In the next ten minutes, allow me to share with you the reforms and developments in the fiscal sector of the Philippine economy. It’s been 9 months since the last Philippine Economic Briefing in Japan, and I am very keen to give updates on the government’s fiscal policy.
The expansionary fiscal policy we have adopted remains to be prudent, sustainable, and supportive of our development objectives.
To repeat, we believe that the Philippine economy will grow at a robust rate of 7% to 8% in the next five years, making it the fastest growing economy in the fastest growing region in the world. Our growth target is broadly in line with the growth projections of multilateral institutions and think tanks all over the world. With higher public investments, we are confident that our growth target is achievable.
The outline of my discussion is as follows:
I will present the fiscal performance of the Philippine economy in the past few years. I will touch on government revenues, disbursements, and the deficit to give you an overview on the health of our finances. Next, I will give updates on the Build Build Build Program, especially the status of infrastructure and other capital disbursements. Thereafter, I will proceed to the performance of national government spending and our efforts to curb underspending. Lastly, I will update you on our ongoing budget reforms and the priorities for the 2019 National Budget.
The graph before you summarizes the fiscal performance of the Philippine economy from 2010 to 2022. It shows actual data from 2010 to 2017 and includes the government’s program for revenues and disbursements from 2018 to 2022. What is immediate to the eye is the staggering growth in revenues and disbursements. We will sustain the growth in revenues through tax policy and tax administration reforms. The revenue effort is projected to increase from 15.6% in 2017 to as high as 17.3% in 2022. In nominal terms, revenue collection will rise from P2.5 trillion in 2017 to as much as P4.5 trillion in 2022.
Likewise, government disbursements as share of GDP will increase from 17.9% in 2017 to 20.3% in 2022. This means government spending will rise from P2.8 trillion in 2017 to as high as P5.3 trillion in 2022.
The planned deficit will be capped at 3% of GDP. Last year, the recorded deficit was at 2.2% due to strong revenue collection and a little bit of underspending. Moving forward from 2018 to 2022, we intend to keep the deficit at 3%.
Combining improved revenue collections and increasing the deficit from 2% to 3% will free up resources to the tune of P2 trillion (or $40 billion) from 2018 to 2022. The fiscal space to be generated will be equivalent to about 2% of GDP annually in the next four years.
The expansionary fiscal policy is necessary to finance the government’s investments on public infrastructure and human capital development.
How will the deficit be financed? We will continue to finance it in favor of domestic borrowings. We believe that this approach will reduce our risk exposure to exchange rate volatilities. Hence, 81% of our borrowings came from domestic sources in 2017, compared to just 19% from foreign sources.
Nevertheless, we have adjusted our financing mix in the next few years to accommodate foreign sources of capital. Previously, we agreed upon an 80-20 financing mix. We have revised this to 65-35 in 2018, before returning to a 75-25 mix from 2019 to 2022. This approach will allow the government to prudently manage its liabilities while enabling us to tap new markets and take advantage of favorable borrowing rates abroad. For instance, our Treasury department is looking into a “samurai bond” issuance by the third quarter of the year.
Our expansionary fiscal policy is both necessary and sustainable. It will help finance our investments in public infrastructure and human capital development.
Public debt should be measured relative to the size of the economy. The Philippine economy’s debt-to-GDP ratio is low and declining. The debt-to-GDP ratio was at 42.1% in end-2017 and is projected to decline to 38.9% in 2022. The rule-of-thumb is to maintain a debt-to-GDP ratio below 60%, and we are comfortably below that.
Moving on, let me give an update to our Build Build Build Program, which is envisioned to usher in the “Golden Age of Infrastructure in the Philippines”. We intend to increase the infrastructure budget from 5.4% of GDP in 2017 to as high as 7.3% of GDP in 2022.
Such huge investments on public infrastructure are unprecedented in Philippine history. In the last 50 years, infrastructure spending as share of GDP averaged a measly 2.6%.
We intend to reverse this sad state of affairs. And the data supports our claim that Build Build Build is already underway. For FY 2017, actual disbursements for infrastructure and other capital outlays outpaced the program by P19.4 billion, or 3.5%. In total, infrastructure and other capital disbursements reached P568.8 billion.
The same observation can be made in the first quarter data for 2018. Actual infrastructure disbursements are once again ahead of the program, this time by a whopping P13.7 billion, or 9.6%. This is just the first quarter and we are confident that we are on pace to meet our infrastructure spending objectives for the year.
The government has identified 75 flagship infrastructure projects, and most of these will begin implementation in 2018 and 2019. These are game-changing projects which will change the face of the Philippines, headlined by no less than the Metro Manila Subway Project in partnership with JICA.
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