Deficit spending is not a new invention. It was during the greater part of the nineteenth century the preferred fiscal method of precisely those governments which were not called democratic and progressive, of' Austria, Italy, and Russia. Austria's budget showed yearly a deficit from 1781 on until the late eighties of the nineteenth century when an orthodox professor of economics, Dunajewski, as minister of finance restored the budgetary equilibrium. There is no reason to be proud of deficit spending and to call it progress—Ludwig von Mises
In this issue
Record Fiscal Deficits: Why TRAIN 2.0 Will Be Ramrodded into a Law
-2nd Largest 1st Semester Deficit
-Record Deficit Spending: From Stabilization Tool to Economic Development Model
-Despite TRAIN, June BIR Collection Growth Falls Below CPI Rate
-TRAIN: The Surfacing of Unintended Effects?
-Why TRAIN 2.0 Will Be Ramrodded into a Law
Record Deficits: Why TRAIN 2.0 Will Be Ramrodded into a Law
There was no surprise announcement in President Rodrigo Duterte’s 3rd State of the Nation Address (SONA). The surprise was instead a Presidential speech that flowed according to his script, was adlib and expletive-free, and thus was relatively short.
A further surprise was the mutiny against the Alvarez led House leadership where former Philippine President Gloria Macapagal Arroyo assumed the role as House Speaker.
2nd Largest 1st Semester Deficit
Though the speech incorporated many issues, it was the call for action by the President for the passage of TRAIN 2.0 which had been critical
“By the end of July 2018, all 5 packages of my tax reform would have been submitted to Congress. Apart from TRAIN, ricetariffication, and Package 2, they include the mining, alcohol, and tobacco tax increase, reform in property valuation, reform in capital income and financial taxes, and an amnesty program.”
The Bureau of Treasury reported last week, the cash operations statistics of the National Government as of June or for the first semester
The numbers have been striking. It reveals to us why by hook or by crook TRAIN 2.0 will be ramrodded into a law.
Figure 1
From a nominal perspective, public expenditures haven’t only been growing faster than that of revenue collections, its pace of expansion has been accelerating more than revenues. (top most chart, Figure 1: orange revenues, green expenditures) That gap represents the widening deficits.
Reading on June’s growth numbers alone would mislead. Revenues grew by a fiery 24.66% while expenditures stagnated, expanding by a measly 2.87%, yet deficit ballooned by Php 54.29 billion. The reason behind this asymmetry has been the comparative base. There was little improvement from the sharp expenditure growth in June 2017 which led to a Php 90 billion deficit. Yet, the June 2018 deficit was the second largest for the year.
From the semestral perspective, the variability in the growth rates between revenues and expenditures have been marginal. Yet, revenue (+19.91%) and expenditure (+20.49%) growth in the 1H of 2018 has been booming at rates unparalleled in recent history. (middle chart, Figure 1)
The product of such blistering record growth rates: The 1H fiscal deficit of Php 193.017 billion signifying the 2nd largest in Philippine history! (lowest window, figure 1)
But 2010’s Php 196.73 billion came from a different backdrop than today.
Record Deficit Spending: From Stabilization Tool to Economic Development Model
2010’s deficit was a result of stabilization measures undertaken by the Philippine government to shield the economy from the Great Recession. The National Government launched the Economic Resiliency Plan (ERP), a Php 330 billion or 4.1% of GDP fiscal stimulus package in February 2009
Fiscal stimulus, which used to function as crisis-fighting measures, has morphed into an economic development story today. That is, the political agenda behind the deficit of 2010 and today have been vastly different.
Recall that the National Government’s Development Budget Coordination Committee (DBCC) has set as a target a rate of 3% of fiscal deficit to GDP, which is around Php 520 billion.
The annualized 1H deficit translates only to Php 386 billion or 26% short of the annual objective. Current fiscal conditions suggest that public expenditures will have to be ramped up from its current pace in the 2H.
And the rise in public expenditures will require almost a proportionate increase in revenue administration goals. Or the NG’s deficit target would have to be matched by a corresponding revenue and expenditure performance objectives.
I would bet that a deficit target coming off an economic slowdown via faltering tax revenues haven’t been part of the centrally planned program. Most, if not all of their projections on ‘spend, spend and spend’, have been moored upon ‘boom, boom, and boom’!
Despite TRAIN, June BIR Collection Growth Falls Below CPI Rate
Figure 2
But here’s the thing. June’s sanguine data masked a critical development.
Despite the sharp rise in 1H revenues, due principally to an expanded tax base, the Bureau of Internal Revenues (BIR) collections rate of growth decelerated substantially in June to 4.22% which is lower than the CPI (5.2% base 2012). (upper pane figure 2)
That is, BIR’s real collection growth was a NEGATIVE .98%.
And June’s underperformance wasn’t isolated. BIR collections dropped to 8.4% in May after a sizzling 23.95% in annual tax month of April.
Media partly covered this: “In June alone, the BIR’s tax take rose 4 percent to P136.9 billion from P132.2 billion a year ago. Actual collections last month were about 1 percent more than the P135.7-billion target, he said.”
