Government spending is not the engine of the economy. Tax hikes are not the only solution to bad administrations. Printing money is not a tool for growth, but one for cronyism. Upside down economics does not work. We need to return to monetary and fiscal sanity—Daniel Lacalle
In this issue
The Philippine Political Economy: Increasing Demand for Public Spending Entrenches the Era of Stagflation
I. Lower Spending, and Over-Earnings? The Mirage of the Low Base Effect
II. Inflation Bloats The Treasury’s Coffers: Why Kill The Goose That Lays The Golden Egg?
III. Has the Government Been Underspending?
IV. The Interdependence of Public Debt with the Banking System, The Economy of Human Actions
The Philippine Political Economy: Increasing Demand for Public Spending Entrenches the Era of Stagflation
Mainstream media believes that the budget management policies of the administration have been suboptimal. In particular, the GDP underachieves because of underspending and over-earning.
This news article explicitly conveys the public’s entrenched conviction.
Inquirer.net, "Gov’t still underspending, overearning in September", October 27: The national government’s budget deficit in September barely narrowed, by 0.6 percent compared to the same month of 2021, to P179.8 billion from P180.9 billion as growth in revenues outpaced that of expenses. Still, despite rising year-on-year, September numbers were the lowest over the past several months. Also, the government is expected to catch up with more overspending in the remainder of the year and the debt stock could end up representing a bigger rather than smaller chunk of the domestic economy.
The underlying belief of this claim is that spending is the key to prosperity. And authorities are duty-bound to juice up the GDP, which from their viewpoint, operates mechanistically. Like switchable knobs, central planning can shape the GDP to an optimal state.
I. Lower Spending, and Over-Earnings? The Mirage of the Low Base Effect
But this perspective misleads.
It is a contrasting story altogether when seen from the peso level. (Figure 1, topmost window)
If the treasury has spent less while earning more, why would the 9-month budget deficit be only 11% lower than the unprecedented Php 1.139 trillion last year? (Figure 1, middle pane)
II. Inflation Bloats The Treasury’s Coffers: Why Kill The Goose That Lays The Golden Egg?
Raging inflation has been a bonanza for the government's pockets!
Since the government computes taxes extracted from the private sector based mostly on values, surging headline prices benefit the treasury directly.
For instance, raging street prices redound to bumper sales tax collections. (Figure 1, lowest pane)
In Q3, aggregate revenue growth roared at unparalleled levels and rates (up 24.5%), serving as an anchor to the GDP. The Q3 boost has also energized the 9-month revenue growth (18.8%) to a record! (Figure 2)
Besides, with inflation rates higher than interest rates, financial repression acts as a subsidy to borrowers led by the Government.
From their perspective, who's afraid of inflation?!
Or, why kill the goose that lays the golden egg?
III. Has the Government Been Underspending?
If one's angle is from the crude percentages, then yes. But not from the peso level.
Though up by only 8.4% in Q3 and 8.7% in 9 months, the peso level of expenditures has ambled within record territory.
As it is, the share of public spending continues to shanghai a larger share of the GDP, exposing the economy to mounting risks of inflation and rising rates. (Figure 3, topmost and middle panes)
The BSP knows and admits to this: When the government spends a lot more than it collects, there is stronger demand to borrow to finance the gap in the budget. This exerts upward pressure on domestic rates, particularly if the government borrows from a relatively less liquid domestic market. (bold added)
Nevertheless, despite providing the fundamentals of inflation in their educational literature, they say otherwise in the media.
Apparently, the political agenda of the executive branch has been given precedence over the "price stability" objectives of the BSP
The economic reality is that there is no free lunch. Government actions come at a hefty price to the economy.
And the price comes in many interconnected forms: malinvestments via the crowding out syndrome, rising street prices, redistribution of finances and resources toward the government and politically connected private sector entities, mounting debt loads, escalating financial risks, corruption, and a lower standard of living.
And so, the establishment sees only the benefits from the 'rightful or ethical' distribution of public expenditure while discounting the risks from political interventions on the economy.
IV. The Interdependence of Public Debt with the Banking System, The Economy of Human Actions
Not only the effects of public spending on prices but frequently dismissed or ignored are discussions about the risks of debt. (Figure 3, lowest pane)
They would argue that because long-term maturities carry the yoke of debt distribution, this reduces risks associated with interest rates.
But that would represent a very simplistic overview of public debt.
Short-maturities accounted for 5.9% of debt outstanding, while medium and long-term debt represented 34% and 60% last August.
So while rates have risen rapidly, the lagging increases in interest liabilities reflect this distribution. (Figure 4)
As a share of expenditures, the increments to the aggregate interest payments also demonstrate this phenomenon.
But they forgot that aside from fresh issuance and rollovers, public debt is interdependent with the banking system.
Because of indirect monetization, the banking system’s net claims of central bank liabilities are at record highs. (The BSP will likely publish the updates on this data next week) (Figure 4, lowest window)
Further, when the economy seized up in 2020, not only did the public sector take over the financing from banks, but the BSP infused unprecedented amounts of cash into the system to rescue the industry through debt monetization.
Under the rationale of public spending, the outstanding public debt jumped. But for banks to secure access to the BSP's liquidity program required even more public debt securities, which functioned as collateral, which the Treasury obliged with increased issuances.
The inflation spiral, thus, represents the belated effects of this liquidity-led rescue package.
By extension, using the 2020 template, at the risk of a severe economic slowdown or a double-dip recession, the BSP, in collaboration with the Treasury, appears predisposed to engage in the same set of policies but at a bigger scale to save the banking system.
In doing so, the torrent of liquidity injections will translate to an avalanche of public debt issuances with banks acting as intermediaries!
In this way, because the economy becomes deeply dependent on interventions, the escalation of the inflationary backdrop should persist, embedding the era of stagflation.
And as a parting note, the establishment seems lost in explaining the inefficacies of the spending-to-prosperity model thru its implicit trickle-down model of economic development.
Manila Bulletin, October 20: About 49 percent of Filipino families or an estimated 12.6 million households have rated themselves as “mahirap” or poor, according to the latest Social Weather Stations (SWS) survey results released on Thursday, Oct. 20. The nationwide survey conducted from Sept. 29 to Oct. 2 is the first under the administration of President Ferdinand “Bongbong” Marcos Jr.
Authorities then rationalize the difference between their poverty statistics from the SWS emanating from their distinctive methodologies.
So while one survey presumes the context of scientism (quantity), the other projects sentiment (quality).
Econometric models from which statistical numbers are derived represent insufficient or even partial means of viewing and interpreting history.
So to alleviate poverty, authorities recommend more stop-gap measures thru financial assistance or redistribution.
Ironically, the economy represents a complex dimension of dynamic human interactions to address scarcities. Unfortunately, misdiagnosis results in wrong prescriptions.
