Is government debt the problem?
The short answer is no. Let me try to tell you why.
Over the course of the pandemic, we have repeatedly saw or heard of the news that our government, through the Department of Finance, continuously borrows from international financial institutions such as but not limited to the World Bank, the Asian Development Bank, and the International Monetary Fund, to finance the government’s response strategy to combat the ongoing crisis which greatly affected the tax and revenue collection of the government.
Based on the report published by the Bureau of Treasury, the total government debt as of February 2021 amounted to Php 10.4 trillion or an increase of 6.2% for the first two months of the year compared to end-2020. Of the total debt of the government, a large portion was sourced domestically (71%) while the remaining 29% was sourced externally.
Is this still healthy? If basing on the debt-to-GDP ratio, then it can be said that the level of debt of the Philippines is still within that range. The said ratio is being used as an indicator to simply look at the size of an economy vis-a-vis the debt to determine whether or not the country can still afford to pay its debts. Currently, the country’s debt-to-GDP ratio stands at 57.0% (as of end-2020). Based on that figure, it can be said that the Philippines’ economy is larger than the debts it owes. As a general rule of thumb, keeping the debt-to-GDP ratio within a healthy level is the way to go as this can also have an impact on the government’s credit portfolio or ability to borrow. Hence, it can only become a problem when it becomes out of control i.e. the government can no longer pay its debts such was the case of Greece when it defaulted in 2015.
But is government debt a wrong thing? Not necessarily. Precisely for the reason that much like a corporation where loans or credits from banking institutions are also as important to increase the capital available for the corporation. If there is more capital, then there can be an increased in production or spending. Or in an individual’s case, borrowing money is not necessarily a bad thing for the reason that if we only rely on one stream of income, then our spending or purchasing power can only be limited to that. In short, we wouldn’t be able to afford buying a new home if we only relied on our monthly income.
Much like the government, it has to borrow because tax and revenue collection cannot at all times be sufficient to cover the necessary government expenditure — especially during this period of crisis where tax and revenue collections are not the same as the pre-pandemic years. Notwithstanding the current context, it is almost always the case that there is a budget deficit (where the expenditure exceeded the government revenue). So, in one way or the other, the government really has to borrow money — whether externally or internally; and considering the current data from the country’s treasury, then we can definitely say that the Philippines has the ability to pay its obligations. In fact, some even say that the country is not borrowing enough. However, while it can be true, fiscal prudence must still be observed in borrowing.
The real issue here is not the country’s government debt but the lack of trust of the people in the government and the politicians on how they will make use of the borrowed money. Are the money borrowed really spent for the economic recovery or providing social amelioration to those who needs it the most during this crisis? The government will always say that they are doing so. However, when looking at it from the perspective of the public, it’s not always the case — it is because of the seemingly lack of trust the people have in the government, and by extension, in the people exercising authority.
So are we saying that the surveys on the public’s approval rating of the President and of the Administration (even of the past) is not true? We have to understand that our political culture is largely driven by personality. In short, we may trust the person holding the office while trust in institutions is a different issue altogether. For instance, the Global Competitiveness Index of the World Economic Forum for the period of 2017–2018 shows that the Philippines’ posted a score of 3.5 (out of 7) and ranked 94 (out of 137 countries) in the Institutions pillar. The said pillar looks at the quality and efficiency of public institutions of the country as they are also vital in determining the country’s competitiveness. One of the indicators of the said pillar is Ethics and Corruption which is measured by 1) diversion of public funds, 2) public trust in politicians, and 3) irregular payments and bribes. Below is the Philippines’ scores on each of the sub-indicators:
It can be surmised from the data that the Philippines performs poorly in these indicators. Looking closely, the Philippines performed the poorest in public trust in politicians posting a score of 2.2 out of 7. With that figure alone, it can be said that, to some extent, people remain skeptical of the politicians. This is quite contrary, a repugnant even, to the high approval ratings of the highest officials of the land even during the period the study was conducted. But again, caution must be observed considering that the politicians referred to the study may not necessarily be the highest officials of the country and may even include officials from various levels and offices of the government.
Despite that, in 2019, the EON group released the Philippine Trust Index which measures the trust of the Filipinos on 6 key institutions of the society: 1) government, 2) business sector, 3) media, 4) non-governmental organizations, 5) the Church, and 6) the Academe. Generally, the trend tends to go downward. More specifically, the trust of the people towards its government dropped from 80% in 2017 to 76% in 2019. While there is a drop, the trust in government remains high. However, it brings to light the question: who do they really trust? Is it the institution or the person holding office in that institution?
To my mind, this distrust of the public towards its government, as manifested in the public’s skepticism in the large borrowings of the government, is largely driven by its perceived unresponsiveness and the perceived corruption that persists within its chambers all throughout our history as a country and as well as the perceived lack of accountability of public officials in the conduct of their affairs in government.
And while from our vantage point the outstanding debt stock of the country seem to be fine, it is important to understand that this also came in a time of great necessity — and that the people expects that these borrowings will reach them either in a form of a cash assistance or other forms of support at the time of the pandemic. As such, it behooves the government to work in regaining the trust of its constituents by providing a clear plan or a way out of this pandemic and by making them feel that the government’s borrowings are being put to good use. Until such time, the public will always be skeptic and distrustful of its government.
