A failure to correct unsustainable fiscal trajectories poses major risks to growth, inflation and financial stability—Agustín Carstens, General Manager, Bank for International Settlements
In this issue
September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso
I. September Deficit Highlights Three of the Five Phases of Marcos-nomics Stimulus
II. Untold Aspects of Fiscal Health: How the Shift in Monthly Revenue Reports Impact Quarterly Performance
III. Revealing Hidden Dynamics: How Quarterly Expenditures Shape Fiscal Outcomes
IV. September Debt-Servicing Costs Hits an All-Time High Relative to Historical Annualized Data!
V. How Deficit Spending Drives a WEAKER Philippine Peso; the USD-PHP V-Shape Recovery!
VI. All Time High in Interest Payment as Share of Expenditures Soar to 2009 High!
VII. Pre-Election Spending? All Time High in 9-Month Government Disbursements, Second Highest LGU spending
VIII. The Inflation Tax: BSP and Banking System’s QE
IX. Conclusion: Big Government Comes at The Expense of a Healthy Market Economy
September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso
There seems to be little recognition that September's deficit was a milestone of a kind; it actually highlights "Marcos-nomics" in action. With a quarter to go, debt servicing costs hit an all-time high as the USD-Peso mounts a ferocious recovery.
I. September Deficit Highlights Three of the Five Phases of Marcos-nomics Stimulus
Everyone has been conditioned to believe that current economic conditions are "normal."
To reinforce this notion, media narratives often highlight selective aspects of growth while ignoring other salient parts and related data.
That’s right: when the public’s dependence on "political interventions"—referred to as ‘stimulus’—becomes entrenched, this deepening addiction becomes the norm.
As the great Nobel Laureate Milton Friedman presciently stated, "Nothing is so permanent as a temporary government program."
But have you heard any expert mention this? You might read piecemeal allusions; for example, the BSP's rate-cutting cycle is expected to boost household spending and business activity.
Nonetheless, the public hardly understands the interconnectedness of what are sold as disparate policies.
As previously discussed, we identify the five phases of the "Marcos-nomics stimulus," subtly operating under the Pandemic Bailout Template (PBT).
The first phase involves record-setting public spending, contributing to a significant deficit.
The second phase highlights the BSP’s monetary policy, characterized by the latest round of interest rate cuts.
The third phase signifies the BSP and bank injections, partially fulfilled by the recent reduction in the banking system’s Reserve Requirement Ratio.
The fourth and fifth phases encompass various subsidies, such as the current credit card interest rate ceiling, along with pandemic relief measures.
The National Government and the BSP have yet to expand their coverage in this area, but it is expected to happen soon.
This step-by-step approach underlines the structure of the stimulus, which subtly mirrors the Pandemic Bailout Template.
September’s deficit highlights its first phase.
II. Untold Aspects of Fiscal Health: How the Shift in Monthly Revenue Reports Impact Quarterly Performance
Inquirer.net, October 25, 2024: The country’s budget deficit widened by 8.9 percent to P273.3 billion in September from P250.9 billion in the same month last year, as the increase in revenues was not enough to cover the hike in expenses, the Bureau of the Treasury reported on Thursday. Revenue collections increased by 17.32 percent to P299.7 billion last month, from P255.4 billion last year, while state expenditures also grew by 13.15 percent to P572.9 billion. But for the first nine months, the budget deficit narrowed by 1.35 percent to P970.2 billion from the P983.5-billion budget gap a year ago.
While the Bureau of the Treasury (BuTr) issues a monthly report, recent changes in tax revenue reporting and end-of-quarter budget compliance targets make quarterly reports far more significant.
In fact, monthly reports can be considered largely meaningless without considering the quarterly performance.
For instance, the latest BuTr report sheds light on the reasons behind recent revenue surges.
The increase in VAT collections in 2024 is partly due to the impact of the change in payment schedule introduced by the TRAIN law provision which allows the tax filers to shift from monthly to quarterly filing of VAT return [bold mine] (Bureau of Treasury, October 2024)
Distortions brought about by changes in the BuTr’s reporting methods pose a crucial factor in analyzing the fiscal health of the Philippines.
This brings us to September’s performance.
Indeed, public revenue in September grew by 17.3%, but this increase is primarily due to base effects.
Additionally, administrative policy changes and one-off charges contributed to the month’s revenue growth.
