MANILA, Philippines — Income inequality in Asia Pacific would likely worsen as shrinking budget space prevents governments, including the Philippines, from funding much-needed social protections to families battered by the health crisis.

In a report released on Tuesday, Moody’s Investors Service said countries like the Philippines are facing the problem of heeding calls to jack up spending for social programs like cash transfers as tax collections fall because of tepid business activity due to the pandemic.

This could make tackling a worsening income inequality amid the health crisis more difficult, Moody's said, adding that the struggle could spark political unrest that could “derail structural reforms.”

“Malaysia and the Philippines have little fiscal space to ramp up spending without offsetting tax measures,” the debt watcher said. 

“Revenue is low, which constrains the ability of these governments to shore up financing for spending on social transfers,” it added.

The situation is already evident in the Philippines where economic officials are not only controlling spending, but also leaving no budget for a fresh round of cash subsidies to 17.9 million poor families displaced by the crisis. That program, called the social amelioration program, cost P210 billion to implement from March to October this year.

On one hand, officials argued that economy has reopened and with it jobs should, but on the other, Moody’s said a complete bounce-back is not expected next year.

“If growth remains below pre-pandemic rates, these governments may be presented with tough choices between addressing inequality before it has persistent and wide-ranging effects – particularly, but not limited to, social and political strains – and implementing fiscal consolidation,” the credit rater explained.

Even with cash to finance dole-outs however, India, the Philippines and Indonesia are also largely seen unable to reach their target beneficiaries and maximizing public funds allocated for subsidies. At the other end, China, Singapore and Hong Kong are seen well positioned to distribute aid.

Inefficient aid disbursement, in turn, is likely to have a political blowback, Moody’s said as public discontent peaks over the inability to get assistance from governments. That appeared to have been contained at home for now, with latest satisfaction polls showing 91% approval rating to President Rodrigo Duterte as of September. 

“History suggests that various episodes of political conflict across Asia have their roots in income imbalances, which have typically converged with class and religion-based divides,” Moody’s said.

“Generally speaking, public discontent with progress in addressing social issues could erode government legitimacy, with negative implications for credit quality,” it added.