Budget deficit and GDP growth
The Philippines as expected breached the full-year budget deficit ceiling of P250 billion this year. Businessman are not worried even if the gap exceeded the government limit- they somehow expected it given the global recession and the state’s deliberate attempt to increase spending in order to stimulate the economy.
The budget deficit, however, will become worrisome to investors and traders if it fails to induce economic growth as planned. A budget much in excess of the ceiling implies that revenue collections are falling short of target and that the government is borrowing heavily to finance the gap.
The fiscal situation could worsen if revenue collections continue to decline and spending accelerates further. Local interest rates will creep up once the government increases its domestic borrowings to fill in the budget gap. Higher interest rates will raise production cost and ultimately slow down economic growth.
Stock market investors fear this scenario. Higher production cost will eat into the profitability of listed companies and dampen tlw enthusiasm of investors in the light df the government’s inability to raise revenue collections.
An investment bank has already expressed fears that the widening ‘deficit might prevent the stock index from reaching new highs next year. Investors are fully aware that an unrestrained budget deficit funded by borrowings, instead of tax collections, will crimp gross domestic product growth. Reduced GDP growth, in turn, will decrease the profits of companies and forte them to abandon their expansion plans.
Foreign investors, too, will shy away from the Philippines because an undisciplined spending program gives them little earnings prospects In the country. Reduced foreign investments will weaken the peso against the US dollar.
A weaker peso, meanwhile, will make imports of raw materials used in local production costlier. The bigger budget gap over the long haul will fan inflation and may force monetary authorities to increase local interest rates to check spiraling prices.
Incurring a budget deficit to pump-prime the economy is a textbook prescription for economic growth. Deficit spending, however, is not sustainable if the government funds is mainly from borrowings.