This is attributed to higher personal income tax (PIT) particularly on withholding on wages due to the release of salary differentials of civilian government personnel pursuant to Executive Order No. 64, series of 20242 , which updated from the Salary Standardization Law (SSL) of 2019…
Non-tax revenues surged to P46.2 billion in September, more than twice the level attained a year ago primarily due to the one-off windfall from the Public-Private Partnership (PPP) concession agreement…the higher outturn for the period was attributed to the P30.0 billion remittance from the Manila International Airport Authority (MIAA), representing the upfront payment for the MIAA-Ninoy Aquino International Airport (NAIA) PPP Project [bold added] (Bureau of Treasury, October 2024)
Importantly, aside from the factors mentioned above, as noted by the BuTr, the shift in VAT payment timing played a crucial role in boosting 2024 revenues.
Figure 1
That is to say, since VAT payments are made at the end of each quarter but recorded in the first month of the following quarter, this quarterly revenue cycle inflates reported revenues for January, April, July and October, often resulting in a narrowed deficit or even a surplus for these months. (Figure 1, topmost chart)
Therefore, we should anticipate either a surplus or a narrower deficit this October.
In any case, Q3 2024 revenues increased by 16.95%—the highest growth rate since Q3 2022, which was a record in nominal terms for Q3 historically. However, this was also the second-highest quarterly revenue in pesos after Q2 2024. (Figure 1, middle image)
What might collections look like if we consider only “core” operations? Would deficits be larger without these reporting distortions? Or could the government be “padding” its revenue reports?
III. Revealing Hidden Dynamics: How Quarterly Expenditures Shape Fiscal Outcomes
The mainstream media and their expert cohorts rarely mention the most critical segment: historic public (deficit) spending.
Although public spending rose by only 13.2% in September due to a high base effect, it marked the largest non-December outlay on record. It was also the third-largest overall, trailing only the year-end budget expenditures of December 2023 and December 2022. (Figure 1, lowest graph)
Notably, 2024 has already seen three months of spending exceeding Php 500 billion—even before the year-end budget allocations. This pattern isn’t an anomaly but rather a path-dependent trajectory of political decisions.
In the context of quarterly performance, Q3 spending grew by 6.4% year-over-year, also constrained by high base effects. Still, this represents the third-highest quarterly outlay on record, following Q2 2024 and Q4 2023, and a milestone high when compared with previous Q3 performances. (Figure 2, topmost diagram)
Similarly, the monthly deficit resulting from September’s historic expenditure constituted the second largest non-December monthly deficit, following the pandemic recession in April 2020, which saw a deficit of Php 273.9 billion. This was the sixth largest deficit when including the year-end closing budget.
Furthermore, the pressure to meet quarterly compliance targets push the burden of expenditures to the closing month of each period; thus, the largest deficits occur at the end of each quarter (March, June, September, and December). (Figure 2, middle pane)
Simply put, this new schedule has introduced significant distortions in the Bureau of Treasury’s (BuTr) fiscal balance reporting.
Revenues at the start of each quarter are likely to close the gap with expenditures in October, potentially leading to a surplus or a narrowed deficit. In contrast, end-of-month spending for each quarter should boost expenditures and consequently increase deficits.
However, for now, the alteration in BuTr reporting has artificially inflated the government’s fiscal health.
Still, it goes without saying that the year-end expenditure target will likely push December 2024’s fiscal deficit to a fresh milestone!
From a quarterly perspective, revenues remain above their polynomial trendline, while spending hovers slightly below it, reflecting revenue outperformance in comparison to trend-aligned spending. (Figure 2, lower graph)
Meanwhile, the widening gap between the deficit and its trendline may signal increased volatility ahead.
IV. September Debt-Servicing Costs Hits an All-Time High Relative to Historical Annualized Data!
Despite the potential embellishment of budget statistics through inflated revenues or understated deficits, it remains essential to recognize that this spending requires funding.
Some mainstream experts have attributed the recent decline in Bureau of Treasury (BuTr) financing to prudent “rationalization” by budget overseers.
However, we have consistently argued that this perspective is grotesquely misguided; it is the government’s default action to indulge in a spending binge.
This behavior serves not only to advance its political agenda of centralizing the economy and promoting its interests in the upcoming elections but also because such fiscal transfers create a temporary illusion of economic boom.
For a spending-based GDP, ramping up expenditures is necessary to increase tax revenue and, more importantly, to depress interest rates, which allows the government to access public savings cheaply to fund its expenditures.
