During the first week of May, I wrote that a weak currency would signify as a natural outcome of leftist governments [The Political Economy of Leftist Governments Leads To Weak Currencies]
The essence of which is that of the tendency for leftist governments to expand government size relative to the economy. In doing so, a bigger government would command a relatively greater amount of resources. The government’s larger use of resources would imply of the crowding out the private sector, increased financing requirements and higher operating costs for businesses. Since government activities signify as consumption, such would entail of less efficient use of resources, deadweight losses, corruption as well as, diminished productivity. Furthermore, the government will resort to financial repression to corral citizens’ resources especially during economic slowdowns. Part of financial repression will be manifested through increases in debt, taxes and or inflation or a combo. Moreover, a torrent of regulations would imply of restrictions or proscriptions on economic activities
So let us see how this squares with the first State of the Nation Address by Duterte administration
In discerning the economics of the proposed programs by the new administration I will use Professor Thomas Sowell’s invaluable perspective “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics”
Here’s the wish list (italics my comment)
-Creation of Inter-Agency Committee on Illegal Drugs where the reservists (ROTC) will be mobilized for information campaign. Prioritize the rehabilitation of drug users through the increase the number of residential treatment and rehabilitation facilities in all regions of the country. Part of which will be the use of military camps for drug rehabilitation
In the light of information, rehabilitation and treatment campaign, this only means that more manpower and logistics will be devoted to service such as tasks. Thus since there is no such thing as a free lunch, this entails significantly increased expenditures on expanded bureaucracy and more regulations for the war on drugs
-Expanded role of military
A. Crush the terrorist group Abu Sayyaf where the “AFP shall enhance its capability to search and engage these rogue and lawless elements.”
B. “In the area of environment, the military is directed to intensify its support [Makinig kayo, sige tawa diyan] its support role against illegal logging, illegal mining, nandyan pa naman si Gina Lopez, and other destructive practices that aggravate the devastation of our natural resources.
More expenditures for the upgrade of the military’s capability as well as increased personnel and logistics for grassroots presence to implement other political objectives.
-To promote business environment “Government Financing Institutions (GFIs) shall come up with out-of-the box financing packages to capacitate our small and medium entrepreneurs.”
Here is a guess. Out-of-the box financing packages would mean subsidized interest rates and or no collateral loans. If this is correct then the politically connected will most likely benefit from such subsidies. Second, who pay for this? Here is the answer: currency holders and taxpayers via Financial repression.
Unless the government decides to undertake PPP, the following infrastructure spending projects means more government spending, more bureaucracy and red tape (corruption too).
- Infrastructure spending: Tourism: construct more access roads and tourism gateways to service centers and tourist sites.
- Infrastructure spending: Agriculture: Road development ‘construction and rehabilitation’ projects, irrigation, establish modern harvest and post-harvest facilities, conduct a nationwide soil analysis and strictly enforce fisheries laws, particularly on illegal fishing and promote aquaculture
Again we see more taxpayer money involved. Taxpayer money will not just be about road development but on implementation which means more personnel, logistics, real estate (offices) and regulations.
-Infrastructure spending: Mindanao “accelerate infrastructure spending by improving national roads and bridges and implementing the Mindanao Logistics Infrastructure Network [applause] and other road network master plans. We shall pursue inter-island linkage projects”
-Infrastructure spending: Flood control “ We shall be implementing structural mitigation measures to address of the perennial flooding in Metro Manila and neighboring areas. [applause] We shall put up new pumping stations in strategic places.”
-Infrastructure spending: Garbage Collection “To have adequate disposal facilities for the Metro Manila Garbage, the final closure and rehabilitation of the Carmona Sanitary Landfill shall be pursued while the adoption of appropriate waste-to-energy facilities will be explored”
-Infrastructure spending: transportation “The revival of the operation of the Pasig River Ferry Service System is a viable option for the severe traffic congestion in Metro Manila.”
-Infrastructure spending: transportation “Passenger capacity congestion shall be addressed by increasing the number of running trains from the current 16 trains [applause] with a total of 48 cars per hour, to 20 trains with a total of 60 cars per hour
-Infrastructure spending: transportation “Specifically for the LRT, the operating hours shall be extended from 9:30 to 10:30 p.m.
-Infrastructure spending: transportation “The Clark Airport can be utilized to shift some operations of our domestic and international airlines. Moreover, a one-stop shop will be established within the civil aviation complex for the benefit of the Overseas Filipinos.
-Infrastructure spending: technology connectivity: “I have also directed the newly-created DICT, Information and Communication Technology, to develop a National Broadband Plan to accelerate the deployment of fiber optics cables and wireless technologies to improve internet speed. [applause]… Wi-Fi access shall be provided at no charge in selected public places [applause] including parks, plazas, public libraries, schools, government hospitals, train stations, airports and seaports. O ‘di ba? [applause] Happy lahat.
Infrastructure spending are no free lunches. All these expenditures will vastly expand on budget deficits, increase bureaucracy and regulations.
