‘Government should advance fiscal consolidation’

To ensure debt sustainability

MANILA, Philippines — The government should advance its fiscal consolidation through reduced borrowings and moderate spending to ensure sustainability of the country’s debt level, a state think tank said.

In its latest discussion paper, the Congressional Policy and Budget Research Department (CPBRD) said the challenges associated with maintaining debt and fiscal sustainability are compounding over time amid volatile macro-fiscal conditions.

As of end-March, the national debt stood at a record P16.68 trillion. Its share to the country’s output jumped to a two-year high of 62 percent, with the ratio moving further above the internationally accepted threshold.

As such, CPBRD argued that a sustained fiscal consolidation over the medium-term that is guided by carefully calibrated fiscal targets is essential to mitigating debt risks and ensuring long-term economic stability.

“Policymakers are enjoined to intensify efforts to strengthen fiscal sustainability and advance fiscal consolidation by reducing borrowing and, more importantly, moderating deficit spending,” CPBRD said.

It emphasized that a slower pace of fiscal consolidation could undermine the buffer needed for inclusive growth.

Data showed that the deficit has remained elevated even after the pandemic, settling at P1.5 trillion as of last year.

CPBRD estimates that the gap will continue to expand given the record national budget of P6.32 trillion and the lower revenue expectation this year.

“It is unlikely that the government can reach the tax revenue growth targets set by the Development Budget Coordination Committee due to moderated growth prospects and a standing moratorium on ‘new’ taxes,” CPBRD said.

As a key indicator of debt sustainability, CPBRD warned of the rising debt-to-GDP ratio, which signals potential concerns regarding long-term fiscal health.

Given that the current ratio remains above the debt thresholds for emerging markets, the think tank said that there is a clear need for sustained revenue mobilization strategies to ensure fiscal stability.

Moving forward, the government is urged to bolster revenue mobilization by raising the tax effort to at least 15 percent of GDP in line with multilateral benchmarks for sustainable development and to adopt a prudent spending policy.

Currently, the government has a medium-term fiscal framework (MTFF) aimed at attaining short-term macro-fiscal stability while remaining supportive of economic recovery and to promote fiscal sustainability.

It also aims to consolidate the government’s resources so that these are mobilized and utilized in order to gain the maximum benefit and high multiplier effects for the economy.

CPBRD argued that adopting fiscally prudent strategies earlier rather than later ensures that the present debt burden remains manageable throughout the medium term.

“Greater fiscal conservatism reduces the vulnerability of the macroeconomy to potential adverse shocks and preserves the economic gains accrued in the past decades,” it said.

On the bright side, the think tank maintained that the country’s macroeconomic fundamentals are on firm ground and is set to attain upper-middle-income status.

“The growth momentum can help generate the resources needed to manage debt and sustain public investments moving forward,” it said.