The Philippine economy recoveredstrongly from the global recession owing to a combination oftransitory and permanent, as well as global andidiosyncratic factors. Similar to its regional peers, therecovery was partly driven by the rebound in global tradeand domestic consumption linked to sharp increases inconsumer confidence. In the Philippines, growth was alsospurred by two domestic and temporary factors-continuedfiscal policy easing and election-related spending-and astructural one, namely the acceleration in globaloutsourcing which benefited the country's businessprocess outsourcing sector and associated sectors such asconstruction. The economy is projected to grow by 6.2percent in 2010 and by 5 percent in 2011, with large butbroadly balanced risks. While inflation expectations areunder control, the prospects of large short-term capitalinflows partly linked to renewed quantitative easing by keyG7 central banks are complicating monetary policy at a timewhen the economy no longer needs accommodative monetarypolicy. The first budget of the Aquino government could be aturning point for the Philippines in the public financearea. The 2011 budget changes current dynamics in twocritical areas: the (structural and cyclical) fiscal policystance and the quality of public finances. This "reformbudget" renews the fiscal consolidation effort-albeitmodestly and contains significant reform measures aimed atimproving spending efficiency, transparency andaccountability of the budget. For the 2011 budget to indeedturn the country away from a weak fiscal position,inconsistent spending efficiency, and significant gaps inpublic expenditure and financial accountability, effortsinitiated in this budget will have to both be sustained overtime and expanded. Strengthening revenuemobilization-through a modern tax system with efficiency andequity at its core-would enable future budgets to scale upspending needed to generate inclusive growth.
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