But if the government invests funds unsuccessfully and no surplus results, or if it spends the money for current expenditure, the capital borrowed shrinks or disappear entirely, and no source is opened from which interest and principal could be paid. Then taxing the people is the only method available for complying with the articles of the credit contract. In asking taxes for such payments the government makes the citizens answerable for money squandered in the past. The taxes paid are not compensated by any present service rendered by the government's apparatus. The government pays interest on capital which has been consumed and no longer exists—Ludwig von Mises
In this issue:
Rising Risks of a Fiscal Crisis: Record Public Spending Share to GDP! BIR Revenue Plunged 8% in September! Public Debt Servicing Costs Rockets!
-Signs of the Neo-Socialist State: Record Public Spending Share to GDP!
-Rehabilitated Boracay: A Prison Resort or An Enclave of Cronies and Politicians?
-Examples of The Fascist Model of Socialism: Boracay, Telco, TNVS and Others
-The Story of 9-Month Fiscal Deficit: Rapid Pace of Public Spending Growth as Revenues Slow
-Liquidity Crunch Hits Demand? BIR Revenue Plunged 8% in September! Total Revenues Grew a Paltry 1.13%
-Public Expenditures Decelerate in September, May Add to the Liquidity and Demand Woes
-TRAIN Boomerangs as VAT Misses Targets By a Mile! DOF: Inflate Philippine Debt Away!
-Surging Public Domestic and FX Debt Intended To Finance Twin Deficits: Fiscal and BOP Imbalances!
-Rocketing Costs of Debt Servicing! The IMF’s Blueprint on Predicting Fiscal Crises
Rising Risks of a Fiscal Crisis: Record Public Spending Share to GDP! BIR Revenue Plunged 8% in September! Public Debt Servicing Costs Rockets!
Signs of the Neo-Socialist State: Record Public Spending Share to GDP!
The Neo-socialist state. That is the elected direction the Philippine government has undertaken for its development model.
Figure 1
No better proof of the current state of our political economy than this data.
The ratio of public expenditure to GDP has spiked to its highest level since 1998! (the data is limited to only 1998)
In the nine months of 2018, this ratio, representing the National Government’s (NG) DIRECT control of the economy, has broken the 20% threshold!
Since the private sector has also been mobilized to finance and operate some of the public projects, they also contribute to the rapidly expanding NG's control of the nation's resources.
That said, 20% is a CONSERVATIVE estimate of the NG’s actual command of the economy!
And there’s more.
Public outlays are supposed to represent actual data. On the other hand, GDP signifies an econometric constructed model of the economy founded on surveys as inputs.
In other words, a comparison of facts against an estimate could distort the actual conditions.
First, an overestimation of the GDP would translate to the underestimation of the NG’s command of the nation’s economic activities.
Next, budgets are mostly fixed, revenues aren’t. Or, since public expenditures are programmed, irrespective of economic performance, a lower GDP would magnify the NG's share of the economy.
Third, the inflation tax, or the actual loss in the purchasing power of an individual, is hidden from statistics. In doing so, the ratio understates the government’s share of the economy.
Ergo, with the NG’s thrust to control the economy DIRECTLY, through deficit spending, and INDIRECTLY, through the inflation tax, political mandates, licensing, subsidies and regulation, statistics haven’t captured fully its contribution accurately.
And costs are not benefits.
Revenues of the government emanate from taxation.
Men live by production, wrote the esteemed journalist Frank Chodorov, but the State lives by appropriation
The appropriation of the means of production of property owners and the diversion of resources to the government to spend on its volition is socialism.
As the government commandeers a larger share of the economy, the private sector’s share shrinks.
And government expenditures translate to the substitution and transfer of the means of production for consumption, which entails capital consumption.
As the government expands at the expense of the private sector, capital will be reduced.
Lesser capital means reduced productivity growth that heightens economic and financial risks!
Rehabilitated Boracay: A Prison Resort or An Enclave of Cronies and Politicians?
And that would signify the statistical side of the economy.
As said above, the path to socialism has hardly captured by statistics.
A great example would be Boracay which had its soft opening this week.
The government will not only limit and control demand and supply, but it would also restrict social activities, people mobility (entrance and exit) and remarkably even control the number of population in the island!
From Philstar: The BIATF will also limit the number of tourists allowed on the island on any given day at only 19,215 guests, based on the carrying capacity recommendation of the Department of Environment and Natural Resources (DENR). According to the carrying capacity study, the island and its swimming areas can only support 55,757 people per day – broken down into 36,542 residents and workers and only 19,215 tourists.
