Unconvincing revenue growth narrows budget deficit in May

MANILA, Philippines — The Duterte administration’s budget deficit shrank in May on the back of a deceiving pick-up in revenues. 

The fiscal gap narrowed 0.91% year-on-year last month to P203.6 billion, the Bureau of the Treasury reported Tuesday. That brought the 5-month deficit to P566.2 billion, up at annualized rate of 0.72%.

Breaking down the Treasury’s report, revenues grew 69.26% on-year to P256.4 billion, bringing year-to-date state earnings up 12.92% annually to P1.2 trillion. But the readings were mainly distorted by so-called base effects: the pandemic-induced recession sank last year’s tax collections, so the current figures appear big when compared on an annual basis.

Compared to the previous month, revenues were actually down 12.2% in May, data showed.

For Nicholas Mapa, senior economist at ING Bank in Manila, revenues would likely remain anemic for the rest of the year, as the economy struggles to get out of the coronavirus hole all while a new law lowering corporate income tax for pandemic-stricken companies hurts collections.

“The battle to balance the budget will be a complicated one given the need to limit the impact on the country’s fiscal metrics while still attempting to provide some assistance to the beleaguered economy,” Mapa said in an e-mailed commentary.

On the other hand, expenditures leapt 29.2% year-on-year to P456.7 billion, mainly due to spending on infrastructure projects, education and health programs, as well as health insurance premiums of senior citizens. In the first five months, disbursements increased 8.80% from year-ago level to P1.67 trillion.

Moving forward, ING Bank’s Mapa sees the budget shortfall lasting for the remaining months of the year, with the economic managers likely continuing to rein in spending to prevent the fiscal gap from widening to unhealthy levels and avoid a credit rating downgrade. Already, the Duterte administration expects the deficit to balloon to 9.4% of gross domestic product (GDP) in 2021 from the original projection of 8.9%.

It was a fiscal strategy that convinced credit rating agencies to retain the Philippines’ investment grade, which allows the government to borrow funds offshore at cheaper costs to fund its pandemic response. But amid threats from more infectious coronavirus variants that may trigger another round of crippling lockdowns, Mapa has a warning.

"The strategy to hold off on spending has worked to limit the deficit and debt but it also almost ensures that the injured economy stays in sick bay for a little longer," he said.

“If growth fails to return to the lofty status of faster than our peers and should our debt continue to pile on with no respite of fresh revenue streams on the horizon, perhaps ratings agencies will need to take a hard and fast look at the Philippines to gauge whether the former darling of the investor community is still the same superstar they once knew before the pandemic,” he added.