P180-B stimulus plan to keep deficit in check

August 12, 2020

The proposed P180 billion economic stimulus plan that incorporates around P40-billion in tax credits to the private sector has already taken into account the deep contraction of the economy in the second quarter, and would be maintained at this level to keep the budget deficit manageable, according to Finance Sec.y Carlos Dominguez III.

Dominguez said the government’s borrowing plan to cover the massive funding for both its coronavirus pandemic response and economic recovery program is also in place and would be sufficient to cover the country’s requirements for 2020 and 2021.

About 75 percent of the government’s projected borrowings of P3 trillion next year would be sourced from domestic lenders, and the remaining 25 percent from foreign sources, the head of President Duterte’s economic team said.

“Our recovery plan is in place and when it was made, we had anticipated a large reduction in the GDP (gross domestic product) growth (in the second quarter),” he said.

The country’s GDP shrank by 16.5 percent in the second quarter, resulting to a first-semester contraction of nine percent. First-quarter GDP growth was at a revised -0.7 percent.

The DoF chief said the government is ready to spend P14o billion for an economic stimulus plan this year, and free another P40 billion in tax credits to the private sector in the form of the immediate reduction of the corporate income tax rate from 30 percent to 25 percent starting this 2020–via the proposed Corporate Recovery and Tax Incentives for Enterprises bill endorsed to the Congress by the President–and which would bring the total recovery package for the year to P180 billion.

“This number was arrived at to keep our fiscal deficit in a manageable zone,” he said.

Earlier, Dominguez said the government expects a higher deficit-to-GDP ratio for this year that it aims to keep below or at the median of the levels of its peers in the Association of Southeast Asian Nations region.

For this year, he projects a ceiling on the deficit-to-GDP ratio at 9.6 percent, which will lower to 8.5 percent in 2021 and 7.2 percent in 2022.

The Finance chief said reducing the CIT rate would leave around P40 billion in the hands of the private sector, especially micro, small and medium enterprises that account for most domestic companies, to help stimulate the economy and boost consumer confidence.

For 2022, he said the government would continue to borrow about P2.3 trillion to sustain a strong economic rebound.

“As we said, whatever stimulus package we have, it has to be affordable and it has to recognize the fact that this (corona) virus may not be defeated by the end of this year,” Dominguez said. “So we have to keep, as they say, we have to keep our powder dry for next year as well.”

Aside from providing P40 billion in tax credits to businesses, he  said the government’s stimulus plan also includes injecting P50 billion into the banking system, which would have a multiplier effect of between eight and 10 times, or about P400 billion worth of economic activity.