So if the island’s quota is 55,757 people, to allow more tourists means to diminish the population! And to achieve this, the government picks who is ‘in’ and who is ‘out’. And unaccredited establishments are the possible first candidates of the Boracay purge. By political exclusion, these companies will be forced to close shop, thereby inciting such stakeholders (employers and employees) to move elsewhere!
And guess who will be the privileged personalities who would acquire residency in such exclusive politically carved enclave???
As I wrote last April, “Boracay will now transform into a playground for the rich, the politically connected and the political class.” See Institutionalizing A Neo-Socialist State: Demand Controls on the War on Boracay and Price Controls on the War on TNVSApril 22, 2018
I wondered if I had been reading articles about Boracay or a prison compound masquerading as an island resort.
And guess who are the beneficiaries of Boracay’s contribution to the NG’s record deficit spending via rehabilitation?
From the Inquirer: “The DENR had already partnered with several of the country’s top conglomerates—the Lucio Tan Group, San Miguel Corp., the Gokongwei Group, the Aboitiz Group—and the Lopez-controlled Energy Development Corp. to rehabilitate the wetlands and turn them into ecotourism sites.”
One of them made amends with the leadership by paying Php 6 billion in supposed back taxes last year. As such, aside from the rehab partnership, the tycoon's firm has been bestowed further with the political privilege, having been awarded with a license to operate an inter-island ferry services to Boracay.
So the principal recipients of the largesse of subsidies financed by TRAIN and inflation will be the elites!
The average Juan, Pedro, and Maria have been made to bear the burden of the erosion of the standards of living just to accommodate such invisible transfers to the elites and to the political leadership!
Such transfers showcase the deepening rent-seeking nature of the neo-socialist economy.
Incredible!
And here’s more.
The elites have been mobilized to partake of the economic opportunities provided by the NG at the expense of the markets or the consumers.
In doing so, the government now controls the resources of the elites in exchange for carrots from political privileges!
So what happens now to the race to build supply?!
Examples of The Fascist Model of Socialism: Boracay, Telco, TNVS and Others
Whether it is about Telecom franchise (Villar) or infrastructure (Dennis Uy), Mr. Duterte has the elites on his palms.
And to finance such political privileges, a favorite neophyte elite has, reportedly, been guzzling debt with such intensity (200% debt increase in one year!).
The recent sprint in debt acquisition by cronies reminds me of the ill-fated empire of Brazil’s oil and mining magnate Eike Batista. $35 billion vanished in 2 years, and Mr. Batista's net worth turned negative! To rub salt to the wound, the erstwhile billionaire has even been serving a jail sentence for corruption!
Furthermore, competition is amazingly seen on a different lens by the National Government (NG) and the mainstream. Instead of open competition to provide consumers with the best services at most affordable prices, the bidding process for the third telco participant represents a competition designed to GRATIFY the whims of the government!
The byzantine obstacles via the “highest committed level of service (HCLoS)” imposed ensures not only of high costs and elevated risks for the third player, but also the challenge to cut through the thicket of regulations! A crony, who dabbled earlier with the industry, said that money is the key to the success of the third player. Oddly, after acquiring mountains of debt, he sold out in 2016. Duh!
The same “competition” template applies to the Transport Network Vehicles Services (TNVS) industry. Because supply isrestricted, participants are limited. Price controls affect demand too. Various interventions affect the industry’s operations andpotential competition. Excessive regulations and the virtual control have stifled the industry’s growth potentials and actual output! And shortages have been a natural consequence.
Fascism is the contemporaneous model of socialism embraced by the Philippine leadership.
The nuances of traditional socialism with its fascist version as explained by Sheldon Richman, a research fellow at the Independent Institute, at the Library of Economics and Liberty. (bold mine)
As an economic system, fascism is socialism with a capitalist veneer…Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners. Where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the “national interest”—that is, as the autocratic authority conceived it. (Nevertheless, a few industries were operated by the state.) Where socialism abolished all market relations outright, fascism left the appearance of market relations while planning all economic activities. Where socialism abolished money and prices, fascism controlled the monetary system and set all prices and wages politically. In doing all this, fascism denatured the marketplace.
It has been bad enough for a credit bubble to have taken place, but even worse is this credit-financed government bubble that has been denaturing the marketplace.
