The economic team of President-elect Rodrigo Duterte is increasing borrowings to fund infrastructure projects and lowering taxes in a major fiscal policy shift to boost the economy further. The plan implies a much-larger budget deficit to pump prime the economy, a policy that outgoing President Benigno Aquino III did not pursue in the last six years.
Increased borrowings per se is not bad, as long as the funds are spent on infrastructure projects and major social services like education. Coupled with reduced taxes, notably personal and corporate income taxes, the higher borrowings will increase the purchasing power of the public and stimulate demand.
The higher demand, in turn, will prompt the private sector to expand and invest more in production to meet the increased purchasing power of the people. More money will be pumped into the economy, resulting in expanded economic activities.
Incoming Budget Secretary Benjamin Diokno is aiming for a larger budget gap equivalent to three percent of the gross domestic product. He defended the higher borrowings amid the low interest rate regime and questioned why the past administration did not pursue the tack.
The Duterte administration has lined up its immediate priorities that include the faster construction of infrastructure projects, solving Metro Manila’s traffic problems and investing in agriculture.
The new government, however, must make sure that the borrowing policy will not backfire on it. Higher borrowings and increased spending could be inflationary and could easily erode the increased purchasing power from lower taxes, if the Duterte government fails to build more infrastructure and other projects that it seeks to fund.
Economic growth, meanwhile, will be in jeopardy if the new budget tack pushes inflation higher than the programmed level. The incoming administration must still keep a fiscal discipline in spite of the looser policy. Against the backdrop of a sluggish global economy, the incoming administration, at the end of the day, should weigh increased budget spending against its ability to generate revenues.