MANILA - The last time the Philippines suffered a reenacted budget was in 2020, when there was a six-day delay in the signing of the budget for the year, due to a photo finish of budget deliberations in Congress in 2019. But that was nowhere near what happened the year before.
During the 17th Congress, led in part by Former President and House Speaker Gloria Macapagal Arroyo and Former Speaker Pantaleon Alvarez, a budget impasse stalled the passage of the General Appropriations Act (GAA) for 2019. That Congress was marred by leadership issues, with Arroyo taking over from Alvarez after a coup in 2018.
On top of the quarrels over power in the Lower House, it can be recalled that there were also accusations of anomalous budget insertions hurled between the Senate and the Lower House. It was a messy political situation, and it mirrors what is happening in the 18th Congress now following the suspension of budget deliberations by Incumbent House Speaker Alan Peter Cayetano. Cayetano is fighting over the speakership with Representative Lord Allan Jay Velasco. The two have a power sharing agreement brokered by President Rodrigo Duterte, with Velasco scheduled to take over the speakership on October 14. Cayetano appears to have other plans.
The politics however is not what is being discussed. The consequences are.
Any delay in the passage of the government's budget, and a reenacted budget, results in government underspending.
There were 15 consecutive quarters of at least 6 percent economic growth for the Philippines prior to the first quarter of 2019. That quarter growth hit 5.7 percent, the slowest quarterly expansion in four years. By the second quarter of 2019, growth slowed to 5.4 percent. This was the impact of the reenacted 2019 budget that coincided with the midterm elections, which brought with it an election ban on new construction projects.
In the first quarter of 2020, the Philippines suffered its first quarterly contraction in economic activity in decades. This can be blamed on multiple factors, including the Taal volcano eruption, and the early effects of the COVID-19 pandemic. By the second quarter, the contraction widened to 16.5 percent, the worst quarterly contraction on record, pushing the Philippines into an official recession.
2020 was supposed to be the year the Duterte administration would get back on track. There were claims that 2019 would be the worst year of economic growth under Duterte, as the "Build Build Build" Infrastructure push would power growth to above 6 percent and beyond all the way to 2022.
Consider this chart showing government spending versus other drivers of growth, such as household consumption, investment, and trade.
In 2019, government spending saw a distinct drop compared to previous quarters, a direct result of the delayed budget. The election ban in effect in the second quarter extended the spending slump. Government spending growth was just 6.4 percent in the first quarter of that year, and 6.8 percent in the second quarter. Government expenditures only really kicked back up by the last quarter of 2019. The lack of government spending was a clear drag on economic activity, which was propped up by the always dependable domestic demand.
The roles reversed in 2020, with all other drivers of growth on the demand side plummeting due to COVID-19. Household consumption, the main driver of the economy, shrunk 15.5 percent. Prior to this, the biggest contraction recorded was 2.8 percent in the third quarter of 1985. Capital formation posted a 53.5 percent decline, the worst since the first quarter of 1985.
Government spending was the only buffer of the Philippine economy against the ill effects of the pandemic and the lockdowns enforced to control it. If it were not for the 22.1 percent growth in state expenditures, the fastest in more than eight years, the economic fallout of the pandemic would have been much worse.
Government spending matters, just as the timely passage of the budget by Congress matters.
Look at this chart, which shows capital outlays growth in orange and expenditure growth in blue. There was a sharp decline in outlays in April 2019, and further contractions in the orange line in February, March, June, July, August and October of that same year. The blue line follows a similar trend as disbursement only started to pick up in the second half of 2019.
In 2020, capital outlay growth was negative in January, February, May, and July. The slow start to both 2019 and 2020 can be attributed to the reenacted budgets, with the impact in 2020 somewhat mitigated by the much shorter delay in the 2020 GAA passage.
There was a spike in spending in April 2020, but this may be partly attributed to the low base effect, with spending cratering in April the year before. It may have also been sparked by the passage of the Bayanihan to Heal as One Act in March, which opened up the 2020 budget for reallocation into COVID-19 response and recovery measures.
The results are clear. The reenacted budget in recent years resulted in uneven growth in government spending. Without budget continuity, the government cannot achieve any spending momentum.
What’s worse, the 2021 budget, which again could be delayed by politics, contains most of the Duterte administration’s COVID-19 recovery program. The economic team deliberately pushed for a ‘fiscally responsible’ Bayanihan to Recover as One Act (Bayanihan 2), which took effect in September, because the bulk of their recovery spending programs was included in the 2021 budget.
Arroyo recently spoke on the budget issues festering in the House of Representatives saying “ I have lived with a reenacted budget, a delayed budget for much of my administration. But that doesn't stop you from spending as much as possible at the start of the year, and that is what you must do, every time a budget is delayed.”
Business groups don’t want to take the chance. Francis Lim, President of the Management Association of the Philippines says “we hope that the suspension will not delay the passage of the 2021 budget, which is even more critical now given the need to mitigate the impact of the current crisis. The situation reminds us of the 2019 national budget, the enactment of which was delayed due to the impasse between the Senate and the House of Representatives. Let’s keep our fingers crossed that this sad situation will not repeat itself, otherwise our country’s economic recovery from the pandemic will be delayed to the further prejudice of our people.”
Opposition Senator Risa Hontiveros said on Twitter that “the Senate is working overtime to pass the national budget. This is one of the most important budget deliberations of our generation, and we will not allow it to be delayed by petty politics.”
Her message mirrors that of President Duterte, who appeared frustrated as he told lawmakers through a televised statement Thursday night that they have to fix the budget, or he will fix it for them.
History is on the verge of repeating itself, as bickering lawmakers threaten the timely passage of the 2021 budget.
This budget contains multiple programs meant to aid the Philippines’ COVID-19 recovery. It contains provisions for the "Build Build Build" infrastructure program, the cornerstone of the Duterte administration’s economic recovery plan. The record P4.5 trillion allocation is supposed to pick up the slack in terms of government spending, following what many criticized as an ‘underwhelming’ Bayanihan 2 allocation of P140 billion.
All of this is under threat, because of politics.