Aquino's Team Plans `Austerity Measures' to Cut Philippine Budget Deficit

Philippine President-elect Benigno Aquino will implement “austerity measures” and focus public spending on helping the poor as he seeks to narrow the budget deficit without raising taxes, his incoming officials said.

Aquino’s economic team, announced today, will review in two weeks the growth and fiscal goals set by the previous government, and may reduce the 2010 budget-shortfall target, Budget Secretary-designate Florencio Abad said in an interview in Manila today. The administration may cut the deficit to about 2 percent of gross domestic product in three years, Finance Secretary-designate Cesar Purisima told reporters.

The government will study “each and every item of the budget,” Aquino, who takes office tomorrow, said at a briefing in the capital. It will focus on improving tax collection before seeking new or higher taxes, he said, adding that if additional borrowing “has to be done, it will be done.”

Philippine growth has lagged behind its Southeast Asian neighbors as a budget shortfall in all but four of the past 25 years curtailed the government’s ability to develop an economy where the World Bank estimates one in every four people live on less than $1.25 a day. Aquino ran for president on the slogan “if there’s no corruption, there’s no poverty” and said tax evaders were known and would be pursued.

“I have never seen a country tackle a structural fiscal- deficit issue via tax-efficiency gains,” Edwin Gutierrez, who manages about $5 billion of emerging-market debt at Aberdeen Asset Management Plc in London, said before the comments today by Aquino’s team. “This never works.”

Deficit Target

President Gloria Arroyo’s economic team earlier this month widened the 2010 budget shortfall ceiling to 297.2 billion pesos ($6.4 billion), close to last year’s record, and lifted the growth target to a range of 5 percent to 6 percent.

The Philippines needs to cut the budget gap and increase investment to boost growth, Pacific Investment Management Co. said June 25. The country’s low revenue and high level of debt constrains its credit rating, Standard & Poor’s Associate Director Agost Benard wrote in an e-mail today.

Gary Teves, Arroyo’s finance secretary, said last week the new administration should consider a proposal to raise taxes, including the value-added tax rate, to increase revenue by 94 billion pesos next year.

‘No Point’

There’s “no point” raising taxes before leaks are plugged, Aquino said during his presidential campaign.

Aquino “instructed me to implement zero budgeting,” Abad said before the president-elect’s briefing today when the members of the cabinet were announced. “You don’t increase the budget, you look at the program and see if spending is aligned with priorities.”

Abad, who turns 56 next month, served in the cabinets of Arroyo and Aquino’s mother, Corazon Aquino. He was president of the Liberal Party, served with the president-elect in the House of Representatives and was his campaign manager this year.

Purisima, 50, led Arroyo’s successful attempt to raise the value-added tax to 12 percent in 2005, before he, Abad and other officials quit the government and asked Arroyo to step down amid allegations she rigged her 2004 election. The budget deficit, which averaged about 200 billion pesos from 2002 to 2004, narrowed to 12.4 billion pesos by 2007.

Philippine local-currency bonds climbed to a record high after Aquino and his economic team pledged to narrow the budget deficit, and the peso rose for a second day today. The country’s financial markets and government offices will be shut tomorrow for the presidential oath-taking, and will reopen July 1.

Targeted Spending

Growth is more important than balancing the budget, Purisima said today. The new government isn’t ruling out an overseas bond sale, he told reporters after the briefing.

Spending will be targeted at “people left out in economic growth,” Abad said. “We need a dramatic increase in spending for the poor, like in education, health,” the incoming budget chief said.

Aquino appointed Kim Henares, 49, former deputy commissioner of the tax bureau, as head of the agency, which is responsible for more than 60 percent of government revenue. The president-elect named Cayetano Paderanga economic planning secretary, a position he held under Corazon Aquino from 1990 to 1992.

Aquino designated Manila Water Co. President Rene Almendras as energy secretary, Manila Electric Co. President Jose de Jesus as transportation and communications secretary, Maynilad Water Services Inc. President Rogelio Singson as public works and highways secretary and SM Investments Corp. Executive Director Gregory Domingo as trade secretary.

To contact the reporter on this story: Clarissa Batino in Manila at cbatino@bloomberg.net; Max Estayo in Manila at mestayo@bloomberg.net

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