-Mandatory education: To help ensure that the hard-earned money of the Filipinos overseas are put into productive use, a mandatory financial education for all migrants and their communities will be pursued with incentives to encourage entrepreneurship among them.
The public will now be coerced to attend financial education which guarantees more government spending, intervention and regulations. However such measures provide no assurance that OFWs will go into business. Especially not under an environment hostile to businesses.
Neither will repressive actions incentivize entrepreneurship nor produce enhanced productivity
-Public services: More lawyers “The number of lawyers and support staff in the PAO — that is the Public Assistance Office — regional and districts shall be increased to provide indigents with more access to counsels”
-Public services: More DFA offices “I have also ordered the DFA to streamline documentary requirements and passport applications and open additional Consular Offices in strategic places to decongest Metro Manila sites [applause] and avoid queues that have caused hardships and suffering to passport applicants.”
-Political preferences: I also have directed the DILG to undertake nationwide information and campaign on federalism in partnerships with various alliances and with LGU, civil society, grassroots and faith-based organizations.
See more government spending and recruits?
Remember this? Here is what I wrote just after elections. “And the most important appointments will be the military (Defense secretary, Chief of Staff), police (Chief) and local government (DILG). That's because national policies will have to be implemented by police and military power at the grassroots level.”
Well the DILG will be tasked to promote on the new administration’s personal political agenda with taxpayer’s money!
-Infrastructure mandates: energy subsidies. “To help avoid squatter-like conditions in relocation sites, we urge utilities like Meralco and electric cooperatives to exercise their social corporate responsibility by making direct connections to relocation sites and depressed areas.”
Guess who will pay for such subsidies? Expect electricity prices to rise!
Social Welfare: DSWD subsidies: “I have decided to direct the DSWD to provide the rice subsidies to the poorest of the families, at least, para makakain lang every month. [applause]…
Social Welfare: Health Subsidies: “The government will also provide universal health insurance for all Filipinos [applause]. Benefits -- Sali na lang natin sa PhilHealth. The professional competence and operational capabilities of government hospitals and health facilities will be strengthened.
Social Welfare: Education: “We are planning to increase spending on basic education and incorporate mandatory education about the evils of drugs. We will also intensify and expand Alternative Learning System programs.
Truly awesome!
In the world of politics, spending other people’s money is the easiest thing to do. Lavishing on others would also signify as the most euphonious things to hear…specially in the ears of statists and gullible audiences. But it’s the cost that will matter most: dependency, financing and long term social consequences. All of which will be ignored until the day of reckoning arrives.
Some have raved that the SONA will benefit business due cuts in red tape
For instance. -Revenue We shall also enhance local business environment by addressing bottlenecks in business registration and processing, streamlining investment application process and integration the services of various government offices.
That’s nice to hear. But the incredible amount of spending and interventions would nullify or offset whatever streamlining of regulatory bottlenecks.
I am reminded of the telecom industry which was liberalized or deregulated in in 1995. Yet increased administrative or operational interventions basically brought monopoly back even when the industry remains technically “deregulated” from an investment point of view.
Here is more: On the clamor of our citizens for timely issuance of Philippine passports, the government shall work towards amendment of the 1996 Passport Law to lengthen the validity of the passports from the current 5 years to 10 years.
This is one of the rare good news here.
And more: To address backlogs and low prosecutorial effectiveness and efficiency, the investigation and case management processes shall be streamlined including those for illegal drugs and heinous crimes.
Well this represents political priorities rather than the thrust to improve institutional efficiency.
How the new administration intends to raise revenues: “Revenue side On taxation, my administration will pursue tax reforms towards a simpler, and more equitable, and more efficient tax system that can foster investment and job creation. We will lower personal and corporate income tax rates”
That’s nice to hear and should be a wonderful thing over the long term. Corporate taxes had beenchopped from 35% to 30% in 2008. Such must have helped shield the economy from the Great Recession. But of course, it was BSP’s monetary accommodation in 2009 that was pivotal in creating today’s bubble conditions.
But with the onslaught of proposed public spending, just where will the government get its revenues to plug on the immediate gap?
Well except for the easing of bank secrecy laws, that answer was not provided in the SONA. Nevertheless the government intends to shift tax burden to consumption through expanded coverage of VAT, a hike in Diesel and softdrink taxes.
As for easing of bank secrecy laws, this is practically a war on property rights. Governments will have a freehand in confiscation of bank accounts.
So I’d really have big doubts over this government’s purported goal to reduce taxes.
Yet as earlier mentioned: “Reforms to ensure competitiveness and promote ease of doing business will be mandatory. [applause] Reacting to these needs, the restrictions on the economy will be needed to make more investments to come and to develop labor-intensive industries such as manufacturing, agriculture and tourism shall be pursued.”
This is a very confused understanding of the economy.
