…the deficit may be
financed by selling bonds to the banking system. If that occurs, the banks
create new money by creating new bank deposits and using them to buy the bonds.
The new money, in the form of bank deposits, is then spent by the Treasury, and
thereby enters permanently into the spending stream of the economy, raising
prices and causing inflation. By a complex process, the Federal Reserve enables
the banks to create the new money by generating bank reserves of one-tenth that
amount…In short, the government and the banking system it controls in effect
“print” new money to pay for the federal deficit. Thus, deficits are
inflationary to the extent that they are financed by the banking system; they
are not inflationary to the extent they are underwritten by the public—Murray N.
Rothbard
In this issue:
Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next?
I. Bullseye! Q2 2024 Public Spending Hits All-Time High, Partially Affirming Marcos-nomics Stimulus!
II. The Crowding Out Effect: Q2 2024 Revenue Spike Equals Lower GDP?
III. The 2024 Public Spending Surge: Pre-Election Expenditures via LGUs and COMELEC; Defense, and Infrastructure Budgets
IV. 6-Months Debt Servicing Costs Hit Another All-Time High!
V. Marcos-Nomics Stimulus: Mounting Debt Servicing Burden Points to the Coming BSP Rate Cuts
VI. The Inflationary Aspect of Deficit Spending: More Fuel to the Rising USDPHP; Conclusion
Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next?
The acceleration of June and Q2 2024 spending affirmed the emergence of the "Marcos-nomics stimulus." With debt burdens soaring, a rising public debt stock, and fiscal deficits widening, the BSP may soon cut interest rates.
I. Bullseye! Q2 2024 Public Spending Hits All-Time High, Partially Affirming Marcos-nomics Stimulus!
Businessworld, July 25, 2024: THE NATIONAL Government’s (NG) budget deficit narrowed by 7.24% year on year in June, as revenue collection grew at a faster clip than spending, the Bureau of the Treasury (BTr) said on Wednesday. Treasury data showed the budget gap shrank to P209.1 billion in June from P225.4 billion a year ago. Month on month, the budget deficit widened by 19.54% from P174.9 billion in May. In June alone, revenue collections jumped by 10.93% to P296.5 billion from P267.3 billion in the same month last year…On the other hand, state spending increased by 2.62% year on year to P505.6 billion in June. “The increase was mostly attributed to the implementation of capital outlay projects of the Department of Public Works and Highways, and the Department of National Defense under its Revised AFP Modernization Program, the preparatory activities of the Commission on Elections for the 2025 National and Local Elections, and the higher National Tax Allotment shares of local government units (LGUs),” the Treasury said. (bold added)
Defense spending. Domestic elections spending (direct and indirect).
Figure 1
Statistical base effects have played a large part in the government and media’s "smoke and mirrors" narrative of fiscal performance last June. (Figure 1, topmost image)
That is, the lower public spending growth rate was entirely a function of its comparison from a higher base a year ago.
In contrast, distortions from the base effect magnified the revenue growth rate calculated from a lower base last year.
The devil is always in the details.
Yet here are the most important factors that were withheld from the public:
-June 2024’s public spending was the sixth highest on record. (Figure 1, middle chart)
-Excluding public spending for December, June 2024 represented the third highest after May 2024 and June 2023.
-May and June represented the third-highest two-month public spending.
-Q2 2024 public spending was at an all-time high! (Figure 3, lowest graph)
Figure 2
-June’s deficit was the highest this year. (Figure
2 topmost chart)
-The gap between the 1H 2024 deficit and 2023 widened and was 14.3% and 8.95% below the 2022 and the 2021 historic high. Please take note that the latter two represented a fiscal stimulus in response to the pandemic recession. (Figure 2 middle window)
Yet, June data was a bullseye for us!
Authorities admitted that aside from infrastructure, defense, and pre-election spending accounted for its outgrowth.
That, in essence, is our Marcos-nomics stimulus.
VII.
"Marcosnomics" Stimulus: Expanded Spending on Pre-Election,
Defense Related and Infrastructure?
