AER on passing a stimulus-responsive 2021 budget: “Gamot at vaccine, hindi bala; farms, not arms”

As the 2021 budget is being deliberated on in the Senate, Action for Economic Reforms (AER) urges the Senate to adopt a budget that is truly responsive to a stimulus.

With the deep economic recession and the COVID-19 pandemic, the government needs to substantially increase its spending. However, tax revenues are decreasing because of the decline in economic activities. Hence, the increased government spending has to be financed through borrowing and monetization.

A strong stimulus is needed to pursue economic recovery. The stimulus’ objective is to increase incomes, thereby increasing consumption and boosting demand, which will then result in the creation of more jobs and more investments — putting into motion a virtuous cycle.

We implore the Senate to pass a budget which facilitates economic recovery during this economic and health crisis. To do this, we urge lawmakers to take into consideration the following factors:

The stimulus needs to identify and address the principal problem. In our case, the principal problem which impedes economic recovery is the uncontained spread of COVID-19. Thus, we appeal to the Senate to adopt a budget that prioritizes health and saves lives by “flattening the curve.”

Yet the proposed 2021 budget for the Department of Health (DOH) suffers from cuts and inadequate allocation. The Human Resource for Health (HRH) budget is 14% lower than its 2020 budget and is also lower than what the DOH is asking for 2021. Concretely, this will mean a reduction of 1,513 positions for nurses.

Funding for COVID-19 vaccination is also insufficient. The allocated amount of PhP 8 billion is only good to vaccinate the frontliners and the poor elderly — far from the number needed for herd immunity. 60 to 70 percent of the population must be immunized to achieve herd immunity.

Quality of spending must be ensured; spending should follow equity and efficiency, and should do no harm. We find it concerning that budgets for health, social amelioration, and agriculture remain inadequate, while the budgets for counter-insurgency (PhP 19 billion) and intelligence and confidential funds (PhP 9 billion) are unusually huge. These funds would be better allocated to finance the fight against COVID-19. The intelligence and confidential funds are not transparent either. Thus, we face the tradeoff that Western economics textbooks label “butter vs. guns.” In the Philippine context, the judgment is “gamot at vaccine, hindi bala; farms, not arms.”

Spending must be targeted to benefit the most affected by the health and economic crisis: the poor, hungry, unemployed, sick, and their households. However, the budgets for Departments that serve the most vulnerable sectors are inadequate. The Social Amelioration Program (SAP), for instance, which provides cash subsidies for more than 80% of Filipino families affected by the pandemic, is good for only two tranches. Economic managers are banking on renewed economic activities, which they hope will make the SAP unnecessary. But consumer and investor pessimism is still pervasive because of the fear that the virus has yet to be contained. The SAP is not only a lifeline; it also serves as a stimulus, as it will result in higher consumption and higher aggregate demand.

The Department of Agriculture (DA) currently has an insufficient budget to complete its Registry System for Basic Agriculture (RSBA), a necessary tool to target farmer beneficiaries for DA’s programs. The amount needed to complete the RSBA is an amount between PhP 1.7 and PhP 2 billion, and yet the 2021 budget allotted for it is only P200 million.

The DA’s budget only makes up 2.5% of the total national budget, even though agriculture’s contribution to GDP is around 10%. As a ratio of total government budget, the agriculture budget is much lower than the agriculture budget for ASEAN counterparts such as Vietnam, Thailand and Indonesia. Thus, we believe doubling the DA budget is reasonable.

Part of the stimulus is providing a cut in corporate income taxation, as mandated in the soon-to-be-passed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Bill. But a corporate tax cut has limited effect on the stimulus, because its gains will not necessarily be transferred to the workers and their households. To maximize the stimulus effect, the tax cut needs to be tied to job preservation or creation, or accompanied by conditionalities like temporarily restricting dividend payments and equity buybacks.

The stimulus must be done with urgency and timeliness. Time is of the essence, and to maximize the stimulus, it needs to be put into place as soon as possible.

It is crucial to have a bold stimulus, as a weak stimulus translates into weaker recovery. Thanks to a series of tax reforms, the Philippines now has the fiscal space to pursue a bold stimulus. Debt indicators are currently solid; heavy borrowing in the time of COVID-19 will not lead the country to the brink of a debt crisis. But national government deficit spending is 9.6% of GDP, and is much lower compared to the deficit of other emerging markets. We have been quite reluctant to spend; we cannot curtail pandemic- related spending if we want our economy to recover quickly.

Although signs of economic rebound are not yet on the horizon, a stimulus cannot run forever. It will eventually need unwinding — spending has to be rolled back gradually and revenues must increase to prevent a debt or fiscal crisis.

We call on the Senate to pass a stimulus-responsive budget at the earliest possible time. Aside from this, we need sustained public investments, such as strengthening pandemic or disaster preparedness, attaining universal health care, and addressing climate change, which are crucial in our post-pandemic reality.