Government to stick to its present fiscal policy, says Canlas

The Arroyo administration is not about to depart from its fiscal policy of trimming the budget deficit through a cutback in public expenditures, instead of resorting to a countercyclical or discretionary fiscal policy that entails more government spending, a Cabinet official said yesterday.

Socio-Economic Planning Secretary and NEDA director general Dante Canlas said the government remains firm on its fiscal policy stance despite the advice of some economists who are batting for a countercyclical policy to coax additional output growth from the economy.

The proposal, he said, stems from the view that enlarging the budget deficit even if financed by borrowing stimulates the economy. This, however, runs counter to the administration’s budget-deficit reduction program started last year with the end in view of balancing the national government budget in 2006.

"Government deficit spending financed by borrowing is not helpful; if it persists, it is, in fact, harmful to the economy," Canlas pointed out.

He explained that when the government borrow to finance the deficit, it absorbs funds that otherwise the private sector can use, and with the generally less productive government spending, economic growth is compromised.

Canlas cited that in 1999, when the then Estrada administration embarked on a large scale deficit spending with government spending growing 6.7 percent – personal consumption slowed down to 2.6-percent growth in real terms. By 2000, when state spending went down a bit to 6.1 percent, personal expenditures went up 3.5 percent.

Earlier, when the government adopted the discretionary fiscal and monetary stimulus in the 70s in reaction to the oil price shocks, Canlas said the output and employment gains were temporary but the inflation and peso depreciation proved permanent, with adverse effects on personal and family well-being.

In contrast, Canlas said the deficit-reduction program of the current administration has been delivering desirable macroeconomic outcomes. In 2001, even as government spending in real terms grew only 0.3, this was compensated for by the growth in personal consumption of 3.6 percent, higher than when the government was increasing spending by more than six percent.

As of the first half of 2002, real GDP (gross domestic product) grew 4.1 percent, although government spending was flat. Personal consumption again grew 3.6 percent, matching its growth rate in the same period last year.

Further, after inheriting a budget deficit-to-GDP ratio of 4.1 percent, Canlas said the Arroyo government brought the ratio slightly down to four percent in its first year in office. This year, Canlas said the target radio is still 3.3 percent despite the budget deficit running ahead of program in the first seven months, as the economy has gained newfound strength from its strong showing during the second quarter.

"I am aware that some critics of the administration’s deficit-reduction programs are saying that public investments that support long-run growth are being sacrificed. The fear is unfounded. It is a responsible deficit-reduction program, one that protects spending responsible deficit-reduction program, one that protects spending that matters for long-run growth with equity," the NEDA head said.