Recto’s Debt Cap Bill

Just the other day, reports came out that Senator Ralph Recto had filed a bill limiting the relative amount of national government debt at 50 percent of the gross domestic product, or GDP. This amount would include loans contracted by the private sector, such as, for example, when a private firm requires a government guarantee for a public-private partnership project. Also covered are loans by government owned-or-controlled corporations. However, the bill does not say if borrowings by local government units (LGUs) are included in its proposed limit.

“Having this limit,” Recto said, “will force government to observe credit discipline, constantly monitor the debt needle, and deliver them from the temptation of accepting donor-driven projects of dubious benefits to the people… it will force government to exercise prudence in spending and to strengthen its fiscal management. Setting limits to borrowings will lead to better prioritization of programs and projects as it has to spend within available resources.”

On fears that the bill, when passed into law, will “handcuff the government” in its fund sourcing activities, he further clarified that the measure “merely sets the red line in the debt meter that this and future governments must not hit.”

The larger context of government borrowing can be drawn from various considerations, including factors that are external to national realities. The difference between projected revenues and expenditures would normally set the level of debt government would aim to produce in any given fiscal year. For example, if government aims to spend 1 trillion pesos next year but estimates that the total revenue it can make to fund the budget for those expenditures is only half that amount, there is an estimated deficit of 500 billion pesos and therefore government has to fund it through borrowings.

Let us note at this point that for decades the government has operated on deficit. Government incurs debt to cover revenue shortfalls and, because money is said to be fungible (or fungiable), in effect it borrows money to pay for borrowed money. The cycle goes on and on; although by and large we have shown our having managed the recurring deficits well.

The trend makes it hard for any administration to cut budget deficits without sacrificing key expenditures, like zero provision for pork barrel funds, which is an impossibility. When government sees opportunities in revving up public investments some more, like what it now does with capital-intensive infrastructure projects, the deficit can be expected to balloon further. Unless the increased spending is matched by an increase in revenues (say through tax reforms), the need to increase borrowings will follow.      

It is also possible for government to take advantage of favorable money market conditions—foreign or local—when interest rates, or cost of money, are relatively low. At one point during the Marcos years, for example, government went into a borrowing binge when the so-called black gold reign made the oil-producing middle-east countries awash with cash.

We can argue that the same favorable conditions exist today. A stable economy, affirmed by glowing sovereign credit ratings, make government securities attractive to investors. These securities, like treasury bills or bonds, are the major instruments by which government incur debt. They are sold weekly by government through public auctions facilitated by the Bureau of the Treasury. The strong demand for them pushes interests down, which allows government to generate funds at relatively low costs.

Government has deliberately favored domestic debt over external borrowings to minimize risks of foreign exchange shocks. Over the years, the volume of domestic borrowing in relation to foreign debt went up from 52:47 in 2004, to 58:42 in 2010, and 65:34 in 2018.

Government has also managed to pare down the volume of national government debt as percentage of GDP from 74 percent in 2004, to 52 percent in 2010, and to 42 percent in 2018. A debt-to-GDP ratio is indicative of a borrower’s capacity to repay its loans at any given hour. The higher the ratio, the greater is the risk that a borrower may default on its loans.

But the ratio by is not by any means the lone indicator of creditworthiness. The debt-to-GDP ratios of five of the world’s biggest economies are much higher than that of the Philippines, led by Japan (234 percent), Italy (127 percent), USA (109 percent), France (96 percent), and Spain (95 percent). And yet their sovereign credit ratings are also much higher than that of the Philippines (except Italy, which is even at a little above investment grade, according to the major ratings agencies).  

Reduced to its essential form, therefore, the Recto Debt Cap Bill looks good from the viewpoint of aesthetics. But it is not necessary.

What is important is for the government, through the Development Budget Coordination Committee, to provide Congress with pertinent reports regularly and in a timely manner. This can be done by force of habit, without need of legislation.

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