True, revenue expansion in August reduced that month’s deficit, which led to an improvement in the 9-month deficit, dropping from last year’s level. However, we suspect this improvement may be short-lived, as December 2024’s massive spending is likely to push the deficit above last year’s figures.
Still, it is noteworthy that the 9-month deficit for 2024 remains the fourth largest since the pandemic bailout template (PBT) measures began in 2020.
Any improvement in the deficit has been inconsequential, as the post-PBT deficits have remained in an “emergency” mode.
It only takes a substantial downturn
in GDP for this deficit to set a new high—which is likely what
its polynomial trendline suggests.
Figure 3
Despite improvements in the 9-month deficit, financing reversed its downward trend, rising 12.6% year-over-year to Php 1.875 trillion. (Figure 3, topmost chart)
This trend reversal means not only an increase in the public debt stock—recently improved due to the peso’s substantial gains against the USD—but also higher costs of servicing public debt.
The BuTr will report on September’s public debt figures next week, but with the substantial V-shaped recovery of the USD, October is expected to yield interesting data.
Nevertheless, the 9-month cost of servicing public debt has reached an ALL-TIME HIGH relative to annual historical data, with a full quarter left to go! (Figure 3, middle graph)
Interestingly, amortizations have exceeded the annual 2023 data by 8.7%, while interest payments remain just 7.2% below this benchmark.
Signs of normal times?
V. How Deficit Spending Drives a WEAKER Philippine Peso; the USD-PHP V-Shape Recovery!
Although the 9-month growth rate for debt servicing slowed to 17.4% due to base effects, it set a record in peso terms.
More importantly, the share of external financing has been increasing, which not only indicates rising credit levels in the local currency but also amplifies external borrowing, effectively exacerbating "USD shorts" (implied short positions on the USD). (Figure 3, lowest window)
Borrowings ultimately need repayment.
However, if organic USD revenue sources prove insufficient to meet debt
obligations and refinance existing loans, the government will need to take on
more debt to cover existing obligations—essentially, a recycling of debt, or
what is known as Ponzi
finance.
Compounding these challenges, debt-financed government spending, a preference for easy-money conditions, and domestic banks’ bias toward consumer lending all contribute to a widening savings-investment gap, fueling the country’s "twin deficits." This combination of factors will likely increase reliance on external financing, leading to a structural depreciation of the peso.
The crux of the matter is this: the widening fiscal deficit results in a weaker Philippine peso, raising external credit risks. (Figure 4, upper image)
Oddly enough, some media outlets and pseudo-experts have recently attributed the recent V-shape recovery of the USDPHP exchange rate to a “Trump presidency!”
Huh? Are they suggesting that a Harris administration would result in a strong peso?
As I recently posted on x.com: During the Trump 1.0 presidency 1/20/17 (49.92) -1/20/21 (48.054), the USDPHP fell by 3.74%! How about Biden? So far, at 58.32, the USDPHP is up 21.4% (as of October 25, 2024)!
Certainly, the recent strength of the dollar has played a role, contributing to a broad-based rebound of Asian currencies this week. While the USD Index (DXY) rose by 0.8%, the Philippine peso fell by 1.39%.
In the context of the USD-Philippine USDPHP reclaiming its old trendline, this represents a "signal," while the peso’s recent bounce signifies "noise" or an anomaly. (Figure 4, lower chart)
On the other hand, the DXY remains below its immediate broken trendline.
So, is the USDPHP market suggesting a retest of 59 soon?
This partially illustrates the "exorbitant privilege" of the US dollar standard, where global central banks rely on building up their USD reserves, to "back" or "anchor" their domestic monetary or currency operations that fund their economies and imports.
In any case, over the long term, the relative performance of a currency against regional peers vis-à-vis the USD might signal developing vulnerabilities within that currency.
This inability to recognize causality represents the heuristic of attribution bias— giving credit to endogenous activities while attributing deficiencies to exogenous forces.
VI. All Time High in Interest Payment as Share of Expenditures Soar to 2009 High!
Circling back to debt servicing, it's important to note that amortizations are not included in the published budget. As the government defines it, this represents "a financing transaction rather than an expenditure" (Ombudsman, 2012).
Consequently, this aspect has barely been addressed by the headlines or the experts.
