Inflation deceleration, G7 deindustrialization, and deficit reduction
August 8, 2023
My Cup Of Liberty
By Bienvenido S. Oplas, Jr.
https://www.bworldonline.com/opinion/2023/08/08/538237/inflation-deceleration-g7-deindustrialization-and-deficit-reduction/
Last week, there was a piece of good news reported by the Philippine Statistics Authority — the inflation rate has significantly declined, from 8.7% last January down to 5.1% last June, and only 4.7% in July. The Inter-Agency Committee on Inflation and Market Outlook (IAC-IMO), headed by the Secretaries of Finance, the National Economic and Development Authority (NEDA), and Budget, is working.
Continuing this column’s inflation monitoring of major economies of the world and Asia, I note that the average inflation rate of the Philippines in January-July 2023 is 6.8%, still high but not as bad as that in the UK, Italy, and Germany which range between 7-9%.
I checked food inflation in particular and saw that a surprising trend is that all the G7 countries (group A) have very high food inflation, with averages of 3.5% to 9% in January-July 2022, and 8% to 18% in January-June 2023. Group B (other big Asian economies) and group C (ASEAN-6) countries had food inflation of only 2.5% to 8.8% in January-June 2023 (see Table 1).
This column has suggested since last year that the G7 countries, the Europeans especially, are on the slow path to deindustrialization and degrowth, driven mainly by their climate, energy, and trade policies. Industrialized countries are supposed to have low inflation because they can mass produce and have efficient storage and transportation of a huge amount of food and other commodities — now this is not happening.
The Philippines’ economic and infrastructure teams should note this slow deindustrialization in the west and further modernize our energy, seaports, and airports, toll roads, water and other infrastructure, to attract many companies that are slowly leaving the west.
THE BUDGET
Also last week, Budget Secretary Amenah Pangandaman and the Office of the President submitted the budget proposals for 2024 to Congress. Below is a summary of the fiscal program from the Budget of Expenditures and Sources of Financing (BESF). I extended the data to 2020 and 2021 to further provide context. Here are the trends.
1. Disbursements have jumped from P3.8 trillion in 2019 to P4.23 trillion in 2020, and P5.16 trillion in 2022. Consequently, the deficit has more than doubled, from P0.66 trillion in 2019 to P1.55 trillion/year average in 2020-2022.
2. Net borrowings (new gross borrowings minus amortization) have nearly tripled, from P0.88 trillion in 2019 to P2.24 trillion/year average in 2020-2022, which is huge and really unsustainable.
3. The Deficit/GDP ratio has expanded from -3.4% in 2019 to -7.8% yearly average in 2020-2022 (see Table 2). This was irresponsible and very dangerous damage done by the lockdown dictatorship of the previous administration in 2020 and 2021.
The projected deficit/GDP ratio this year is still high at 6.1%. The main problem is not in the revenue side, because they keep rising even without new tax measures as many businesses and households are still recovering from the “kill business” philosophy of the horrible lockdowns. The problem is in the expenditure side, and I want to highlight three sources of spending distortion.
1. The salaries, allowances and bonuses of government personnel — from the National Government down to barangay staff — were given intact in 2020-2021 even if millions of people became jobless in the private sector and many taxpaying businesses were closed by the government. Revenues declined from P3.14 trillion in 2019 to only P2.86 trillion in 2020 and P3 trillion in 2021.
2. Endless subsidies with no timetable — like free tuition in all state universities, free irrigation, free healthcare, and free monthly cash for millions of households, and so on. If you reward poverty, then many people will declare themselves poor even if their actual incomes are rising. And many social welfare agencies plus their consultants will demand that their budget should keep rising by tens of billions yearly.
3. The continuing fiscal bleeding from irresponsible pensions for the military and uniformed personnel (MUP). I say irresponsible because the active and retired MUPs contribute zero for their generous current and future pensions, and the pensions are funded 100% from taxes — yet they are not even taxed. The proposed reforms in MUP pension have been submitted to Congress — new entrants will contribute, which is good. But current retirees and pensioners will keep getting tax-free pensions, up to about P180,000/month, tax free. Congress should tax this.
My minimal government hat says I should not support the continuing expansion of the budget while revenues keep lagging. But the economist in me recognizes the constraints faced by the economic team, so I support their target of sustained reduction in the deficit/GDP ratio to only -3.5% by 2026. And hopefully down to only -2.8% or less by 2028 when the Marcos Jr. administration steps down.
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See also:
BWorld 625, SONA 2023: investments, revenues and climate, August 17, 2023
BWorld 626, Debt service, sustained growth, and the PDE alumni homecoming, August 18, 2023
BWorld 627, Energy at SONA 2023 and electric cooperatives, August 23, 2024.
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