Diokno’s Dilemma: A Summary
Secretary Ben Diokno has a dilemma. As Secretary of Finance, he has to juggle a ballooning deficit with a Presidential commitment to keep government spending high. Yet the government does not want to raise taxes. And they cannot take on more debt.
The elements of Diokno’s dilemma became apparent in the past week. The Bureau of the Treasury declared a P674.2 billion cumulative budget deficit on the 26th of July. The DBM expects the deficit to reach P1.67 trillion this year. And this would be the second year that the national budget deficit breaches 1 trillion pesos.
What’s a Budget Deficit?
What is a deficit? To understand this concept, you need to be familiar with government budgeting. Government raises revenue through taxes. It spends that money through the budget.
On one hand, a deficit occurs when the State spends more than what it earns. On the other hand, a surplus occurs when revenues are greater than spending.
A deficit is not necessarily bad. Tax revenues tend to fall in an economic recession. This is because businesses close and people spend less. As such, government must step in to provide stimulus. Theoretically, this provides a “multiplier effect”. The productivity gained from the stimulus outweighs the revenue lost.
This is called “deficit spending” or “counter-cyclical spending”. This is because one would expect government to cut back on spending when revenues are low. However, cutting back on spending during recessions may also remove much-needed assistance.
Governments can handle a deficit in a number of ways. First, the government may issue Treasury bonds. Second, it may take on a loan from an international bank. Third, it can reduce spending. Finally, it can raise taxes.
A Presidential Straitjacket
Secretary Ben Diokno’s dilemma was clear during the SONA. President Marcos Jr. announced that they would keep government spending at 20% of GDP. He announced only one new tax measure. This was the tax on digital services. It will raise P13.2 billion incremental revenue annually. All other tax measures were administrative or revenue neutral in nature. These include improving tax compliance, reducing technical smuggling, and rationalizing the tax on passive income.
Secretary Ben Diokno must keep government spending high. And this will worsen the deficit. without raising taxes. And the government cannot take on more loans. The debt to GDP ratio is now at 60%.