In Charts: The Record Fiscal Deficit in the Perspective of August and in Eight-Months

The Bureau of Treasury released the National Government’s fiscal conditions for August last week.

 

And as expected, the eight-month deficit zoomed to a record Php 282 billion (or 2.56% estimated 8-month GDP)

Because of TRAIN, Government Revenues (tax and non-tax) grew the most since 2009

Traditionally, August has been a month of surpluses. However, such was not the case for 2018 which showed a slight Php 2.6 billion deficit.

Such seasonal deviation points to substantially larger deficits in the coming months.

And interestingly, despite the landmark 8-month revenue growth, the Bureau of Internal Revenue posted its lowest August collection since 2010.

And it seems that the growth rate in August BIR revenues has been in a 6-year declining trend. 

 

In the eight months of 2018, TRAIN provided the initial boost on Tax revenues. But that stimulus seems to be fading, which means that to continue with its aggressive spending targets, the NG will be pushing hard for TRAIN 2.0 lest its fiscal balance to GDP target may go off the rails.

That the August growth rate of 12.99% has declined below the trend line peak established in 2012 reinforces the fading effect of TRAIN 1.0 (green trend line)

Such a scenario would raise the risks of a fiscal crisis. And under such conditions, as the IMF observed, the NG may use “other forms of expropriation, including domestic arrears and high inflation that erodes the value of some types of debt”* (p.8)

*Svetlana Cerovic, Kerstin Gerling, Andrew Hodge, and Paulo Medas Predicting Fiscal Crises, IMF.org, August 2018

A domestic debt default by high inflation, in short.

So TRAIN 2.0 will be a crucial factor in 2019.

 

Artificially lowered rates, which had been transmitted to as credit expansion and subsequently money supply growth, have played a significant role in tax revenue conditions.

The 100 bps rate hikes, which has yet to appear in the loan portfolio of the banking system, and the BSP’s pullback of deficit monetization in August would be inauspicious for tax revenues given its current correlations.

Of course, the objective is to drop CPI rates (even temporarily). Like the GDP, the PSA announced a press briefing on the CPI on October 5. The CPI has now attained the status of the GDP! That demonstrates the state of concern the NG has with the CPI!

So to manage the balance sheets, the TRAIN series and high inflation will remain part of an economic climate driven by record fiscal deficits.

As they say, get used to it.