Awash With Cash: The Duterte Government’s Inheritance From Aquino

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Awash With Cash: The Duterte Government’s Inheritance From Aquino

Many of Duterte’s policy plans would not be possible without the fiscal discipline practiced by his predecessor.

Awash With Cash: The Duterte Government’s Inheritance From Aquino
Credit: Flickr/ World Bank

Ironic as it may seem considering his campaign platform, investors have welcomed the eight-point economic agenda of the incoming president of the Philippines, Rodrigo Duterte, in which he vowed to continue and maintain the current macroeconomic policies of the outgoing government.

This is, by no means, a marked shift from his campaign promise, “Change is Coming,” under which he criticized the outgoing leader Benigno Aquino III for failing to lift up the lives of the more than a quarter of Filipinos still in poverty. This was despite the country’s much-touted fastest six-year economic growth since the 1970s.

Under Aquino, the Philippines achieved no small feat. Once dubbed the “Sick Man of Asia,” the economy grew 6.9 percent in the first three months of 2016 to surpass all major Asian nations, including China. But perhaps the best achievement for the past six years is how the government put its fiscal house in order. From a high of nearly 5 percent of gross domestic product (GDP), the deficit dropped to only 0.9 percent last year. 

In fact, since 2011, Aquino has been criticized more for not spending enough to support the economy than for breaching deficit targets early in the year, something his predecessors had consistently done. His government, in contrast, has fallen below spending caps for the past five years, while recording double-digit revenue growth during the same period.

As a result, the Philippines not only gained a number of credit rating upgrades that lowered borrowing costs for its consumers and investors, it also allowed the budget to become an “indispensable tool” for economic growth, according to Florencio Abad, the budget secretary. And data supports this.

For instance, the government was able to bridge the decades-long classroom gap under the education portfolio, whose budget has risen by nearly three-fold. A social welfare program granting cash to the poorest families in exchange for keeping their children at school and mothers healthy was expanded to cover 4.4 million families, up from just 800,000 in 2010. And despite the archipelago’s continued infrastructure woes, Aquino should also be credited for achieving an infrastructure-to-GDP ratio of 3.3 percent last year, the highest since 1991.

Finance Secretary Cesar Purisima said the next leader will inherit a better Philippines. The national outlay would give credence to this; the Aquino administration’s fiscal discipline was unprecedented. To an extent, Duterte’s own promises even hinge on the fact that, compared with 2010, the new president has more funds now at his disposal upon taking over. He could not have made those promises without knowing the money is already there. And even if Duterte could, as populist as he may be, without the financial basis he was bound to fail — raising more revenue and fiscal reforms immediately will not necessarily and automatically translate to better collections. Aquino himself had six years to reform the budget. He raised more revenue in a matter of two years, but it took him almost his entire presidency to balance it out with just enough — not too much, not too little — spending.

Consider Duterte’s promise of annual infrastructure spending equivalent to 5 percent of GDP, a level the World Bank has suggested. Even the prospect of it would have been nearly impossible a decade ago, with the deficit reaching the roof and debt accounting for 70 percent of economic output. People would have criticized the government shelling out money on capital formation they cannot eat on their dining tables at a time when social services were also suffering.

Another example is the promise to reform the tax system. Last year, there was a proposal to lower the income tax rates, considered the second highest in Southeast Asia and going as high as 32 percent. Aquino opposed it. That cost him some political capital, which Duterte is now taking advantage of. Part of his economic agenda is to revisit the tax system, a good move indeed. But doing so is only possible because of rising revenues that have consistently beaten GDP growth. Otherwise, the proposal would have been catastrophic. The Department of Finance estimates that lowering income tax rate to 25 percent– which is what Duterte’s team wanted — would cost up to 316 billion pesos ($6.8 billion). That represents more than 76 percent of the education budget this year.

Even Duterte’s anti-crime platform has Aquino to thank. His election promise to increase police pay to help him on his anti-drug campaign will need funds, and a government awash with cash will work on Duterte’s favor. This year, the salaries of state workers were increased through Aquino’s order. That just represented the first of four scheduled increases under a bill that failed to pass before Congress adjourned for the elections. We can only hope that next administration would continue that as well.

Globally, the Philippine economy shines as one that has avoided the moral hazard of central bank help. Unlike its neighbors in Japan, South Korea, Thailand, and Singapore, the Bangko Sentral ng Pilipinas has kept policy rates steady for 13 straight meetings, noting that the economy does not need monetary support. On its most recent meeting in May, the central bank took note of a healthy consumption base and strengthening state spending as reasons for the local economy’s resilience.

Making growth felt and denting poverty would require the government to spend more. But it would serve Duterte — and the Philippines — well if fiscal discipline were maintained. His transition team has announced an overhaul of revenue agencies as a way to raise more income. But they should do more than this and enact new tax policies. The International Monetary Fund has said tax administration measures could only add revenues worth half a percent of GDP. At current levels, that would not even be enough to build more roads and bridges, while making sure the poor have jobs and food on the table.

Prinz Magtulis is a journalist covering fiscal policy in the Philippines. He holds a master’s degree in public administration from the Catholic University of Korea.