Tight rein on government spending not that good

In normal times, the Arroyo administration should be commended for their single-minded determination to keep within programmed spending limits. At the end of October, Finance Secretary Lito Camacho proudly reports that they have kept the budget deficit level at 3.2 percent below programmed target. They have proven that if you had decent government officials, it is possible to put a discipline on government spending.

But these are not normal times. In fact, there are those who are saying that it might have been better if government spent a little bit more to induce some more economic activity. In normal times, interest rate cuts by the BSP can help bring up the level of economic activities. Not anymore! A monetary approach must give way to a fiscal approach. Keeping the budget deficit down is not as important as keeping the country out of recession.

Let’s go back to some basic economics. Under normal times, keeping government expenditures in check is good because a runaway deficit is likely to make government crowd out the private sector in the credit market. That will, in turn, cause interest rates to rise. When government overspends, there is also the danger of rising inflation. Worse still, a spendthrift government is likely to waste taxpayers’ money on useless projects that earn billions of pesos for corrupt government officials and their cronies.

But under present conditions, a little more deficit spending will not crowd out private business because private business has no appetite to invest and is not borrowing anyway. Banks are so busy worrying about client defaults they don’t want to lend to anybody anymore. In fact, banks are so liquid, they are not earning their full potential because their only investment outlet is government Treasury bills.

Because government is the only action for the banks, the National Treasury is able to dictate interest rates it is willing to pay. Over the past weeks, interest rates on Treasury bills have been going down. So, there is no danger in interest rates going up if government pushed up its deficit level.

There is also little danger for inflation because there is very weak demand. People either do not have money or are afraid to spend their money. If we have some way of putting money into the hands of people who need it to improve their livelihood and are, therefore, very likely to spend on basic necessities whatever money they get their hands on, then that’s the way to go.

Why should government spend a little more? Simply because no one else is spending much to keep the economy from slipping into a recession. But it is not a question of the government pump- priming the economy by spending on anything. Government must spend in such a way as to put money in the hands of people who will quickly spend within the national economy.

The mistake of the Erap administration was to spend oodles of money on non-essential and scandalously overpriced big ticket items peddled by cronies and foreign merchants who provide attractive kickbacks. This kind of spending is counterproductive because it ends up as idle funds in bank accounts or being remitted in secret accounts abroad. This kind of spending does not pump prime the economy. It bleeds it.

The Arroyo administration could have spent a little more money in the short term to develop the countryside. This will put money in the hands of our farmers who will use it to expand production and buy personal necessities. Because they have a high propensity to spend, the money will be immediately used and put back into the economy. And inasmuch as they compose the majority of our people who are poor, it is also going to produce good social development dividends.

So, why didn’t our favorite PhD in economics think of these basic Economics 101 stuff? Maybe because her administration is too media driven, and they must have figured that it is too much trouble trying to go against conventional wisdom championed by media. Many of us in media think in terms of formula concepts. And because very few of us read beyond the daily newspapers, media reporters and commentators hardly ever go beyond conventional wisdom.

And the conventional wisdom many people hold on to is that government must keep its deficits under control. As I said, that may be right in normal times. But even the very concept of normal has changed significantly and many of us haven’t caught on, yet.

Next year is going to be the year when GMA’s Harvard and Wharton educated Cabinet members will be tested. By all accounts, it will be a most challenging year, to put it mildly. In simple terms, next year will be baaad. Conventional wisdom isn’t going to hack it.

It will take more than controlling the budget deficit to keep an ever-growing Filipino nation fed. More and more OFWs will be sent home as host countries buckle up for the worldwide economic crisis. A little more creativity added to the honesty and competence of GMA’s economic managers will be needed. Our favorite economics PhD, and I don’t mean Dante Canlas, will have to show a lot more spunk in navigating our economic destiny than she has so far shown.

Business as usual

Dr. Ernie E draws a line between business and religion.

The priest had just finished hearing the man’s confession and was considering the man’s penitence. "Are you sure you’re going to try to set aside all sin?"

"Yes, Father, I certainly am going to try," replied the man. "I hereby resolve to double my efforts."

"And you’re going to attend Mass regularly my son?" the priest went on.

"Yes, Father, I realize I have strayed," said the man. "I shall both worship and confess every week."

"And how about your debts and those you have cheated?" inquired the priest.

"Now just a minute, Father." said the man. "Now you’re talking business, not religion."

(Boo Chanco’s e-mail address is [email protected])