Angelo Taningco
Economist, Treasury Group

Philippine fiscal deficit surged 140% yoy to P51.5 billion in January-February on the back of relatively sharp government spending growth (26% yoy), which eclipsed the already strong government revenue growth (19% yoy). Between January and February, the fiscal balance reverted from a P10.2 billion surplus to a P61.7 billion deficit, which was 160% bigger from the same month of previous year.

Government revenues totaled P178.5 billion in February, registering an 18% yoy increase. Its cumulative level climbed 19% yoy to P417.4 billion in January-February. Double-digit growth in the tax revenue collections of both the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC) amid the enforcement of the TRAIN law have contributed to the vibrant government revenue growth in the first two months of the year. We expect the tax effort to be higher this year.

Government expenditures were also healthy as it surged 37% yoy to P240.3 billion in February and 26% yoy to P469 billion in the first two months of the year. Excluding interest payments, the government’s “productive spending” grew 35% yoy to P204.1 billion in February and 27% yoy to P389.3 billion in January-February. The Department of Budget and Management (DBM) has instructed government line agencies to utilize this year’s national budget like a “cash-based budget”, which is seen to have potential in improving the efficiency of budget utilization.

The government’s 2018 fiscal deficit target is P523.7 billion, which is 3.0% of projected GDP. The improved government spending performance, thus far, is supportive of this target. However, we still see absorptive capacity constraints as a downside risk to the government’s expenditure program. Also, tax collections are likely to stay bigger for the rest of the year amid the TRAIN law. With this, we think this year’s fiscal deficit may fall short of the target. Thus, we maintain our 2018 fiscal deficit forecast of 2.7% of GDP.

Better government spending performance tends to promote faster GDP growth. The positive GDP growth impact of deficit spending is likely to be sustained if tax effort also improves. We think the strong revenue collection and spending of the government will result in a manageable fiscal deficit position, and would likely promote robust GDP growth. In this regard, we stick to our 2018 GDP growth forecast of 6.8%.

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