EACH time the Philippines economic growth numbers have been released for the past year, attention has been called to the amount of government spending. The complaint is that the country’s gross domestic product growth could have been larger if only the government would have spent more.
It is well and good to look at government spending growth and say we need more. We would assume the “spending” these commentators are speaking of is practical, feasible and actually adds something to economic growth. We could increase government spending overnight by simply doubling the number of government employees.
But we need spending that has a greater multiplier effect and, more important, supports the rest of the economy. No logical person, who advocates more spending, except maybe those leftist-elite thinkers, who believe bigger government is the solution to all problems, wants spending only for its own sake.
However, the bigger issue is the question of where the money is going to come from to support increased spending.
Every peso taken by the government in taxes is a peso that is not available to consumers and businesses to spend. While we consumers may like to splurge, most people are sensible about what they buy. Every successful business is successful because of prudent spending that adds to profits and growth.
Assuming economically beneficial government spending, the government can still only take so much money out in taxes before government taxing and spending becomes counterproductive. Without increased taxation, the alternative is for the government to borrow funds.
For two decades, Japan borrowed and spent the money to build massive infrastructure projects like bullet trains, subways and dams. It did not work to improve the economy. Now Japan’s debt is so great that it is mathematically impossible for the debt ever to be repaid.
Two underlying factors have kept the Philippine economy stable in the 21st century: a prudent banking system and responsible government and private-sector borrowing.
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. has announced that, as of end-September 2014, outstanding Philippine external debt was $57.7 billion. External debt refers to all types of borrowings by Philippine entities from foreign entities that are approved/registered by the BSP.
Gross international reserves of $79.6 billion as of September 2014 means the country has enough cash to be foreign debt-free if desired. Few nations can claim that condition.
Further, the external debt-service ratio or total principal and interest payments as a percentage of the exports of goods, services and other income improved from 8.2 percent a year ago to 6.4 percent today.
Increased government spending is fine but it must be balanced against the damage that taking on increased debt can cause. Just ask the person with a big credit-card balance about that idea.
Image credits: Jimbo Albano