Wake Up, Philippines!

Citi believes gov’t budget gap may be higher

Posted in Budget by Erineus on June 17, 2009

By Michelle Remo
Philippine Daily Inquirer
First Posted 23:16:00 06/16/2009

MANILA, Philippines—Citigroup said the Philippine government could have underestimated the budget deficit ceiling for the year.

According to the international investment bank, the government may incur a budget deficit equivalent to P350 billion, or about 4.5 percent of the projected gross domestic product for the year because of the need to shore up public spending and weak tax collection.

Citigroup’s deficit forecast is much higher than the revised ceiling of P250 billion, or 3.2 percent of GDP, set by the government’s economic managers.

The government deemed it prudent to revise the ceiling in view of the programmed spending for the year and the likelihood of a shortfall in tax collection, which they said would result from a slowdown in corporate earnings and restrained household incomes.

But according to Citigroup, the deficit for the year would be even higher than the government’s new target.

“The combination of weak cyclical environment … could lead to fiscal deficit [of about] P350 billion,” Citigroup said in a paper on the Philippine economy.

The investment bank said it didn’t help at all that the cut in the corporate income tax rate, from 35 to 30 percent, took effect in January this year when the government needed to maximize its revenue resources to fund rising expenditures.

“Tax policy handicaps that only began this year, like the reduction in the corporate income tax rate from 35 to 30 percent, and the increase in individual income tax exemption probably enforced the tax ratio to decline,” Citigroup added.

A deficit of 4.5 percent of GDP as projected by Citigroup would go beyond the 3.5 percent deemed manageable and acceptable according to international standards.

The International Monetary Fund earlier said the government’s budget deficit could be raised to as much as 3.5 percent of GDP this year without harming its credit standing. But any amount higher than that could erode confidence of the financial market on the Philippine government’s fiscal condition.

The government was forced to raise its deficit ceiling for the year to P250 billion from an earlier limit of P199.2 billion following the release of the first-quarter GDP report. In the first three months, the economy, measured in terms of its GDP, grew by only 0.4 percent, the slowest in 10 years.

Economic managers were likewise forced to revise their GDP growth target for the year from a range of 3.1 to 4.1 percent, to a range of 0.8 to 1.8 percent.

They said that with an economic growth of only 0.8 to 1.8 percent this year, tax collection would be reduced and the deficit could go as high as P250 billion.

Citigroup said that with the government’s budget deficit expected to balloon this year, from only P68.1 billion last year, higher interest rates on its borrowings could result.


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