How the pandemic doubled the budget deficit

Major thoroughfares in Metro Manila, usually packed with vehicles day and night, are empty during the tight lockdown imposed by authorities in March 2020. The quarantine restricted trade, which cut taxes, and reduced government revenues.

Running a budget deficit is nothing new to the Philippine government. 

It has become something of a tradition that a June 2020 study said that the Philippine government ran a deficit in 17 of the last 21 years since the start of the millennium. [See: Towards sustainable tax policies]

But based on this metric alone, the Philippines is hardly an outlier — it shares the same ranking with Cambodia. 

Of nine economies examined by the study, Vietnam incurred deficits for two decades while it was 18 years for Indonesia, 21 for Malaysia, Myanmar, and Laos, 10 for Thailand, and only two for Singapore. 

In 2019, even without a pandemic, the Philippines spent more than it collected in taxes, resulting in a budget gap that reached P660 billion or 3.4% of its gross domestic product (GDP). 

That figure more than doubled in 2020, the year when the novel coronavirus disease (COVID-19) forced the country to impose what is considered as the strictest and the longest lockdowns in the world. 

In 2020, the Philippines’ budget gap reached P1.36 trillion or 7.5% of GDP, according to a BusinessWorld report dated January 21. 

Budget deficit soars to record high in 2020

Citing preliminary data announced by Department of Finance Secretary Carlos G. Dominguez in a virtual meeting, the report said that overall spending reached P4.205 trillion last year, up 11% from P3.797 trillion in 2019. The total expenditures were 0.66% below the P4.233-trillion goal.

The Finance chief said total revenues reached P2.842 trillion, down by 9.5% from P3.138 trillion a year earlier, and 0.39% short of the P2.853-trillion target. Tax collections accounted for 87.6% of the total.

Last year’s P1.36 trillion deficit was brought about by two factors: increased public spending to address COVID-19 on one hand, and lower tax collections brought about by slowing trade and reduced incomes on the other. 

In short, during 2020, overall spending went up and revenues from tax collections went down. 

Government spending increased because, among others, it “added new or expanded existing programs as part of its pandemic response,” according to a Social Watch Philippines report entitled “A Scoping Study on the Asian Infrastructure Investment Bank’s COVID-19 Loan to the Philippines.” [See: AIIB scoping study] 

Meanwhile, revenues — primarily from tax collections — went down because “the economy suffered due to disruptions in production, reduced incomes, and lower than expected trade and investments brought about by the pandemic,” said the study. “All these contribute to the erosion of tax base: lower GDP, higher unemployment, business closures.” 

As a result of increased spending and decreased revenues, the government had to seek fresh funding to cover the shortfall. 

In early 2020, the government was able to secure a loan package called the COVID-19 Active Response and Expenditure Support (CARES) program that was funded by the Asian Development Bank (USD1.5 billion), the Japan International Cooperation Agency (USD459 million), and the Asian Infrastructure Investment Bank (USD 750 million). 

Worth a total of USD2.71 billion, the CARES program’s expected outputs includes measures taken to combat the spread of COVID-19, distribution of funds for social protection and relief for affected people, and delivery of economic stimulus programs. 

Proceeds of the CARES loan package have already been received by the government, a Finance Department official has confirmed. 

But now, the challenge for civil society groups is to make sure that the funds from all loans — including the ones borrowed for the CARES program — are spent efficiently and effectively. 

“It is also essential to monitor the impacts of servicing these debts in tax and budget policies in the long term and to engage government into taking fiscal measures that will promote sustainable, equitable, and adequate financing for development,” the study said. 

The study added: “While borrowings are not necessarily detrimental and may even be necessary in some situations, prudent debt management is important to ensure that the people most affected by the pandemic will not bear the burden of servicing these debts.”