…
Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May.
This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion!
So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus." (Prudent Investor, 2024)
In his third State of the Nation Address (SONA), the Philippine President advocated for numerous public spending programs, including "Walang Gutom 2027," a war on poverty measure aimed at feeding one million food-poor citizens by February 2027. He also proposed a nationwide "Free Wi-Fi Program" and promoted "green-lane certified" investments, amounting to approximately Php 3 trillion in business projects (PPPs?) related to renewable energy, digital infrastructure, food security, and manufacturing. He also addressed tourism infrastructure, water projects, and more.
"Marcos-nomics" is on a roll, with more free lunches ahead!
II. The Crowding Out Effect: Q2 2024 Revenue Spike Equals Lower GDP?
What was the contribution of public revenues to the June and Q2 deficit?
Although aggregate collections reportedly grew by 10.93% in June, non-tax revenues, which experienced a remarkable 81.4% growth rate, comprised the bulk of these gains.
Further, Q2 2024 revenues soared by 16.74%.
This is because, after the April growth surge in collections by the Bureau of Internal Revenue (12.7%) and the Bureau of Customs (19.5%), the subsequent monthly performance almost ground to a halt: both tax agencies registered paltry gains in the following months—BIR grew by 2.8% and 4.7% in May and June, respectively, while the BoC was 4.3% and 0.7% higher over the same period.
Despite this growth, revenue year-on-year (YoY) growth spikes have historically accompanied a GDP slowdown, except for one occasion in 2014. This anomaly aside, revenue growth has typically preceded a slowdown in GDP growth.
The crowding-out effect could be a possible reason for this phenomenon.
Figure 3
So far, revenues from the private sector, which have been involved in government projects, bank lending expansion, and inflation (e.g. CORE CPI), have driven the aggregate performance of public revenues. (Figure 3, topmost and second to the highest diagrams)
Notwithstanding historic public spending, record revenues have also kept the fiscal deficit from spiraling out of control. For now. (Figure 3, second to the lowest chart)
But what if the law of diminishing returns on these factors worsens the current economic conditions?
III. The 2024 Public Spending Surge: Pre-Election Expenditures via LGUs and COMELEC; Defense, and Infrastructure Budgets
In the meantime, after providing a crucial perspective on the aggregates in public spending, we will delve into more details. (Figure 3, lowest graph)
Due to base effects, LGU allocations were up by only 2.6%, a decline from 8.54% in May. However, their share of total expenditures rose from 14.6% in May to 16.6% in June.
Firstly, the Mandanas ruling has also been instrumental in driving this uptrend. The previous spike in LGU collections occurred in the second half of 2021, prior to the 2022 national elections. The collections decreased in late 2022 (post-elections), which extended through most of 2023.
Implemented in 2022, the Mandanas ruling (EO 138) decrees an increased share of revenue allocation from the national government to 40%, which includes collections from the Bureau of Customs.
The second wave of increased allocations to the LGU appears to have emerged since Q1 2024 as the 2025 national elections approach.
Another pillar supporting this is the programmed annual increases in budget allocations.
Increased LGU allocations likely include budgets to market or improve the electoral chances of administration candidates in the 2025 general elections.
Also due to base effects, the National Government’s disbursement grew by 8.6% YoY, though this was substantially lower than 22.32% in May. Nonetheless, its share of the aggregate also declined from 72.5% in May to 69.2% in June.
These increases reflected direct election spending via the Comelec, indirect spending via LGUs, as well as infrastructure and defense allotments.
IV. 6-Months Debt Servicing Costs Hit Another All-Time High!
The thing is, the media has omitted a very critical factor: interest payments. On the other hand, the Bureau of Treasury glossed over the discussion of overall debt servicing costs.
