THE Department of Finance (DOF) expects the country’s budget deficit by 2025 to go down further to around 3.2 percent of GDP—near the prepandemic deficit of 3.4 percent—if the government pushes through with fiscal consolidation and generates additional revenue of P250 billion a year.

In an economic bulletin on the national government’s debt stock as of end-April, Finance Chief Economist and former Undersecretary Gil Beltran said on Tuesday that narrowing budget deficit through fiscal consolidation entails shoring up revenues and cutting non-priority expenditures without sacrificing infrastructure spending.

“Absent new tax measures and further cuts in spending, the latest baseline scenario projects the deficit reaching 4.1 percent of GDP by 2025, down from 2021’s 8.6 percent. Mobilizing an additional P250 billion a year will cut further the deficit so as to reach around 3.2 percent by 2025, a figure comparable to the prepandemic deficit of 3.4 percent,” Beltran said.

For this year, the DBCC expects the budget deficit-to-GDP to start tapering down to 7.6 percent as revenue collections are expected to grow faster than its expenditures.

Budget deficit occurs when expenditures exceed revenues. To recall, budget deficit as a share of the economy last year soared to a record-high of 8.61 percent.

Beltran said restoring fiscal health and building up reserves is best done while the economic weather is still good, pointing out that the country has “higher odds” of achieving the growth targets set by the Cabinet-level Development Budget Coordination Committee (DBCC) of between 7 and 8 percent this year and 6 and 7 percent next year until 2025.

These growth targets are likely to be achieved given the infrastructure spending in prior years, the lowering of corporate income taxes, and the recently-passed structural reforms such as the amendments to the Foreign Investments Act, Retail Trade Liberalization Act and Public Service Act, Beltran said.

However, he said these growth assumptions were hinged on the absence of negative economic shocks like the resurgence of infections.

“It is therefore important to restore fiscal health  and build up reserves when the economic weather is fine  so as to have the capacity to respond again should shocks materialize. This is akin to having an insurance that covers for contingencies. Not having one is a fool’s game and fiscal heartaches hit the hardest when it’s too late,” he said.

3-package plan

The Department of Finance recently unveiled its proposed fiscal consolidation and resource mobilization plan seen to generate a total average of nearly P350 billion per year from 2023 to 2027 to help the country outgrow its debt at a faster rate.

The three-package proposed fiscal consolidation and resource mobilization plan includes the imposition of several taxes, 3-year deferment of the second tranche of reduction in personal income tax rates, and the expansion of value-added tax (VAT) base and removal of   VAT exemptions, except for education, agricultural products, health, financial sector, and raw food, among others.

Estimated to generate an annual average of P349.3 billion in revenues, the proposed fiscal consolidation plan will not only help the government accomplish this, but this will also help the country reduce its debt as a share of its economy from the projected 60.7 percent this year to 55.4 percent in 2025. Without the reforms, the country’s debt-to-GDP ratio in 2025 is seen to reach 58.2 percent.

However, incoming finance chief Benjamin Diokno, who is currently the Bangko Sentral ng Pilipinas governor, said he intends to focus on streamlining tax administration before deciding on whether the country needs new taxes as part of its fiscal consolidation program.

As of end-April, the national government’s outstanding debt also hit another record high at P12.76 trillion, just two months before President Duterte steps down from office.

The national government’s debt-to-GDP ratio as of the first quarter of the year rose to a 17-year-high at 63.5 percent, above the internationally recommended 60-percent threshold by multilateral lenders for emerging markets like the Philippines. It is also the highest since the country’s debt-to-GDP ratio hit 65.7 percent in 2005 under the Arroyo administration.

Finance Secretary Carlos G. Dominguez III has since said that the current debt level remains “sustainable” as the country needed to ramp up its borrowings for Covid-19-related expenditures amid weaker revenue collections during the pandemic.