surplus fetish

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.