year’s budget seems to fare. It is worth comparing budgeted levels in 2013 to that of previous election cycles. Back in 2010, expenditure levels were exactly at the same level compared to what they are proposed to be in 2013—that is, they were 16.9% of GDP. The same goes for 2007, the last time mid-term elections were held.

Incidentally in that year, the budget was practically balanced. Had the global financial crisis not followed, the government might have been achieving surpluses afterwards. It was the stimulus spending of subsequent years combined with weaker revenues that caused the government to incur deficits which have carried over until today. In 2004, a presidential election year, the expenditure to GDP level was at its highest over the past decade at 17.5%.

So is next year’s budget an election budget? Is it geared to win or buy votes for the administration? On the face of it, it would seem that the spending rate is at par with other election years. The 2004, 2007 and 2010 election spending by the Arroyo government earned the ire of the then opposition for what they said were blatant attempts to divert money into the ruling party’s campaign kitty. So could the same thing happening again?

First let us have a look at where the money is meant to go. The profiles of the 2012 and 2013 budgets are shown below. We can clearly see from this that from year to year, the structure hardly changes although next year’s budget goes up by 240 billion pesos. The shares of spending for defence (14%), debt (17%), and general expenses (17%) are down by one percentage point each from their 2012 ratios. Meanwhile the share received by social services goes up by 1% point to 35% and that of economic services (transport and public works) by 2% points to 26%.

The ‘doughnut’ chart shows how the additional spending is split across portfolios. Social services receive the biggest increase with an additional 85 billion pesos allocated on top of its budget this year of 613 billion pesos. Economic services receive the next biggest share of about 72 billion on top of the 439 billion from 2012. General services get 26 billion more on top of its current 320 billion, while defence gets an additional 3 billion above its current 87 billion. Net lending (currently at 23 billion) and debt repayments (at 333 billion) each go up by 4 billion and 1 billion respectively.

In terms of which departments get the largest growth in their budgets, the Department of Education sees the biggest growth of 54 billion pesos. Public Works follows with 27 billion. Third comes the Department of Interior and Local Government with 21 billion followed by National Defence with 14 billion. The Department of Agriculture comes in fifth with an additional 13 billion followed by the Health with 11 billion. Rounding out the final four are Finance with 9.6 billion, Social Welfare with 7.4 billion, Environment with 6.2 billion and Transport with 2.4 billion.

The president announced in his SONA that his administration would seek to clear the backlog of classrooms to provide sufficient facilities to public school pupils. This was in line with the K-12 reform which increased the years of secondary school by two while providing universal kindergarten classes at the primary level. It appears that his budget delivers on that.

He also announced the completion of repairs for all paved roads nationally. The procurement of guns for police and of modern equipment for the armed forces also featured in the SONA. The same goes for the improvement of irrigation for agriculture and health coverage of the government insurance system. The Pantawid Pamilya continues to be ramped up which is evident in the figures, and the same can be said of community based forest protection. Finally, the task of getting NAIA-1 refitted and NAIA-3 operational was raised.

So in terms of this budget being meant to win votes at the next election, if the president intends to show that his administration’s ticket deserves the support of the electorate on the basis of his government’s delivery of promises, this budget might be seen as a way to address that.

Other notable things about this coming year’s proposed budget include: an increase of the capital outlays for the compensation of land owners under the Comprehensive Agrarian Reform Program with Reforms by 100% from 2.5 billion pesos in 2012 to 5 billion in 2013; a similar increase of subsidies to government owned and controlled corporations by about 114% from 20 to 42 billion pesos; and a ten billion peso fund to provide performance based bonuses to civil servants.

The increased CARPeR funding is in line with the government’s target of completing land distribution by 2014 when the program ends. The increased subsidies to GOCCs and bonuses to government executives is a curious thing given how the president earlier decried the massive waste incurred by these firms which led to a ballooning of subsidy paid to them and the bonuses executives paid themselves as their firms suffered losses. I could be proven wrong, but it appears that the same could be occurring here.

