Macroeconomic Assumptions Outdated, Revamp 2009 Budget Proposal

Macroeconomic Assumptions Outdated, Revamp 2009 Budget Proposal

As a result of the ongoing global economic crisis, there has been a significant change in the economic outlook for the Philippines. Based on more optimistic assumptions, there is a real risk that the projected tax revenues for 2009 may be on the high side – perhaps by as much as P100 billion. A crucial policy issue is to whether to stick to the original proposed deficit of P40 billion (slightly higher than half a percent of GDP) or allow a higher deficit to stimulate a badly weakened economy. Sticking to the original deficit target is unwise. If adopted, the government’s ability to address the need to create more jobs and to provide a safety net to the neediest will be severely constrained.

Fiscal stimulus

A more appropriate 2009 budget is one that would allow a slightly higher deficit, say 1.0 – 1.5 % of GDP.  But the higher deficit should focus on the following measures designed to create jobs and stimulate consumer spending.

Job creating measures

First, higher funding for more labor-intensive reconstruction and repairs projects and less capital-intensive, slow-moving projects with large right-of-way (ROW) component. Examples of the labor-intensive projects are rehabilitation of irrigation canals, repairs and regular maintenance of existing national and provincial road, construction of small water impounding (SWIM) system, reconstruction and repair of school buildings.

Foreign assisted projects should be pursued with more vigor – accelerated if possible. This makes a lot of sense since it minimizes commitment fees for project delays and serves to minimize the risk of rising cost of financing the deficit through foreign borrowings. Financing through official development assistance (ODA) is cheaper than through commercial borrowings (which may be unavailable at reasonable costs given the ongoing credit crisis).

Second, create an army of volunteer nurses under a Health Service Volunteer Program (HSVP). Some 400,000 nursing graduates are either unemployed or doing work unrelated to nursing. This is a monumental waste of skilled human resources. It is also grossly unfair for all families who have invested in the college education of their children. Filipinos in the countryside, especially those with very little access to basic health care, will benefit immensely from this program.

The central government, in partnership with local governments, may employ some 15,000 volunteer nurses to work in 1,500 municipalities nationwide to provide basic health care for the poor, especially the young and the elderly, many of whom have not seen a doctor in their lifetime.  I estimate that this program would cost an additional P1.8 billion ($40m), based on the following computation: 15,000 times P10,000 per month times 12 months. The cost of the program for two years is approximately P3.2 billion. Participating towns should supplement the operating costs of the program.

Measures to stimulate consumer spending

Third, the conditional cash transfer (CCT) program should be expanded to benefit some 3 million households. This is based on one-fourth of the elementary enrolment of 12,096,656 in public schools during the 2006-2007 school year. The rice subsidy program that has a large leakage and has been a major source of rent seeking should be folded into the CCT program. Each household beneficiary will receive P500 per month for 10 months through its authorized bank or some more efficient method that may emerge in the future (for example through pass a load using the mobile phone). The total maximum cost of the project is P15.1 billion ($336m), computed as 3,024,164 households times P500 times 10 months.

Fourth, give a tax refund to fixed-income earners who filed an income tax return in 2007. The objective is to stimulate consumption spending at the earliest possible time.  Through the multiplier effect, it would soften the adverse impact of slowing consumer spending assuming that the refund will be spent rather than saved. It would benefit some three million hardworking, taxpaying workers.

A conservative estimate of this proposal is P12.4 billion ($276m). We use the following assumptions: (a) the basis of computations is the personal income tax collection of P138 billion in 2007; (b) ninety percent of taxes collected are paid for by fixed income tax filers; and (c) 10 percent of the taxes paid in 2007 will be refunded. The estimated cost of P12.4 billion could be further reduced significantly if the refund is capped at P5,000. From the equity standpoint, this makes sense.

Here’s the bottom line: these four measures will cost the Filipino taxpayers some P29.2 billion. This is a very conservative estimate – that is, on the high side. Still, it is significantly less than the projected loss of the National Food Authority of P40 billion in 2008 alone.


A Paper by Prof. Benjamin E. Diokno, Professor of Economics, School of Economics, University of the Philippines. This was presented in the Round-table Discussions Series of APBest on October 20, 2008 in Quezon City. Prof. Diokno is also one of the Founders of APBest.