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Friday, September 25, 2020

PH has the money for Php1.6 trillion stimulus

Last of a two-part series

The government can alleviate huge suffering and save the economy if it wanted to. Contrary to government claims, the Philippines has the fiscal capacity to take the action needed to address the health crisis, household distress, and economic damage from COVID-19.

The last six months since the first confirmed COVID-19 case in the Philippines already shows the price of inaction. Unlike governments in the other major economies of Southeast Asia, the Duterte administration responded slowly, preferred a long and harsh lockdown as its main tool for virus containment, and spent as little as it could for COVID-19 response.

The failures of the approach are stark. It took over three months to reach the first 10,000 cases of COVID-19 – we’re nearing the point of getting 10,000 cases in just a day. Fear and anxiety still repress economic activity in the Philippines which has become the undisputed COVID-19 epicenter of the region.

We also have the worst performing economy in Southeast Asia despite our acclaimed creditworthiness and ‘financial stability’. Our second quarter -16.5% collapse will soon be confirmed as the worst in the region when the final growth data for Thailand and Malaysia are released. This performance is exceptionally poor compared to Vietnam whose speedy response and hefty intervention enabled it to squeeze out 0.4% growth.

The Philippines has to spend generously and smartly and right away. Every day of delay means the virus continuing to spread exponentially, poor households suffering more, and distressed enterprises retrenching or shutting down. These gravely compromise recovery.

Real solutions

A well-implemented Php1.6 trillion people-oriented COVID-19 response for health, recovery and reform will be effective. (See Table 4) This is equivalent to 8% of 2019 GDP and will be just the boost the economy and people sorely need.

This begins with an Php80 billion investment in health to rapidly contain the pandemic and treat the sick, including not just COVID-19 patients but others in need of medical attention. The economy cannot even start to rebound or recover properly without this.

The two legs of restoring economic activity are Php750 billion in emergency relief for households and Php730 billion in enterprise support. Unlike in the Bayanihan 2 bills and even larger ARISE bill, these are balanced and reinforce each other.

Emergency relief is mainly cash assistance for the 21 million households already receiving this under the social amelioration program (SAP). Since this has already been done, further transfers should already be more efficient and expedient. There’s additional support for elderly and displaced overseas Filipino workers, as well as allowance for other emergency needs.

The emergency relief immediately supports household welfare and is given widely to ensure that everyone in need gets it. People will have more to spend on food, rent, utilities, transport, health and other essentials. This minimizes suffering in such difficult times.

There is however also the macroeconomic benefit of substantially boosting aggregate demand – the improved purchasing power and market conditions will make the enterprise support and monetary interventions even more viable, including to hundreds of thousands of informal micro enterprises nationwide. Economic activity is impossible if too many are jobless and have nothing to spend.

Enterprise support is mainly wage subsidies, cheap loans, loan guarantees, and other assistance to micro, small and medium enterprises (MSMEs). These need to be contingent on upholding labor rights and meeting environmental standards. There is also substantial support for agriculture and fisheries as well as for the educational system.

The enterprise support immediately addresses serious financing difficulties faced by smaller firms that larger firms are less vulnerable to. This seeks to avert retrenchments, closures and investment declines and improve prospects for recovery and growth.

The huge government outlay is however also an opportunity to steer the economy in reformist directions and not just recover to a flawed situation. Priority can be given to enterprises supporting rural development, national industrialization, and sustainable production.

Real financing

The president and his economic managers routinely claim lack of funding to dismiss demands for real solutions. However, with a little creativity and more boldness and taking all the legal steps necessary, the government can raise all the financing required for all the COVID response needed.

For starters, spending that has become less urgent amid current crisis conditions can be deprioritized. This particularly includes infrastructure and debt service for which huge appropriations have already been made in the 2020 budget. (See Table 5)

Big-ticket infrastructure projects that are no longer economically or financially viable, or are too import- or capital- intensive, can be put off or shelved. Debt service to development banks and the like can be restructured on the argument that there are more pressing uses for scarce government funds.

Additional debt is perhaps also not necessarily a bad thing as long as this is used well and the burden of repayment is put on those most able to afford this. Borrowing that tops up available funds and enables immediate implementation of the Php1.6 trillion people’s COVID response could be a good thing.

Whereas debt for irrelevant infrastructure projects, to just pay off debt, or militarist purposes would be grossly out of place.

This is also the time to exploit the low interest rates from creditworthiness paid for by the people. The government can also issue special COVID bonds targeted at cash-rich companies, financial institutions and the super-rich but on solidarity terms like low interest rates and being zero coupon.

The most rational and sustainable source of government revenues – including, but not only, for repaying debt – is to have a much more progressive tax system with higher direct taxes. This most of all means a wealth tax on the country’s super-rich (raising Php240 billion annually), higher personal income taxes on the richest 2.5% of families (Php130 billion), and a two-tiered corporate income tax scheme (Php70 billion).

The Duterte government can come up with a credible medium-term fiscal plan built on greater tax progressivity if it really is as anti-oligarch as it professes to be.

Spend, Spend, Spend

The country is facing an unprecedented crisis and this is not the time to be thrifty. A much larger and better designed fiscal stimulus is needed right away to avert deep and lasting hardship.

The Duterte administration can be much more concerned about crisis imperatives and much less obsessed with narrow metrics of ‘financial stability’. The International Monetary Fund already notes that the average overall fiscal deficit worldwide may reach 14% of GDP in 2020 and global public debt over 100% of GDP. Against this backdrop and the damage of inaction, the narrow-mindedness of the economic managers is perplexing.

As it stands, the administration bizarrely seems serious about just waiting out the health and economic storm because the vaccine supposedly promised by China or Russia by the end of the year will fix everything. Meanwhile, it will boast about credit ratings and being ‘fiscally responsible’ at the expense of the people.

The economic managers have perhaps bought into their own propaganda that the Philippine economy was strong coming into the pandemic. The decrepit health system, accelerating spread of the coronavirus, and massive economic collapse say otherwise.

The self-delusion however has very real consequences for the people who will most of all suffer the cost of the Duterte administration doing too little, too late. The harm the inadequate response causes especially to the poor will be the worst by any government in the country’s history.

A robust stimulus response is needed and very possible. If there is none, it’s only because the Duterte administration chooses not to have one.

Read the first part of this series here.

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