Yet some worrying anti economy comments
War on the unofficial economy: “Our anti-colorum campaign and out-of-line apprehension including the removal of terminals will be intensified”
Colorum exists because of the inefficient and costly formal transports. Improve on efficiency and cost effectiveness, colorum will die a natural death. Apparently the government wants to reward inefficiency and punish consumers.
War on property rights: “ there will be there no demolitions without relocations. Hindi talaga ako papayag. [applause] Hindi naman aso yan na — just like in Davao. I’d like to make a dialogue with the businessmen. “Sir, how much are you investing in this land you have bought with the squatter?” "So, I bought it at about 60 million." Dagdagan mo ng 20 million. Ako na ang bahala. Sabihin ko doon sa mga tao, "Bili tayo ng relocation site or I will provide." Government will expropriate. I will make use of the expropriation powers.”
In essence, this represents a subsidy to squatting or trespassers. By using the underprivilege as camouflage, government here incentivizes criminality. Expect more squatting or land grabbing by political factotums.
Also this represents big business for lawyers. And this could one of the reasons why PAO will be expanded.
If government cannot respect property rights then that’s a bad sign for business.
Now to the NPAs.
I was supposed to say that the unilateral ceasefire called by the new administration on NPAs would do less to improve current conditions. Apparently conditions have changed so swiftly to make my case below argument moot.
The reason is that twentieth communism seems to have lost its footing. So they morphed into various political shells like environmentalism or politically correct progressives.
Meanwhile, local NPAs look more like professional bandits rather than ideologically influenced renegades. Wikipedia has conflicting numbers on the size of NPA. On the introduction, it says 60,000 members. On the other hand at the second great rectification movement, it says NPA’s have been down to 4,000 from a high of 26,000 in the 1980s. A January 2016 Philstar article noted that AFP’s estimates of NPAs have dropped below 4,000 in 2015. The point here is that giving leverage to a spent political party seems to be a very reckless move.
But the administration has a very soft heart for the NPAs. Aside from earlier offering them with 4 cabinet posts, which had been toned down and offered to moderate socialists instead, early July, the president even urged NPAs to join his war on drugs campaign. So rebels (illegal entities) have been pressed to do the administration’s bidding, as well as, serve his political penchant. So two wrongs do make a right for this administration. (Could the vigilantes be in fact rebels?)
Ironically, the NPAs spurned the entreaty and gave the government a thumb on their nose, fromGMA Online: “The CPP, meanwhile, clarified that it does not have a "kangaroo court," saying that it also respects "the right to due process of criminal suspects."
And still the ceasefire.
Since local NPAs look more like professional bandits, an NPA ambush occurred just days after the SONA. NPAs blamed the military, so the president made another fantastic volte-face by the lifting of the self declared unilateral cease fire.
This administration’s policies swing like pendulum: one moment here and another moment there.
Yet the deafening plaudits by an economically clueless political correct crowd in search of an elixir.
**I have not covered from the SONA: media’s repression, women’s rights, BBL, the regime’s bullishness on coal and the Indigenous Peoples’ Rights Act.
2Q Tax Collection Growth Slumps to Just 1.1%!
Going back to my initial premise: the peso already vulnerable to any slowdown in the economy and from its “dollar short” position. And the pesos’ conditions will worsen once credit bubble pops.
And if the proposed programs in the SONA will materialize then this will aggravate on pesos’ predicaments.
The Bureau of Treasury released its revenue-expenditure data for the month of June. So I got the quarterly average growth which tabulated to only a scanty 1.1% for the second quarter!
To repeat 1.1%!!
April’s 17.95% jump in growth rates was practically negated by May’s 17.63% tax collection collapse. And June’s 7.34% growth effectively delivered the paltry growth for the quarter.
What I asserted during the 1Q 2016 remains true today.
Perhaps tax officials allowed lesser intake in order for corporations to fund the elections campaign. Maybe tax officials joined the elections campaign. Or tax officials were uncertain of the prospective tax policies by the coming administration. But while some of these excuses maybe valid, this won’t be enough to rationalize the decline.
That’s because falling tax collections have been a trend. The rate of growth of tax collections has been in downtrend since Q1 of 2015, or even from a longer period or from Q4 of 2012.
What a paradox: NGDP has been climbing since the low of Q1 2015 even as tax collections growth has been plunging to reach to its recent low (1Q 2016)! (see chart in upper window)
Although 2Q collections fell, deficits shrank for the quarter due to the big surplus in April.
Despite the BSP silent stimulus, tax collection growth remains headed downhill. And this heralds big trouble for the new administration.
And in spite of potential leakages due to tax collection lapses, the economic component will remain a bigger force to reckon with.
Yet think of what this implies to PSE listed firm’s topline. Also think of what this means to profits in the context of PSE’s universe of listed firm.
The Philippine government will likely come out with fabulous GDP numbers, all because of surging bank credit growth manifested through M3.
But the tax intake reveals of the real score.
Moreover, think of what falling tax collections will do to the balance sheet of the government in the face of the new administration’s incredible spending spree.
Worst think of what all these will mean to the peso!
No comments:
Post a Comment