Can we afford to spend more?

UNLESS, like some people, you are only driven by a political agenda—“The administration is always wrong/right”—it is important to try to understand what the government is doing. When we try to comprehend something that is complex, we attempt to bring it down and simplify the situation in terms of our own experience. This is particularly true of government finances, which can be like trying to learn a foreign language.

If we spend more money than we earn, that creates a deficit, a budget deficit. In order to make up that shortfall, we borrow money. Borrowing money from a bank, which will not tolerate any excuses for late or nonpayment, is like the government borrowing from foreign sources. Borrowing money from your relatives is more like a government’s domestic borrowings, which can be paid in local currency that is created through simple accounting “tricks”.

There is concern with the Philippine government’s efforts to ramp up its infrastructure program in that the necessary funding will not be available without increasing its budget deficit, which will be met with borrowings. It is important that the public be aware and knows exactly how much, to whom and at what price any additional debt will be added.

However, perhaps driven by politics, there seems to be an extreme, and maybe unnecessary, concern over the government increasing both its budget deficit and its external borrowings.

When you look around the world, you see two different conditions that are striking in their difference. There are economies like the Philippines that are growing and those that are not. The reason is obvious on closer observation. You cannot have a healthy national economy if the government’s “economy” is unhealthy.

For two decades the Philippine economy was a “basket case” because the government’s finances were in the same basket, depending on debt and handouts. This changed because—in the words of a recent speech at the United Nations by Ambassador Teddy Locsin Jr.—President Gloria Macapagal-Arroyo saved the economy “in the Wall Street global financial crisis”.

In 2008 the government debt as a percentage of GDP was 54.7 percent. It is now 23 percent lower at 42.1 percent. Back then the government budget deficit as a percentage of GDP was 3.7 percent. In 2015 it was 0.9 percent. The Aquino administration took advantage of those facts to increase spending in 2016 as supposedly the Duterte administration will in 2017 to increase the deficit to over 3 percent again. But is that a problem?

Compare this with other nations. Brazil’s debt-to-GDP ratio is now at 17 percent. The US and Japan are both over 4 percent. While a plus 3-percent Philippine deficit will be higher than Canada, Australia, France and the UK, there are two big differences.

The Philippine economy is growing much faster than in those nations and can handle a 4-percent budget deficit much more easily. Further, those countries are using their deficit to support their failing economies while the Philippines will use the money to build infrastructure to increase growth.

We must be vigilant that the government does not borrow and spend foolishly. That is our job. But there is a sound financial foundation to justify more spending to build for our future.

source:  BusinessMirror Editorial