MANILA - The government can allow the budget deficit to breach 3% of gross domestic product (GDP) for no more than two consecutive years, since going beyond that point could make debt unmanageable and interest rates prohibitive to business, a Finance official said.

Finance Undersecretary Gil S. Beltran said in an interview yesterday that while deficit spending can prod growth during a crisis, the government should also consider the costs it will have to bear down the road due to such policy.

"We can allow the deficit to exceed 3% of the GDP...for two years only. That is the general rule...We are pump-priming the economy, but it won’t be forever. It is not a prudent fiscal policy. You will have problems," Mr. Beltran said.

"There are costs involved when you go beyond what is necessary. The private sector will be affected by the high interest rates. The government will incur a high debt."

Expectations of lackluster revenues on account of a slower business activity has forced the government to widen this year’s programmed deficit to P250 billion, or 3.2% of the GDP, from P199.2 billion previously.

Next year’s budget shortfall, however, is expected to improve to P233.4 billion or 2.8% of the GDP as the government expects revenues to increase amid a global recovery.

Even so, Mr. Beltran said they will work hard to keep the 2010 shortfall at 2.8% of the GDP, noting that next year’s targets had been adjusted just recently.

"It is not right to think of revising something that has been revised recently. We avoid those things. We made the adjustments early this month," he said.

Sought for comment, University of Asia and the Pacific economist Victor A. Abola agreed that the government should limit the fiscal gap since a high debt would eat up funds that can be used for vital projects.

"I agree with him [Mr. Beltran]. We still have a high debt ratio. If the debt ratio is too high, it will become difficult to bring it back again [to its previous level]," he said in a telephone interview.

"That [higher debt] means more money [of the government] will go to interest payments instead of social services and infrastructure."

For his part, Ateneo de Manila University economist Leandro A. Lanzona said the amount of deficit spending should depend on economic performance.

"We are in a global recession right now. While we are practicing discipline, we may also reduce the growth of the economy in the process. Whatever savings you will have will go to waste because the economy will fall into a recession," he said.

"What is crucial is to stimulate the economy. If the economy does not improve, then it is okay to spend."

Economic mangers decided to raise next year’s deficit to P233.4 billion from the original target of P208.4 billion, citing the need to raise expenditures to sustain the government’s pump-priming efforts.

The expenditure program for 2010 had been raised by P35 billion to P1.569 trillion from the previous program of P1.534 trillion.

Next year’s revenue target, on the other hand, had been adjusted to P1.335 trillion, from P1.325 trillion previously.

Mr. Beltran said the higher deficit will result in a debt-to-GDP ratio of 56.7% next year, slightly higher than the previous target of 56.3%.

This would hike the 2010 nominal debt forecast to P4.723 trillion from PP4.698 trillion.

The Finance department had previously claimed that the debt-to-GDP ratio has improved in the recent years due to fiscal measures like the Reformed Value Added Tax Law of 2005 and higher taxes on cigarette and tobacco.

The debt-to-GDP ratio was trimmed to 71.4% in 2005 from 78.2% in 2004. The ratio was at 64.2% in 2006, 55.8% in 2007, and 56.3% in 2008. The government expects this year’s outstanding debt to reach P4.489 trillion or 57.6% of the GDP due to higher expenditures.

Latest data from the Treasury Bureau showed that the government’s outstanding debt as of May this year hit P4.22 trillion, lower than the P4.26 trillion incurred in April, but still more than the P3.93 trillion posted in May 2008.