The National Academy of Science and Technology Philippines, in partnership with the Department of Science and Technology Regional Office 2, held the second installment of its webinar series last June 3, titled COVID-19: Where We Are and Where We Want to Be.
Guest speakers discussed the current economic issues being faced by the country and shared their suggestions on the government’s programs intended to address the needs of impacted sectors.
Risk awareness
Dr. Dante Canlas, Professor Emeritus of the University of the Philippines School of Economics, briefly discussed government response to alleviate the macroeconomic shocks—economy-wide disturbances—caused by the halting of several industrial sectors as lockdowns were imposed. “Under the Bayanihan to Heal as One Act, those spending programs will include some cash transfers and food aid for the poor. Not to mention, the very temporary unemployment benefits to workers laid off from the lockdowns of businesses,” he said.
Because of the sharp decline in tax and non-tax collections, the government is now facing a “tight budget constraint”, Canlas explained, as funding continues for financial assistance measures such as the Social Amelioration Program (SAP). The allocation of funds toward subsidies further increases the national budget deficit.
“We have to worry [about the deficit because] many social programs are quite beneficial to society…If they start to be cut, that becomes really worrisome,” Canlas lamented.
He added that finance officials should be aware of the implications that come with borrowing money from local and international financial sources such as the World Bank, which only recently, approved a fresh USD 500-million loan to help the Philippines with its efforts against COVID-19.
The professor emeritus noted that the government already acquired a P300-billion loan from the Bangko Sentral ng Pilipinas to help fund its programs. This, he elaborated, poses an inflationary risk. “If you print far too much money, this [is] what economies usually call ‘too much money chasing too few goods’, [and] what happens there is inflation,” he explained.
Hence, to ease financial pressure, the country sought aid from foreign financial markets. Nevertheless, Canlas shared that this may result in a loss of confidence toward the Philippine Peso exchange rate once lenders discover a high balance of unpaid debts.
Plunged into poverty
Five to 12 million more individuals may become poor due to lockdown restrictions, especially if vulnerable groups do not receive social welfare, according to an ongoing study presented by Ateneo de Manila University professor Geoffrey Ducanes. “Without transfers from the government or private sector, poverty incidence can rise from the baseline level of 14 percent to anywhere from 18 percent to 24 percent,” he uttered.
The extent of the said effect varies depending on how many people lose their jobs and on the length of the Enhanced Community Quarantine (ECQ). He added that the same factors can also affect the poverty gap—how far a person is below the poverty threshold—making the poor even poorer on average.
These, however, can be cushioned with the provision of government transfers such as the two-month cash grant under the SAP. But such will be insufficient to eliminate the risk of rising poverty altogether and is less effective when countered with inflation. “What we found was that, of course, the higher the food inflation, the higher the poverty, and if food inflation was 15 percent above normal, this is enough to completely offset the effect of the [Bayanihan to Heal as One Act] two-month cash grant,” Ducanes relayed.
To mitigate the pandemic’s impact, he recommends the extension of the SAP even after the ECQ for the most vulnerable households while at the same time improving its targeting and the timeliness of its delivery. He additionally moved in favor of programs that provide worker retraining, offer emergency employment, and mitigate inflation.
Corporate tax cuts: Not a stimulus?
National Scientist Raul Fabella, recognized for his work in economics, questioned the effectiveness of the proposed Corporate Recovery and Tax Incentives for Enterprises Act (CREATE)—the Duterte administration’s plan for stimulating the “supply-side” of the economy by reducing corporate income tax from 30 to 25 percent and incentivizing investments—as part of the national post-pandemic recovery strategy.
Fabella reasoned that firms act very differently when the economy is contracting and that, according to research, they do not invest their tax savings in such circumstances. This stands contrary to the rationale of the bill, which hoped for companies to generate employment and income by reinvesting the money they save from lower taxes.
He also warned that CREATE will cost the government P42 billion in 2020 and a total of P625 billion for the next five years. “Mula sa kaban ng bayan, lilipat sa kaban ng private corporations,” he commented. With the poor still contending with higher taxes on drinks, cigarettes, and text messages, this in effect, according to Fabella, transferred resources from the poor to the rich.
(From the nation’s treasury, the money will be transferred to private corporations’ treasuries.)
The Yale University alumnus instead proposed using an economic stimulus package that concentrates on the “demand-side”, such as the proposed Philippine Economic Stimulus Act, which is set to provide wage subsidies, among other purposes. He, moreover, suggested holding off on the passage of corporate income tax reduction when the economy is stable.
