Jimbo Albano / BusinessMirror

WHEN the government reduced its growth projection for the year to a range of 0.8 percent to 1.8 percent of gross domestic product (GDP) from a range of 3.1 percent to 4.1 percent, it also increased its budget-deficit target to P250 billion from P199 billion.

Such budget-deficit adjustment was expected as slower growth means smaller revenue collection, and the pressure on the government to prevent the economy from teetering and finally sliding into a recession would mean spending more.

The priority given to growth will be done at the expense of a ballooning budget deficit, which Citibank says could reach P400 billion or 5.3 percent of the GDP because of weak revenue collection. The government has been adjusting upward the deficit target from P40 billion to P177.2 billion, then to P199.2 billion, to the latest P250 billion.

It would appear now that the goal of the government to balance the budget before President Arroyo bows out of office is an impossible dream. Priming the economy means spending that, in turn, swells the budget deficit.

So far, the budget deficit for the first five months of the year has swollen to P123 billion by the end of last month, from only P18.8 billion in the same period last year. Still, Finance Secretary Margarito Teves is confident the government will meet its program, with domestic and foreign borrowing bridging the gap.

Nevertheless, the negative effects of a ballooning deficit are there: a credit-rating downgrade and a weakening of the peso against the US dollar.

ING has warned that there’s a good chance the country’s credit rating will be downgraded this year because of the budget deficit that comes from increased spending to avoid a recession.

ING, like Citibank, sees that the country will exceed the P250-billion target deficit. It said that raising the deficit ceiling puts pressure on credit agencies to downgrade ratings, which is a gauge of the country’s ability to service its debts.

Standard & Poor’s has also warned of a rating downgrade if reforms are stalled, or revenues are weak, or if the government is loathe to resort to spending cuts in favor of growth.

The P250-billion deficit is 3.2 percent of the projected GDP, and the International Monetary Fund thinks that debt beyond 3.5 percent of GDP could dampen investor confidence, which could result in a rating downgrade.

Also, the government would be hard put in scrounging around for the money to narrow the budget gap. The proceeds from the samurai-bond option that has been guaranteed by the Japan Bank of International Cooperation, estimated at $1 billion, may not be enough to cover the deficit if this exceeds 4 percent of GDP.

A rating downgrade could make it more expensive for the government to borrow, as it would have to pay higher interest.

We could avoid such a rating downgrade if, as promised by President Arroyo during her recent travel to Japan, the government would stick to its commitment to fiscal discipline. Mrs. Arroyo said the government would stick to deficit benchmarks and will be “deliberate” in spending.

Meanwhile, the country’s revenue-collection agencies would have to work double time to improve their collection. But at this point, it doesn’t look good—last May’s collection of the Bureau of Internal Revenue, the biggest revenue collector in the country, was P4.2 billion off the mark. It’s a long way to go for the BIR to reach its collection target of P850 billion for the entire year, which has been reduced from the previous P865.6 billion because of the economic slowdown.

It’s going to be a bumpy road ahead for the government, which has to resort to borrowing that may carry higher interest, while cracking the whip on tax collectors.