And a remarkable character of socialism is its inherent bias in favor of the politically connected and the moneyed elites as against the average citizenry and the entrepreneurs. The experiences of Boracay, Telco, and the TNVS attest to this.
And the unintended consequences from the intensifying political socialization process will emerge in the various aspects of the Philippine political economy.
The Story of 9-Month Fiscal Deficit: Rapid Pace of Public Spending Growth as Revenues Slow
Because socialism is all about redistribution through central planning by a centralized state, it thrives only if the host has enough essence to feed the parasites.
As noted last week, the 9-month Balance of Payment deficit signifies a symptom of a reverse Robin Hood, which transfers resources and finances from the Main Street to the Political class.
The transmission mechanism for this is through the accelerating credit expansion which finances demand, borrowed from the future, on the politicized segments of the economy. [see 9-Month Balance of Payment Deficit Soars to Record! Incipient Signs of Capital Flight? As Expected, Peso Rallied; Price Controls Magnifies Inflation! October 22, 2018]
So to finance investments (mostly public through build, build and build), the public and the private sector went into a borrowing spree in foreign exchange (of course)!!!!
The September report on the National Government’s Fiscal Conditions, Outstanding Debt and Debt Servicing by the Bureau of Treasury has validated this
First, the record breakthrough of the 9-month Fiscal Deficit
From the Inquirer: “Faster-than-programmed spending on public goods and services widened the national government’s budget deficit to P378.2 billion as of September. The end-September fiscal deficit was 78-percent bigger than the P213.1 billion posted in the first nine months of last year, the latest Bureau of the Treasury data released Monday showed.”
Figure 2
To sum up the 9-month fiscal balance picture, it has been a product of accelerating public expenditures in the face of faltering tax collections! (see figure 2: upper pane)
Yes, you read me right: tax collections have wobbled in the last two months!
Before that the record deficit.
Not only has 2018’s 9-month record deficit of Php 378.234 billion surpassed last year’s level, most importantly, it also zoomed beyond the 2016’s annual record deficit of Php 353.422 billion by Php 24.812 billion or by 7.02% with a quarter to go. (see figure 2: lower pane)
At the current average monthly rate of Php 42.03 billion, the year-end deficit would reach 96.3% or Php 504.312 billion of the annual target of Php 523.7 billion.
Either the capital market or the BSP would finance the potential Php 126.08 billion in the budget gap in the 4Q.
And September’s deficit of Php 96.25 billion signifies the largest since at least 2008!
Liquidity Crunch Hits Demand? BIR Revenue Plunged 8% in September! Total Revenues Grew a Paltry 1.13%
Next, emaciating revenues
On the revenue side, while the 9-month growth of 17.21% produced the highest since at least 2008, 3Q growth registered only 12.13% down from 14.54% a year ago.
Figure 3
Total revenue (tax and nontax collections) growth plunged to 1.13% in September from 11.49% in August and 24.21% in July.
Bureau of Internal Revenue collections cratered -7.68% in September from +7.83% in August and +18.77% in July. (Figure 3)
The Inquirer explained: “The Bureau of Internal Revenue’s tax take last September declined by 8 percent year-on-year to P130.6 billion, which the Treasury blamed on the “high-base effect of the P17.6-billion partial settlement from Mighty Corp. collected last year.”
The September’s crash was worse than the Dec 2015’s -7.27% and was surpassed only by the post-Great Recession effects in 2009!
Remember, it was in the late 3Q 2015 were the BSP initiated its QE.
Bureau of Customs collections decelerated +26.86% in September from +35.84% in August and +49.01% in July.
It can hardly be about the base effects because collections of the Bureau of Customs echoed the material slowdown in the BIR.
Non Tax collections improved +11.63% in September from -5.07% in August and +20.43% in July.
BIR had the largest share of September’s overall revenue at 65%, the Bureau of Customs at 25% and Non-Tax Segment at 9%.
Rather than the base effects, a more significant factor may have been of influence. And that is liquidity.
Figure 4
The plummeting M3 rate in the reflection of slowing bank credit expansion and financial problems within the banking industry has dragged the NG revenues down. (figure 4)
The tightening process, which has affected the financial system, as expressed by raging rates of domestic treasuries across the curve extrapolates to lesser money in circulation. Reduced liquidity implies diminished transactions. Thus, bank loans and M3 have weighed on BIR and BoC collections. For this reason, the downturn in BIR and BoC collections may have been about the conditions of the real economy!
