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Delay in RP's balanced budget goals fine by IMF


MANILA, Philippines - The International Monetary Fund (IMF) does not see any problem with the government’s dropping a 2010 balanced budget goal, but says the pump-priming rationale should be backed up with improved tax administration and a well-crafted stimulus plan. IMF Resident Representative Dennis Botman, in an e-mail to BusinessWorld, said incurring a modest deficit would allow the government to prop up economic growth. Finance officials last week said the interagency Development Budget Coordination Committee, in revising this year’s targets, had also decided to adopt a 2010 deficit ceiling of 1.5 percent of gross domestic product (GDP), equivalent to P132.1 billion. A week earlier, the government’s economic managers said the 2009 deficit cap would be raised to 2.2 percent of GDP, or P177.2 billion, from P102 billion. The latter was already a revision — blamed on the need to spend more to counter a global downturn — of the original P40-billion goal. “A measured fiscal stimulus is appropriate to support growth while at the same time maintaining investor confidence," Mr. Botman said. “The key is to increase revenue through legislative measures [like] rationalization of fiscal incentives and reforming sin taxes, and accelerating tax administration reforms." “These resources," he added, “should be used to increase public investment, social transfers [like] conditional cash transfer scheme, and higher spending on education and health. This will raise the potential growth rate of the economy while ensuring a modest deficit." Mr. Botman said the Philippines could cope with the global financial crisis due to reforms in financial regulation as well as lower deficits. The gains, he added, will not be undermined by increased spending if the tax effort, or the ratio of tax revenues to the gross domestic product (GDP), improves. “The credibility of fiscal policy has been well established over the last few years ... The deficit was reduced from close to 5 percent in 2003 to 1.5 percent in 2008. Together with complementary reforms in banking sector supervision and regulation and reducing non-performing loans, the turnaround in the fiscal position has placed the Philippines in a relatively good position to weather the current global financial crisis," the IMF official said. “A measured fiscal stimulus in 2009 and modest deficit going forward would not undermine these accomplishments, particularly if the tax effort were to increase." Mr. Botman said the Philippines should strike a balance between supporting economic growth and maintaining confidence in the fiscal program, noting that the country still has a higher debt to GDP ratio compared to its neighbors. He noted that lower revenues due to measures such the income tax relief law and a lower corporate income tax rate, as well as weaker commodity prices, would limit resources for a fiscal stimulus. “If the deficit were to increase too much, this could backfire and we deem that current plans strike a good balance between supporting growth and maintaining investor confidence in the fiscal program," the IMF official said. “The key measures are the rationalization of fiscal incentives, reforming sin taxes, and streamlining the optional deductions for the self-employed and professionals. These reforms are critical not to reduce the deficit, but to finance the priority expenditures in the 2009 budget, including public investment and targeted social spending." Asked to comment, National Economic and Development Authority deputy director-general Augusto B. Santos said he agreed with Mr. Botman’s views. He also admitted that a delay in the passage of this year’s P1.415-trillion budget, still to be signed by President Gloria Macapagal Arroyo, would delay the government’s pump priming activities. “The budget is a fiscal stimulus itself. Assuming we approve this budget this month, there will be a delay [in the implementation of projects] this quarter. But we will accelerate the release of the funds once it is signed into law this week," he said. Mr. Santos said the 2010 deficit of P132.1 billion was still manageable and added he believed the government still had the leeway to increase it if the need arose. Last year’s deficit was P68.1 billion, lower than the programmed P75 billion and equivalent to 0.9 percent of GDP. It had been on a downtrend since 2002’s P210.74 billion, dipping to P199.87 billion in 2003, P187.06 billion in 2004, P146.78 billion in 2005, P64.79 billion in 2006 and P9.4 billion in 2007. The government has announced a P330-billion stimulus package which consists of: * a P160-billion increase in spending under the P1.415-trillion 2009 budget; * a P100-billion infrastructure fund to be put up by government financial institutions and the private sector; * P40 billion in foregone revenues due to the income tax relief measure lower corporate taxes that are expected to boost consumption; and * P30 billion in temporary additional benefits from social security institutions. Mr. Botman said the government should also pass proposed amendments to the Bangko Sentral ng Pilipinas charter to provide bank supervisors and examiners with greater powers. “We also welcome plans to double the deposit insurance limit," he said, referring to Congress’ approval of a measure increasing the maximum deposit insurance coverage to P500,000 from P250,000. With the central bank last week having cut rates for a third month in a row, Mr. Botman said there was room for further monetary easing due to declining commodity prices. “As inflation expectations are well-anchored and commodity prices have declined significantly, there may be room for additional easing going forward in the event growth is slowing down further," he said. - BusinessWorld
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