Mortgaging our children’s future

“Some years ago, The Wall Street Journal ran a cartoon that goes to the essence of the matter. A small child is coming home after getting off a school bus. As he opens the door to his house, he shouts to his parents, ‘What’s this I hear about you adults mortgaging my future?’

“I like this cartoon not because it’s funny (it’s not, really) but because it succinctly summarizes the economics of government debt. Courses in macroeconomics examine how government debt affects interest rates, capital accumulation, trade deficits and so on. But the starting point for all that analysis is a transfer of income between generations.

“In their personal capacity, parents cannot choose to live beyond their means and leave negative bequests to their children. As voters and citizens, however, parents can do exactly that, and Americans are now doing so in a big way.”

That’s how N. Gregory Mankiw, an economics professor at Harvard University opened his recent lecture on “The Fiscal Future.”

The lecture was about the US debt but a Filipino can strongly relate to the points he made about the need to sustainably manage the national debt.

They are very concerned about where they are going with their national debt. Dr. Mankiw observed that for the US, the trajectory of their growing debt is not so benign.

“According to the 2025 projections of the Congressional Budget Office, the debt-to-GDP ratio will, under current law, continue to rise over the next three decades, reaching 156 percent in 2055. There is, moreover, no end in sight to this increasing indebtedness.

“Even more worrisome, this projection is optimistic. It assumes that the US economy will experience normal economic growth, without a crisis like a major war, a deep recession, or another pandemic, which would push debt even higher.”

His lecture cites “only five ways to stop this upward trajectory. They are (1) extraordinary economic growth, (2) government default, (3) large-scale money creation, (4) substantial cuts in government spending and (5) large tax increases.

“It would surely be imprudent for fiscal policymakers to assume that rapid growth will come to their rescue,” the economist said.

Aha! That’s exactly what our economic managers from Diokno to Recto to Balisacan have been saying. They insist we shouldn’t worry because rapid economic growth will outpace and reduce the government’s rising debt burden.

The assumption is hopeful but theoretical. It depends on fiscal discipline, and our government’s ability to use borrowed capital in ways that multiply economic value. Our government has little of those abilities.

Debt must fund investment (e.g. infrastructure, education, health care), not dissipated on ayudas, corruption like pork barrel allocations and wasteful consumption.

Real risk emerges if interest costs rise faster than economic growth, or if the government fails to convert borrowed funds into productivity gains.

What is our government’s track record?

Historically, Philippine GDP growth was robust pre?2020, often matching or outpacing debt accumulation. Since the pandemic, debt has grown faster than GDP, pushing the debt-to-GDP ratio up.

The GDP growth projections for 2025 (5.5 to 6.5 percent) and 2026 (six to seven?percent) look optimistic. Most independent forecasts suggest more underperformance of budget assumptions.

Of most concern is the vulnerability of our agricultural sector. In 2024, agriculture contracted by -2.2 percent. The weather has always been a convenient excuse but it is more about the absence of policies and programs that address the age-old problems of farmers.

Overall, meeting the seven to eight percent GDP growth the economic managers talk about will require a surge in private and public investments, including PPPs; that’s uncertain given the country’s apparent unattractiveness to investors, foreign and local.

The second danger posed by runaway debt is the possibility of default. We have been there before during the early 80s and those who experienced the consequences know how painful and humiliating it was.

The third possibility… the government may address an unsustainable debt by getting the central bank to print money. That’s suicidal because inflation will escalate to shocking levels. In Zimbabwe, their currency went from 50 Zimbabwe dollars to 100 trillion Zimbabwe dollars to a US dollar.

Alternatively, the government will be forced to cut expenses, something the IMF required us to do in the 1980s. And that was complemented by mandated painful tax increases.

BBM has endorsed a P6.793-trillion draft national budget for 2026 that seems to have most of the despised pork funds prioritized over counterpart funds for ODA infrastructure and health care, among others.

This year’s P6.326?trillion national budget will be covered by revenue (tax + non-tax) projected at P4.64?trillion. To address the spending gap, the government will borrow from domestic and foreign sources.

On the other hand, total scheduled debt service (interest plus principal repayment) is P2.05?trillion, equating to P5.616?billion per day (P2.05?trillion ÷ 365).

After servicing debts, net new debt taken on is projected at P1.34?trillion. That is about P3.672?billion per day (P1.34?trillion ÷ 365).

It is clear we are not talking peanuts here. We need government officials who will respect the money we pay as taxes as well as the money it borrows to be paid for by our grandchildren.

We need an honest budget that prioritizes national growth through investment in infrastructure and in our people (education, health care). These are the drivers to GDP growth that will enable us to service increasing debt.

Today’s generation of leaders shouldn’t be so irresponsible as to saddle our grandchildren with so much debt. That will keep them poor and vulnerable to abuse.

As Dr. Mankiw observed, the problem is “For most politicians, getting reelected is their highest priority. Enacting good policy is farther down the list.

“It is possible, perhaps even likely, that a solution won’t come until the financial markets leave policymakers with no other choice. That scenario would be unpleasant for nearly everyone.”

We have been there in the first Marcos era. We shouldn’t want to go back there.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco