By Victoria “NIKE” De Dios
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 will be maintained at this level to keep the budget deficit manageable, according to Finance Secretary 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 will 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 will be sourced from domestic lenders, and the remaining 25 percent from foreign sources, said Dominguez, who heads President Duterte’s economic team.
“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),” Dominguez said during a recent virtual press briefing of the Development Budget Coordination Committee (DBCC).
The country’s GDP shrank by 16.5 percent in the second quarter, resulting in a first-semester contraction of 9 percent. First-quarter GDP growth was at a revised -0.7 percent.
Dominguez 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 (CIT) rate from 30 percent to 25 percent starting this 2020–via the proposed Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill endorsed to the Congress by the President–and which will 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,” Dominguez said.
Earlier, Dominguez said the government expects a higher deficit-to-GDP ratio for 2020 that it aims to keep below or at the median of the levels of its peers in the Association of Southeast Asian Nations (ASEAN) region.
For this year, Dominguez 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.
Dominguez said reducing the CIT rate will leave around P40 billion in the hands of the private sector, especially micro, small and medium enterprises (MSMEs) that account for most domestic companies, to help stimulate the economy and boost consumer confidence.
For 2022, Dominguez said the government will 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, Dominguez said the government’s stimulus plan also includes injecting P50 billion into the banking system, which will have a multiplier effect of between 8 and 10 times or about P400 billion worth of economic activity.
Another P5 billion will go to a credit guarantee program for distressed businesses, which has a multiplier effect of around 20 times, or about P100 billion-worth of economic activity generated by the private sector, he said.
“So if you add the two, you will probably end up with anywhere between P400 billion and P600 billion in economic activity,” Dominguez said.
The Finance Secretary said all sectors working together to curb the spread of the COVID-19, supported by prudent fiscal and monetary policies, “will see us through this difficult time.”
“We have to continue these policies over the next years as we continue to struggle with this contagion,” Dominguez added.
Dominguez earlier said that without continued and increased public-sector spending, especially on infrastructure, public health and social protection, the first-semester GDP would have contracted by a total of 11.5 percent or 2.5 percentage points more than the actual 9 percent.
Government expenditures during the first semester of 2020 went up by 27 percent to P2.01 trillion, from P1.59 trillion in the same period last year.
Dominguez assured the public that the government has “the resources necessary” to prevail over the challenge of COVID-19 and its adverse economic impact, following the first-semester contraction by 9 percent of the economy.