What is fiscal deficit and why should it be controlled?

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Metro Manila (CNN Philippines, August 19) — The government kept fiscal deficit in the first half within its target for the year.

According to the Department of Finance (DOF), fiscal deficit in the first half of the year was at 2.34% of the total economic output or gross domestic product (GDP). This is below the government's 3% ceiling for the whole year.

A fiscal or budget deficit happens when the government's expenditures exceed revenues over a period.

Revenue refers to money from taxes collected by the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC), and from non-tax sources of other agencies.

Meanwhile, expenditure refers to spending for goods and services, including infrastructure.

Data from DOF showed, the government chalked up around P1.4 trillion in January to June. But, it spent around P1.6 trillion in the same period, bringing the deficit to P193 billion.

A lower deficit means, the government is able to control expenses so that it won't incur too much debt.

Looking at the revenue side, DOF reported that government revenue grew 17.12% in the first semester, from the same period last year. It explained, this level was the "highest ever achieved during the first semester."

Tax effort, or collections as a proportion of the economy, rose 15.23% in the first half. The BIR's tax effort went up 11.71%, boosted by higher excise taxes, in the wake of the implementation of the Tax Reform for Acceleration and Inclusion Law or TRAIN 1. Meanwhile, collections from the BOC increased by 3.39%

On the expenditure side, disbursement soared nearly 19.47% in the first six months, noting that this level was the "highest first semester expenditure effort since 2003, thus boosting its contribution to GDP growth."

Now, why does the government need to set a ceiling on fiscal deficit?

A high fiscal deficit could lead to a higher debt-to-GDP ratio - the ratio between a country's obligations and its economic output. A lower debt-to-GDP ratio is considered favorable, used as an indicator of a robust economy, as it shows that a country is producing enough money to be able to repay its debt.

International credit rating agencies are closely watching a country's debt-to-GDP ratio, as one of the basis for credit and investment ratings.

Moody's Investors Services affirmed its 'Baa2' rating for the Philippines. For its part, Fitch Ratings retained the country's 'BBB' rating, and similarly, Standard & Poor maintained the local economy's 'BBB' rating.

However, some agencies have flagged the risks of a possible credit downgrade. These include the country's fast-rising inflation, the possibility of a widening fiscal defict amid the government's massive infrastructure spending for its 'Build, Build, Build' program, and the prospect of immediately shifting to a federal government.

DOF: Fiscal deficit to swell to 6.7% amid shift to federal government

DOF Secretary Carlos Dominguez has warned, the shift to a federal form of government may lead to a deficit in the fist year of its implementation, estimated at P1.2 trillion. He said, this may require slashing the federal government's expenditure program by P560 billion to keep the deficit within its 3% target.

The P1.2 trillion translates to a 6.7% deficit-to-GDP ratio.

Dominguez has pointed out, that the draft federal constitution contains ambiguous provisions on the allocation of expenditures for the federated government and its federated regions. He noted, this underscores the urgency of opening more discussions on this proposed document crafted by the Consultative Committee, which was tasked to review the 1987 Constitution.

The business community is also raising concern over the costs and risks of a shift to a federal government. At least 26 groups are calling on Congress to carefully study the matter.