Though interest payments increased by only 5.22% in June, down from 47.8% last May due to base effects, their share of the total rose slightly from 10.97% to 11.01%. (Figure 4, topmost image)
However, total debt servicing in the first semester of 2024 vaulted by 41.3% YoY. It hit an UNPRECEDENTED high of Php 1.283 trillion compared to its semestral predecessors and is down by only 20% relative to last year's annual or the 2023 data. (Figure 4, middle and lowest charts)
Again, compared to 2023, the gap has been closing dramatically: June amortization was only 7.16% lower, and interest payments were down by 39.96%.
Importantly, since 2019, authorities have minimized foreign debt servicing, but this trend appears to have reversed in 2024. (Figure 5, topmost diagram)
Nevertheless, it is incredible to see the media put a spin on the lower monthly external debt-servicing ratio (at the end of April) as 'good news' while ignoring the fact that the external debt-service burden spiked in 2023. The recent decline likely represents a hiatus. (Figure 5, middle window)
Most of all, the surge in the external debt servicing burden has pulled down the GIR-to-debt service ratio, implying reduced liquidity for debt servicing and other domestic FX requirements. (Figure 5, lowest graph)
And one shouldn’t forget that the Philippine GIR also consists of external debt and derivatives or "borrowed reserves."
V. Marcos-Nomics Stimulus: Mounting Debt Servicing Burden Points to the Coming BSP Rate Cuts
Statistics are about the past. They signify historical data predicated on a limited set of assumptions and barely evince or explain the complex causal relationships that led to these captured outcomes.
The fact that the "Marcos-nomics stimulus" is on a roll means that widening fiscal deficits, which should also reverberate into "trade deficits" and expand the "twin deficits," should escalate public debt levels and, correspondingly, increase the debt burden.
With fiscal deficits likely to bulge ahead, prompting more borrowings, the logical sequence would be for the BSP to cut rates to ease the onus of debt servicing.
And that’s only the argument for Philippine government debt.
The BSP’s case for rate cuts will also involve private sector’s mounting debt burden or systemic debt in general. And that excludes shadow banking or informal finance.
Figure 6
Yet, the current spending dynamics also imply that the Bureau of Treasury’s declining cash position in the face of higher deficits translates to a coming reversal in the recent downdraft in the BoTr’s financing (borrowing), which ironically has been celebrated recently by some quarters. (Figure 6, topmost visual)
Above all, such transfers should worsen the strain on public savings and diminish the amount available for investments. Rising deficits have coincided with slower growth of bank deposit liabilities. (Figure 6, middle chart)
Therefore, BSP rate cuts represent the next phase of the "Marcos-nomics stimulus."
VI. The Inflationary Aspect of Deficit Spending: More Fuel to the Rising USDPHP; Conclusion
With insufficient taxes and borrowings, the government would have to produce more currency to fund it: this translates to higher inflation ahead.
While the government is yet to publish June’s debt burden—slated for next week—banks and other financial institutions have been a primary source of financing for the public debt-financed record deficit and the conduit of unparalleled financial liquidity. (Figure 6, lowest graph)
Banks and financial institutions will be loaded with increasingly riskier government debt.
Furthermore, the BSP’s net claim on the central government (NCoCG), which has shadowed the uptrend in public spending, has fed into the CPI. It will continue to do so. (Figure 7, topmost and middle graphs)
In conclusion, the mounting imbalances from the trickle-down policies manifested by the historic savings-investment gap, supported by an ever-growing dependence on fiscal deficits and asset bubbles to bloat the GDP, translate not only to higher demand for the USD-Philippine peso (USDPHP) but also signify signs of rising systemic risks. (Figure 7, lowest chart)
Inflationary government policies, rather than symptoms like trade deficits and real FX rates, are the root cause of the weak peso. The BSP's interventions may delay or defer its effects, but ultimately, they cannot forestall the inevitable.
Good luck to those who see this as a free lunch for the economy and "bullish" for financial investments.
____
References:
Murray N. Rothbard, Ten Great Economic Myths, September 9, 2023, Mises.org
Prudent Investor, Could the Philippine
Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and
Accelerated Deficit Spending? June 30,2024
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