Questioning the fiscal crisis

If the screaming headlines and hair-raising front-page stories don't get you, then maybe the stark figures will. No doubt about it: We are in the middle of a fiscal crisis of such magnitude that worst-case scenarios like Argentina's financial meltdown in 2002 are being cited and taken seriously.

No less than 11 faculty members of the University of the Philippines School of Economics tell us so, their dire warnings bolstered by tables, charts and mathematical formulas.

As if on cue, President Gloria made an uncharacteristically candid admission that, indeed, the "state of fiscal crisis" is upon us and calls on everyone to pull together to overcome this latest challenge to the survival of the nation.

In short, GMA says Congress must pass pronto all eight new tax measures she has certified as urgent and agree to slash the legislators' pork barrel, local government units must learn to render public service without spending because they won't get their expected slice of the national budget, and the people must tighten their belts further under an undeclared austerity program that will test their capacity to survive extreme conditions of poverty, want and a bankrupt, some say inutile, government.

The scuttlebutt is that our government has been spending much, much more than what it earns and to keep that up, has gone deeper and deeper in debt.

The cold facts are there, paraded now and not hidden by our economic managers, the better to shock and awe us into belief. The national budget deficit has been soaring in the past six years -- it was PhP199.9 billion, or 4.6% of GDP, in 2003. This was more than double the original 2003 target in President Arroyo's Medium-Term Development Program 2001-2004.

Moreover, the government is trillion pesos in debt! Total public sector debt, including those of the national government, government banks and corporations and central bank, totalled PhP5.4 trillion as of September 2003. PhP2.01 trillion of the PhP3.36 trillion in national government debt was incurred by the Estrada and Arroyo regimes from 1997 to 2003.

A full third of the 2005 budget will go to interest payments. More shocking, according to an administration congressman, Albay Rep. Joey Salceda, 94% of revenues the government would collect next year will be used to pay its debt, including the principal.

Accordingly, the budgets for social services and capital outlay have been cut to the bone. This is indeed alarming since real spending on education, health and housing has been falling since 1997, particularly when President Arroyo came to power.

The UP School of Economics paper draws an even direr, if more accurate, scenario than government has been compelled to admit. It draws attention to the economy's heightened vulnerability to "any large external shock" such as a sudden increase in global interest rates, a sustained increase in world oil prices, a sharp decline in overseas workers' remittances or anything that could cause the import bill to rise, including, ironically, attempts to revive an import-dependent, export-oriented economy.

These, by the way, are not far-off possibilities, but are already on the horizon, if not actually undermining the economy such as runaway prices of oil and the impact of the wars in Iraq, Afghanistan and Palestine on OFW remittances from the Middle East.

Any or all these conditions would predictably result in "huge difficulties in repayment, whether or not the government defaulted formally." In turn, there would be a huge and sharp cutback in foreign lending as foreign creditors and investors lose confidence that they will get their money back. This would then lead to a series of events including "a sharp peso depreciation, most likely aggravated by capital flight, severely contract(ed) trade as the price of imports rose, and correspondingly a deep recession and unemployment."

But more than what the lenders and investors will think or do, the UP professors point to the more pressing and mundane reasons why government must act to stem the worsening fiscal crisis. For how then will it turn the soaring promises at President Gloria's SONA into anything close to reality? Did she not mention food on every table, jobs, housing, education and lifesaving medicines?

The UP paper proceeds to show how government prescriptions won't necessarily work; in fact, that these could stir up more public protest and political instability because they will hit the poor more than the rich. Already, government pressure to introduce new taxes has been generally perceived as nothing but added burdens on a people already reeling from huge erosions in income due to job loss, frozen wages, inflation versus the unrelenting increases in the cost of basic needs such as food, water, electricity and transportation.

At this point, the urgency of dealing with the public deficit and debt is beyond doubt. However, if we were to meet this fiscal crisis clearheadedly and with the best interests of our people (not the government that has demonstrated an appalling capacity to mess things up), shouldn't we be asking how the crisis came about to begin with?

In medicine, the diagnosis is more than half the treatment: One can't rush off providing the cure without having a clue as to what's causing the patient's disease in the first place.

Giving the Arroyo administration another PhP80 billion of new tax revenue without making it accountable for all the trillions that are now nothing but piled up debts sounds too much like we're being taken for another ride.

BusinessWorld
Aug. 27-28, 2004