And real events may be supporting the growing slack in demand. From the GMA/MSN: “Consumers were put off by their own expectations of higher prices that they decided to steer clear of vegetables, the Department of Trade and Industry (DTI) said Wednesday. As a result, vegetable prices went down following the law of supply and demand.”
Public Expenditures Decelerate in September, May Add to the Liquidity and Demand Woes
Third, expenditures slowdown.
The growth rate of the expenditure side has also moderated. It decelerated +26.86% in September from +28.6% in August and +33.86% in July.
The deceleration in public expenditures may have contributed to the sharp decline in M3, and consequently, to NG revenues.
The Inquirer reported that “build, build and build” boomed by 70.5% in August but was lower compared to July in the context of the amount spent.
If public spending has signified as the only force keeping up the statistical economy (GDP), its slowdown will entail an underperformance in the GDP.
Has the mainstream considered this?
And while the budget deficit may be within in the proximity of the NG’s target, revenue goals have hardly been the reason for this. In contrast, the budget gap climbed higher because of the shortfall in the revenue goals. The 9-month revenue to adjusted GDP was at 3.06%.
And should the revenue expectations continue to underperform in the face of the continuing aggressive push for public spending, the budget gap may soar far beyond the National Government’s target.!
That said, the NG is playing with fires of a fiscal crisis. Play with fire and the chances of getting burned increases.
TRAIN Boomerangs as VAT Misses Targets By a Mile! DOF: Inflate Philippine Debt Away!
Fourth, snowballing unintended consequences
And unintended consequences continue to hound the NG.
Proof?
From the Inquirer (October 23): “The net revenue gained during the first eight months of implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) Act reached only P10.6 billion, below target by 74.1 percent, as the take from sugary drinks, coal, oil products, as well as value-added tax (VAT) fell short. Department of Finance (DOF) documents showed that the additional revenues collected by the bureaus of Customs (BOC) and Internal Revenue (BIR) from January to August were lower than the programmed P41 billion supposed to come from the TRAIN Law’s new or higher taxes on consumption. (bold mine)
To repeat “below target by 74.1 percent”. Hasn’t the DOF heard of the law of demand applied to taxes, “If you tax something, you get less of it”? Or do they think that they can control, like the massive cheatings in the PSEi, the pricing system without repercussions?
And here’s more.
In response to the popular clamor from a public beleaguered with raging street prices, the DoF proposed the postponement of the implementation of the second round of excise tax increases scheduled in 2009 for a quarter
Will the NG reduce its spending concomitantly to adjust with a lower revenue intake? Or, will the capital markets remain accommodating to the NG to give them hope? Or perhaps, could the NG be counting on the BSP to do the rest of the financing legwork?
And here the DoF tacitly and stunningly admits of the use of inflation to fund its deficit spending!
From the Manila Bulletin: “The projected revenue loss from the suspended increase in fuel tax could be reduced if the US dollar further appreciates against the peso next year, although consumers will still have to brace themselves in 2020 as the tax hike could double following the suspension.”
Translation: Inflate the Philippine debt away!
Perhaps, an additional clue to the continued use of inflation to finance record deficit spending. In attributing high oil prices, the leadership admitted to being “helpless in addressing inflation”. Is he being advised to use oil as a convenient scapegoat?
And with price controls in place for rice prices starting October 27, the supply side influence for high price levels have commenced.
And adding to the supply side fuel for higher street prices would be the Palace’s hope for “an acceptable minimum wage ruling’.
Truly astounding developments! Stagflation is just a corner away!
So while demand may be slowing, the distortions from the supply side interventions are likely to keep prices elevated.
And if the record-setting pace of deficit spending is sustained, the question is how will this be financed?
Surging Public Domestic and FX Debt Intended To Finance Twin Deficits: Fiscal and BOP Imbalances!
Fifth, soaring debt levels
So how has the record 9-month Php 378.23 billion budget gap been financed?
Figure 5
Domestic debt grew by Php 146.514 billion in the 9-months of 2018, constituting about 38.7% of the fiscal gap over the same period. The BSP could have financed the balance. As of August, the BSP’s 8-month net claims on Central Government totaled Php 145 billion. (figure 5 upper window)
Public domestic debt grew by 9.53% or Php 14.85 billion in September. Meanwhile, foreign exchange debt jumped by 14.03% or by Php 41.07 billion.
Foreign exchange liabilities expanded by Php 360.832 billion in the three quarters of the year. About half of this increase came from the strengthening of the USD. Additional borrowing by the government had been intended to fund the Balance of Payment BOP USD gap and to cushion the peso’s fall. (figure 5 upper window)
These numbers affirm my projections last week.
