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.