The Department of Finance (DOF) expects the cap on government’s stimulus package would prevent the deficit from ballooning.
The DOF said government is willing to spend P180 billion in a stimulus package it expects could boost the economy as lockdown measures against the coronavirus 2019
(Covid-19) pandemic has pushed it to a recession.
The package consists of P140 billion for actual spending and the expected P40 billion in tax credit through the reduction of corporate income tax (CIT) if the proposed Corporate Recovery and Tax Incentives for Enterprises (Create) law for such is enacted.
According to Finance Secretary Carlos Dominguez III, they arrived at the figure of P180 billion “to keep our fiscal deficit in a manageable zone.”
This year, Dominguez projects a ceiling on the deficit-to-GDP (gross domestic product) ratio at 9.6 percent, which will abate to 8.5 percent in 2021 and to 7.2 percent in 2022.
The DOF chief said reducing the CIT rate will leave P40 billion in the hands of the private sector, especially micro, small and medium enterprises (MSMEs). He expects such would 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.
“Whatever stimulus package we have, it has to be affordable and it has to recognize the fact that this virus may not be defeated by the end of this year,” Dominguez said. “So we have to keep, as they say, our powder dry for next year as well.”
Aside from providing tax credits to businesses, Dominguez said the government’s stimulus plan also includes injecting P50 billion into the banking system, which he believes will have a multiplier effect of between 8 times 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 Development Budget Coordination Committee’s (DBCC) new deficit target this year is now 9.6 percent of GDP, higher than the 8.4 percent of GDP that the DBCC set in May. The DBCC has said this was due to the cut in the estimated revenue take to P2.52 trillion from P2.61 trillion and the expected hike in disbursements to P4.34 trillion from P4.225 trillion previously.
State revenues are seen to drop because of the expected contraction in real GDP growth and the P42 billion in estimated foregone revenues from the implementation of the proposed Create Act.
This will reduce the corporate income tax rate (from 30 percent to 25 percent) to provide much-needed assistance to the business sector and help MSMEs retain their workers.
On the other hand, disbursements are also seen to rise this year as the government anticipated additional spending of P140 billion under Bayanihan to Recover as One Act or Bayanihan II being pursued in Congress.
Deficit targets are also revised upward to 8.5 percent in 2021 and 7.2 percent in 2022 from earlier projections of 6.6 percent and 5 percent, respectively.