So to finance investments (mostly public through build, build and build), the public and the private sector went into a borrowing spree in foreign exchange (of course)!!!!
Total debt (domestic and foreign) grew by 11.11% to Php 7.15 trillion in September or 43.54% of 1H annualized GDP.
The banking system issued Php 606.3 billion in loans to the public in the 8-months of the year. September’s domestic debt would account for 24.16% share of bank credit expansion.
The banking system offset their credit expansion by soliciting funds from the public. Essentially, a significant segment of liquidity infusion had been neutralized by the government and the banking system’s absorption of them.
See now why rates have been rising???
If budget deficits would swell by Php 126 billion in the 4Q to Php 504 billion in 2018, and if the banking system will compound on these through more bond and LTNCD offerings; would liquidity in the system not be further strained?
The loanable funds market has yet to feel the effects of the 100 bps rate hikes in August and September. What if demand for loanable funds falls in response to higher rates, will these not escalate the liquidity drought in the system?
A big factor in the economy going forward will be the supply of debt or demand for savings. That’s because, aside from inflation, these will influence interest rates.
Meanwhile, the growing forex exchange liabilities represent another crucial factor in the public’s debt profile.
To finance the BoP deficit, the NG and the BSP has been expanding its US dollar shorts exposure that needlessly raises the nation’s currency and credit risks
Rocketing Costs of Debt Servicing! The IMF’s Blueprint on Predicting Fiscal Crises
Debt servicing has rapidly risen in the face of higher rates and more issuance of debt.
In the 9-months of 2018, debt servicing (interest and amortization) has reached Php 620 billion outpacing the annual debt servicing of 2013 to 2017. At the current rate, debt servicing may close the year with Php 827.4 billion shy of the 2006 record of Php 854.374 billion. What if the record will be broken? (see figure 4)
The ratio of debt servicing to NG revenues has been rising fast. It has jumped to 29.4% in 9-months to reach 2013 annual levels.
If the capital markets will be relied on to finance the budget deficit growing at a breakneck speed, then the trajectory is for the ratio of debt servicing to revenues to grow faster.
If revenues slow in response to a liquidity crunch, this ratio would rise by even more!
In the realization of the necessity to raise funding for the government, the BSP has eased requirements for the investing in the UITF.
From the BusinessWorld: THE CENTRAL BANK is expanding opportunities under unit investment trust funds (UITFs) by allowing placements in government-issued debt papers. Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said the Monetary Board has approved more options for UITFs to further entice investors with low risktolerance. “In order to maximize participation of the trust industry in the said issuance of the BTr (Bureau of the Treasury), the Bangko Sentral has expanded the allowable investments of conservative money market UITFs to include securities issued by the national government,” Ms. Fonacier told reporters.
As I’ve said earlier, the Duterte regime is playing with the fires of a fiscal crisis.
In a study, the IMF provides a blueprint of a Fiscal Crisis in progress….
While the findings do not necessarily imply causality, they reveal how policies and key economic variables evolve around these exceptional periods. First, we find that fiscal policy is procyclical, especially in AMs and EMs. Crises are preceded by loose fiscal policy, as expenditures grow above average. Once the crisis starts, countries tighten expenditure growth as economic conditions deteriorate. Second, economic growth tends to sharply decline at the onset of the crisis and, at least partially, there seems to be a permanent decline in GDP. AMs and EMs face the deepest contraction in growth and about half of them experience recessions. Thedecline in economic growth is particularly large when crises are triggered by high inflation. Third, public debt tends to rise and remain elevated during the first years of the crisis. An exception is when the crisis is identified by credit events that only involve official creditors. Fourth, fiscal crises are usually associated with both fiscal and external imbalances. We find that twin deficits usually deteriorate in the pre-crisis years. Finally, the data also shows that fiscal-financial twin crises experience a deeper decline in growth than stand-alone fiscal crises
While I am no fan of the IMF, because the ingredients of a fiscal crisis have been present in the current environment, it pays to listen: loose fiscal policy on expenditure growth, slowing economic growth, high inflation, rising public debt and external imbalances (BoP)
*Kerstin Gerling, Paulo Medas, Tigran Poghosyan, Juan Farah-Yacoub, and Yizhi Xu, Fiscal Crises January 2017
As one can see, the pivot to a neo-socialist state doesn’t only come for free, it is booby-trapped with land mines!
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