(STAR) By Des Ferriols -The country’s budget deficit shrank in 2006 to P62.2 billion, the lowest in eight years and the third year in a row that the shortfall was smaller than target, Finance Secretary Margarito Teves announced yesterday.

The government had estimated last month that the 2006 deficit was P60 to P65 billion, half an initial target of P125 billion. The 2005 shortfall was P146.5 billion. The 2006 deficit was the lowest since 1998 when the budget gap was recorded at P53 billion.

"A combination of good revenue collection and lower than expected expenditure allowed us to perform better than target," Teves told reporters, adding the deficit was one percent of gross domestic product (GDP).

"This brings us closer to our goal of achieving a balanced budget by 2008."

The government had originally set a 2006 budget deficit goal of P125 billion, or 2.1 percent of GDP.

According to Teves, total revenues reached P978.7 billion, exceeding the target by P4.6 billion despite shortfalls in the income tax collection.

"We did relatively well with non-tax revenues which made up for shortfalls," Teves said. "There were also additional revenues in the form of proceeds from privatization which exceeded the target."

National Treasurer Omar T. Cruz said the government also generated savings of P30 billion from declining interest rates which lowered the cost of debt servicing.

Cruz said there were also savings from the bond swaps that cleaned up the government’s debt portfolio, amounting to P18 billion.

"We are spending less in debt service and the appreciation of the peso also made some of our foreign loans cheaper," Cruz said. "On the whole, it had been a good year."

While widely expected, the smaller deficit was welcomed by investors.

The peso, which ended 2006 near six-year highs, was quoted at xxxxx to the dollar stronger than its close on Wednesday at 48.955.

The government spent P58 billion less than expected after Congress failed to pass the 2006 funding bill and agencies were forced to shelve big-ticket spending, especially on infrastructure projects.

The government’s fiscal performance was helped by additional revenues from a two-step reform in a sales tax that was imposed fully last February.

The government collected P76.9 billion in extra value added tax revenues last year as a result of the changes, slightly ahead of a P75.8-billion target.

"There was the lack of (approval of the) budget to some extent but they significantly overachieved in terms of reducing the budget deficit," said Bill Belchere, regional economist at Macquarie Bank.

This year, government revenue is likely to get a boost from privatization proceeds.

The government is in the middle of a deal worth more than $500 million to sell a 6.3-percent stake in the country’s most valuable firm, PLDT.

But economists, multilateral lending agencies and rating firms have said the Philippines needs to show sustained improvements in tax collections to prove that it has turned the corner on years of budget deficits.

They also say it needs to increase spending in crucial sectors such as infrastructure and social services to boost growth.

"I think the focus should not be on narrowing the deficit," said Frances Cheung, an economist at Standard Chartered Bank in Hong Kong.

"I think more effort should be on debt consolidation and also to boost revenues, rather than just focus on the deficit numbers."

The Philippines, Asia’s largest sovereign debt issuer after Japan, expects a budget deficit of P63 billion in 2007 and is aiming to end nearly a decade of fiscal shortfalls in 2008.

The government relies heavily on borrowing to fund its budget deficit and to pay off maturing debt, so its spends about a third of its budget on interest payments on about $80 billion in foreign and domestic debt.

Chief News Editor: Sol Jose Vanzi

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