Tax revenue growth (BIR + BoC) at 11.94% dropped to an August 2017 level. (lower pane figure 2)
Why so?
Could this have been due to the BIR’s hitting of its target, thus impelling for a slowdown in revenue collection activities? Or, could the BIR have been pacing its reportorial activities in accordance to its periodical targets?
Speaking of the BIR, the Commission on Audit (CoA) has flagged the tax revenue agency for its “failure to timely remit P80.914 million in withholding taxes and social contributions of its employees for 2017”. What an irony! The tax collector has been deficient in paying taxes! Could this serve as a template for the agency’s future activities?
Could this shortfall have been due to leakages in the new tax reform system?
Could the earlier collection boom have signified the front-loading of tax payments to adjust with the implementation of the TRAIN?
Could the June collection slack have been a reflection of economic conditions?
Or could it have been a combination of the above factors?
TRAIN: The Surfacing of Unintended Effects?
Back to basics.
The structural shift in the nation’s tax regime from income to consumption has signified the essence of the TRAIN tax reform project.
The administration’s priority has shifted towards expanding its taxpayer base in place of income taxes. And perhaps the succeeding focus will be on hiking of tax rates.
Figure 3
As one would note, there were 17.92 million registered individual taxpayers in 2016 according to the BIR’s 2016 annual report.
If the individual taxpayers increased by 10% to 19.71 million in 2017, registered taxpayers would account for only 44.7% of theestimated 44.1 million labor force as of January 2018 according to the Philippine Statistics Authority.
So those tax cuts benefited less than half of the labor force while expanding the tax base for consumption taxes covered both the informal sectors and the unemployed.
The tax cut was thus a political sleight of hand to justify the raising of taxes. TRAIN 2.0’s proposed chopping of the corporate taxes has the same PR effect.
To be clear, I am for tax cuts.
But tax cuts and public spending sprees are incompatible. The reason is simple. Since public spending isn’t free, it would have to be paid for by either the taxpayers or the currency holders. It could involve both. More specifically, record deficits financed by debt translate to HIGHER future taxes. On the other hand, record deficits financed by central bank monetization extrapolate to LOWER purchasing power or currency values.
Even more, since record deficits will also compete with the private sector for access to savings, it will drain liquidity from the financial system. And the siphoning of financial liquidity would lead to a downdraft in economic activities, and consequently a slowdown in tax and non-tax revenues. This scenario is one wherein authorities won’t tolerate.
That said, the BSP will be forced to finance part of the NG’s aggressive deficit spending targets. (we will get June’s data next week). Thus, aside from consumption taxes, the BSP’s inflation tax represents TRAIN’s hidden tax component
And it doesn’t stop here.
If the boom days have been dominated by money throwing activities, how about during busts?
Well, political demand for a bailout will serve to justify a further swelling of such deficits when tax collections reflect on the deterioration of economic conditions
As with most government projects, the initial impact of the enactment of the TRAIN reform law has been favorable, especially during the 1Q.
However, such gains appear to be tapering
Have TRAIN’s unintended effects been surfacing?
Booming Imports and Privatization Powers June Revenues
Back to the June data.
To offset the slack in the BIR’s collections, collections outperformance by the Bureau of Customs (BoC: +41.31%) and proceeds from the privatization programs which bolstered non-tax revenues (+207.31%) contributed most to June’s sterling revenue growth of 24.66%.
Excluding the privatization component, the Bureau of Treasury June revenues would have grown by only 1.17%. A 1.17% growth from a vastly expanded tax base! Wow!
The privatization component represents mostly the “Transfer of bond proceeds remitted by UCPB for the CIIF 14 Holding Companies to SAGF for Coco Levies”.
The Bicam committee is presently deliberating the final version of the Coco Levy bill. The transfer of funds, depicted as revenues, may serve as a clue to bill's progression into a law.
Figure 4
Collection growth by the Bureau of Customs has outpaced import growth since 2H of 2017 or before the TRAIN’s imposition. How is this sustainable?
The coming months would show whether the recent collections slowdown reflects administrative dilemma or economic conditions. It will also reveal whether such has been a deviation or a formative trend.
Why TRAIN 2.0 Will Be Ramrodded into a Law
Needless to say, a failure to onboard TRAIN 2.0 would have seismic ramifications.
One. Once the slack in revenue growth fails to keep pace with the projected trajectory of public spending, the deficit-to-GDP target may shoot way past beyond the government’s target. Increased pressures would hound interest rates and the peso
Two. Major public expenditure programs may be cut or scaled down from insufficient revenues. Forced austerity would affect projects like “build, build and build”, thereby affecting GDP and earnings. Government revenues would soon follow.
Ironically in both cases, deficits are likely to swell to serial records.
So despite reluctance expressed by the Senate to sponsor it, TRAIN 2.0 will remain a program imperative for the administration.
I hope I will be wrong, but I think TRAIN 2.0 will most likely be rammed down on the Filipinos’ throats
So far, debt has financed the June deficit. I’d like to also see the BSP’s data before writing about this.
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