As the Philippines contends with its fiscal constraints (such as its streams of revenue not being able to match its planned match expenditure requirements), the need for a breathing room or fiscal space becomes more imperative. As against fiscal constraints, therefore, which generally operate on a system of rigidity, fiscal space allows for flexibility in the use of government’s resources.
Peter Heller, Deputy Director of the Fiscal Affairs Department of the International Monetary Fund (IMF) writes that fiscal space is a room in a government’s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. Put more simply, fiscal space becomes an exigency, despite tight or shaky fiscal condition, when a worthwhile government expenditure is at stake.
In other words, if education is considered as a priority initiative in view of its impact on economic development, then the government must be able to provide resources for such initiative, despite the presence or prevalence of fiscal constraints, provided that it does so without prejudice to the sustainability of its financial position or the stability of the economy. As a rule, therefore, fiscal constraints (such as the Philippines’ budget deficit) should not be an excuse for downgrading an expenditure initiative which has serious repercussions on economic development.
How exactly does a government create fiscal space? A government has several options to choose from should it decide to create fiscal space even in the midst of recurring fiscal constraints. It can: (1) raise taxes; (2) secure outside grants; (3) realign expenditure program by trimming down lower priority items of expenditure; or (4) borrow resources (from local or foreign sources) or borrow from the banking system. However, no matter what fiscal space creating option is undertaken by the government, it should do so without endangering its economic stability and fiscal sustainability.
Apparently, the creation of fiscal space must be viewed from both short- and long-term perspectives. For instance, increased provisions of expenditures for education may respond to an immediate need to improve the infrastructures for education to ensure that its impact on growth and development is optimized. However, long-term consideration of the repercussions of the means (such as raising taxes or realigning overall expenditure program) by which resources are to be raised to finance such increased provisions is still imperative. This is so in order to avoid adverse implications for other sectors or programs which are also critical to the attainment of growth and development objectives.
For this reason, while the IMF is open to the creation of fiscal space whenever needful, it still emphasizes that such fiscal space should not impinge on macroeconomic stability or debt sustainability.
As a rule, therefore, options for fiscal space should always be explored specially when an expenditure program is adjudged to be crucial to growth and development aspirations provided, however, that the allocation of resources for such fiscal space does not in any way compromise the sustainability of a country’s fiscal position or the stability of the economy.
