Fiscal Policy for Growth and Social Welfare
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level of foreign debt was low. They were able to introduce timely stimulus packages and so improve the growth performance of their economies relatively quickly and reduce unemployment and poverty. In 2012, both governments are planning to introduce new stimulus measures as the global economic problems continue. When countries have limited fiscal space, their room for policy response is more restricted. The Philippines has historically grappled with a problem of high public debt, although the general government debt-to-GDP ratio in 2007 on the eve of the crisis, at 46 percent (according to International Monetary Fund estimates), was well below levels earlier in the decade. However, it was still relatively high compared with the median of 33 percent for all middle-income countries. The country, nevertheless, introduced a stimulus package, which has been judged to have had a positive impact on growth, although not very successful in lowering either unemployment or poverty, both of which were already high before the crisis (see box 1.4 for details).
Box 1.4
Limited Fiscal Space and Stimulus Policies in the Philippines Faced with a history of concerns about its high public debt, the Philippines had to balance the need for higher expenditure in the short term against the need to maintain fiscal sustainability in the longer run. A stronger revenue effort is required to finance the country’s growing expenditure on social services while protecting fiscal sustainability. Recognizing the limited fiscal space available, government plans call for protecting the poorest and improving the medium-term prospects of the economy (World Bank 2009c, 2009d). The Philippines has one of the highest poverty rates in the region, but its social safety nets are limited, as they were during the 1997 Asian crisis. Habib et al. (2010) and the World Bank (2010) find that the 2008–09 global crisis increased both the level and the depth of aggregate poverty. As a result, the poverty rate is calculated to be 1.45 points higher in 2009 than in 2008 and 2.07 points higher in 2010 than in 2009. In addition to high poverty, another major problem, despite some minor improvements, is high and persistent unemployment. The (continued next page)