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Declining inflation and the budget deficit

Last week, the Philippine Statistics Authority (PSA) released the inflation rate for April — 6.6% — and it was a significant decline from 8.6% in February and 7.6% in March. Following this trend, this column projects that inflation will be around 5.5% for May this year.

Based on January-April data, the G7 industrialized countries (except Japan) continue to have high inflation rates, led by the United Kingdom (UK), Italy, and Germany. For East Asian economies plus India, the Philippines has the highest average inflation rate this year. During the same months last year, India and Singapore had the highest inflation rates (see Table 1).

From the PSA data, we see that the top three sources of high inflation in March and April were alcoholic beverages and tobacco, food and non-alcoholic beverages, and restaurants and accommodation services. This implies that people are going out to eat and drink more, travel and party more, which implies that consumer confidence is high — and this is good. When someone is spending that means somebody else is earning, and this helps sustain a dynamic domestic economy towards a higher level of spending, income, and GDP.

Inflation from transportation has significantly declined, from 13% in 2022 to 10% in January and February this year, and 4% (average) in March and April. Lower oil prices contributed to higher consumer confidence.

COR AND THE BUDGET DEFICITAlso last week, the Bureau of the Treasury (BTr) released the cash operations report (COR) for March 2023. I downloaded the historical monthly COR data and compared it with COR for the first quarter (Q1) of the year.

The good news is that revenues continue to rise so the budget deficit has been controlled to below P300 billion, unlike in 2021 and 2022, and financing or borrowing was also controlled to below P1 trillion, again unlike in 2021 and 2022.

The big problem continues in the spending side. More than P1 trillion in Q1 while revenues are only P0.7 to P0.8 trillion. The three biggest items on the expenditure side are National Government (NG) disbursements, transfers to local government units (LGUs), and interest payments to service the huge public debt (see Table 2).

The way public expenditures expand, even if revenues rise high they will never keep up with expenses because many officials, appointed and hired personnel, pensioners — especially the military and uniformed personnel (MUP) — and subsidy-dependents keep raising their claims to taxpayers’ money as if they have entitlement to money they did not earn.

The MUP pension system, in particular, is really unsustainable and bordering on shameless because the active personnel contribute zero to the fund and when they retire, they get huge benefits — tax-free — and these can be passed on to their spouses when they die. The fund was P160 billion/year in 2021 and 2022, and will rise to P200+ billion/year in 2023-2025. This fund should be zero and non-existent in the annual budget. Personnel in other sectors — like government doctors, nurses, teachers, engineers, etc. — do not have this kind of privilege.

Then there is a need to trim the fat or excess personnel in government via the National Government Rightsizing Program (NGRP). Some redundancies are useful, like in cyber security and internal defense against rebels and organized criminals. But some redundancies are wasteful, like having so many signatures and permits required to do business in the country. This kind of redundancy should be trimmed and controlled, then public spending and borrowings can also be controlled.

The public should support these moves by the economic team: MUP pension reform, NGRP, and Land Bank of the Philippines — Development Bank of the Philippines merger, with the LANDBANK as the surviving and sole government bank. These reforms will benefit the taxpayers through lower public expenditures, less need to borrow and tax, and lower interest payments.

LECTURE SERIESMeanwhile, the Ruperto P. Alonzo (RPA) lecture series for the second quarter of 2023 will be held in the afternoon of June 22 at the UP School of Economics (UPSE) auditorium. The main speakers will be Finance Secretary Ben Diokno and Budget Secretary Amenah Pangandaman. Mr. Diokno is a good friend and was a colleague of Prof. RPA at UPSE for decades, while Ms. Pangandaman was a student under Prof. RPA for two semesters at the Program in Development Economics (PDE) in the 1990s.

After the lectures by the two officials, there will be a PDE grand alumni homecoming. Graduates from batches from the 1960s to 2020s will have a great time looking at how the program has evolved and how Prof. RPA played a key role in it, especially molding young minds to become technically prepared, disciplined, and effective public officials like Secretary Pangandaman, Public-Private Partnership Center Executive Director Cynthia Hernandez, Tariff Commission Chair Louie Mendoza, and Department of Budget and Management Undersecretary Joselito Basilio. They and many other mid- to high-level government workers were former students of Prof. RPA at PDE.

Bienvenido S. Oplas, Jr. is the president of Bienvenido S. Oplas, Jr. Research Consultancy Services, and Minimal Government Thinkers.

minimalgovernment@gmail.com

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