It would be interesting to see just where these subsidies are going and how successful the bonus scheme is in its first year. Allowing government agencies to take a hit financially could be a way of avoiding the political fallout if fees and other charges were otherwise increased to cover the cost of service delivery adequately. In this sense, one might characterize this increased support to GOCCs as pandering to the electorate.

The question then becomes what the government intends to do after the elections. Will it seek to claw back some of these losses by increasing fees and charges to what they ought to be? In that sense, shouldn’t the administration be up front with the public instead rather than try to deceive them? The budget statement is silent on these matters despite the glaring deterioration that seems apparent among GOCCs.

At the end of the day however budgets do very little to give incumbent governments a boost, at least a lasting one. Previous budgets under the Arroyo presidency prove this point. Despite the massive infrastructure program and social insurance expansion undertaken from 2007 to 2010, very little improvement in its standing with the public occurred.

The fact of the matter is expanding the budget is fine for as long as the economy keeps growing briskly. Both financial and political markets will accept that the government has to do its part in maintaining the country’s growth trajectory. For as long as revenues are able to keep up with the expanded services, that is.

And this will be the biggest challenge moving forward. In the past, government revenues have not kept pace with growth in the economy. This was due to a range of factors, from technical smuggling of petroleum products, to the non-indexation of sin taxes, to the erosion of the revenue base by granting tax exemptions to targeted voter and interest groups.

This is where the administration could break with tradition: if it makes signing up to new tax measures a condition for its support to allied parties in Congress. That way it becomes less a marriage of convenience and one of principled politics. Candidates under the ruling coalition or alliance should be asked to commit, to sign an agreement to that effect.

Although the budget for 2013 won’t depend on new revenue measures like the mining tax, sin tax indexation and rationalization of fiscal incentives, future budgets and the fulfilment of the president’s agenda towards the latter half of his term will. It is incumbent upon the president to now forge a fiscal compact that guarantees his social contract with the Filipino people. How successful he is in doing this in an election year will prove just how skillful a leader he is.

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 (www.thecusponline.org) 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.

  • manuelbuencamino

    Doy,

    “At the end of the day however budgets do very little to give incumbent governments a boost, at least a lasting one. Previous budgets under the Arroyo presidency prove this point. Despite the massive infrastructure program and social insurance expansion undertaken from 2007 to 2010, very little improvement in its standing with the public occurred.”

    I think there were other factors that prevented GMA from getting a boost from her budgets. I don’t think she would have become popular even if she had provided chicken for every Filipino pot. A properly targeted budget will be rewarded by the electorate, in both the short and the long run, as long as the positive effects are palpable and there are no other factors to contend with like thanks but we could have had more if you didn’t steal as much.

    The electorate will be appeased but it will never be fully satisfied because it’s human nature to always want more. And that’s what good politicians have to know how to deal with. When the electorate suspects that they are not getting enough because they are being robbed, no amount of good budgeting is going to make a politician popular. That, unfortunately, is what GMA failed to understand and so was unable to address.

    But all in all, your analysis of the budget is very helpfful. Thanks for taking the time and effort to do it.

  • J_ag

    I am really curious about your take on financial markets and the fact that OECD countries are running large deficits. Deficit to GDP ratio of the U.S. is close to 10% and they have reached almost 100% debt to GDP ratio while Japan has reached a level of 200% debt to GDP ratios but their governments can borrow at close to zero or negative real interest rates. Inflation protected bonds in the U.S. are now paying out negative interest rates meaning you have to pay the U.S. Treasury to hold your cash.

    All the current revenue measures have been in the pipeline long before PNoy came into the picture. Credit GMA for passing the E_Vat and it was during her watch that we started having BOP surpluses.

    So far since 2000 the FED has been running with a low interest rate regime and the accumulation of large BOP surpluses in emerging markets (esp. China) has kept dollar interest rates very low. Naturally a country that is a net importer of capital like the Philippines finds itself awash in cash with no place to go. So much so that the BSP has been creating so much new pesos to keep the dollar from crashing and has had to create a new level of reserves in the SDA accounts.

    It would be nice if you could simply make a pie chart of how much of the budget goes to debt service, salaries, maintenance and supplies and public infra spending.

    The major economies of the world are busy containing a depression and are in many ways in a liquidity trap.