Figure 5
Despite attempts to downplay discussions around interest payments, the nine-month interest payments have surged to an all-time high, with their share of disbursements climbing to 13.7%—the highest level since 2009! (Figure 5, topmost diagram)
The growing debt burden from deficit spending, amid elevated rates, translates into an even larger cost of servicing, impacting both the budget’s allocated expenditures and its mandatory cash flows.
How’s that for "prudential" debt management or "rationalizing" the budget?
VII. Pre-Election Spending? All Time High in 9-Month Government Disbursements, Second Highest LGU spending
Aside from interest payments, what might be the other major spending items?
The nine-month central government’s disbursement growth surged by 11.64% to an all-time high of Php 2.78 trillion, which, according to the Bureau of the Treasury (BuTr), signifies "the implementation of capital outlay projects by the Department of Public Works and Highways and larger personnel services expenditures due to the implementation of the first tranche of salary adjustments." (Figure 5, middle window)
It is worth noting that, aside from aiming for GDP targets, this spending appears to be tactically timed for pre-election purposes.
Meanwhile, local government spending growth rebounded sharply from a 16.6% contraction in 2023 to 8.8% this year, reaching the second highest level in 2024. (Figure 5, lowest image)
A crucial segment of this substantial recovery may involve direct and indirect financing of local pre-election campaign activities.
The nine-month share of national disbursement was 65.24%, slightly higher than 2023’s 65.2%, while the share of local government unit (LGU) spending declined from 18.2% in 2023 to 17.72% in 2024.
In any event, given the embedded accelerated trajectory in deficit spending for socio-political (pre-elections, war economy, infrastructure-led GDP) and financing goals in the face of volatile economically sensitive revenues or collections, what could go wrong?
VIII. The Inflation Tax: BSP and Banking System’s QE
Direct taxation and debt have not only served as the primary sources of financing for the increasing scale of spending and deficits; the inflation tax has also taken on a more significant role in funding deficit spending.
It's important to remember that the Bangko Sentral ng Pilipinas (BSP) operates under an "inflation targeting" regime.
The unstated objective is not to "eliminate" inflation—since that is never the goal—but rather to contain the inflation "genie" within manageable limits.
The BSP aims to utilize the inflation tax alongside direct taxes and borrowing, while carefully controlling it to prevent social discord.
Consequently, attributing the current inflationary episode solely to supply-side factors has proven to be a convenient way to deflect blame from the BSP to the broader market economy, often framing it as “greedflation.”
Given this context, it’s hardly surprising that none of the establishment experts anticipated the surge in inflation, despite our repeated warnings about the inflation cycle.
Figure 6
When authorities began ramping up spending even before the pandemic in 2019, the BSP’s net claims on the central government (NCoCG)—essentially a local version of quantitative easing—started to escalate and has remained on an upward trajectory ever since. (Figure 6, topmost chart)
Even as mainstream narratives tout the aspiration of achieving "upper middle-income status," little has changed in the BSP’s NCoCG since their historic Php 2.3 trillion bailout of the banking system during 2020-2021.
The same holds true for the Philippine banking system’s NCoCG, which continues to be a vital source of financing for public debt. (Figure 6, middle window)
As of last August, the banking system’s holdings of government securities were just shy of the all-time high reached in July.
Although bank holdings of held-to-maturity (HTM) assets dipped in August, they remained tantalizingly close to the record high set in December 2023. Philippine NCoCG are entwined with HTMs. (Figure 6, lowest chart)
When have these been signs of "normal?"
IX. Conclusion: Big Government Comes at The Expense of a Healthy Market Economy
We shouldn’t overlook the fact that the accelerating surge in the nominal value of public debt has diverged from the rising trajectory of public spending, suggesting a potential understatement of the fiscal deficit. (Figure 7, topmost graph)
The establishment often emphasizes the importance of public spending, claiming it has a ‘multiplier effect.’ However, from the perspective of the banking system, the reality appears to be the opposite: instead of stimulating growth, increased public spending has led to a diminishment of savings, as evidenced by the declining growth of peso deposits. (Figure 7, middle chart)
The impact of diminishing savings is also evident in the capital markets, with trading volumes on the Philippine Stock Exchange (PSE) declining further due to the surge in pandemic-era deficits. Yes, PSEi 30 have risen on the backdrop of declining volumes. Amazing! (Figure 7, lowest diagram)
In short, the greater the centralization of the economy— through: (1) intensifying public spending, (2) increasing political control over the economy—such as Public-Private Partnerships (PPPs), which can be viewed as a neo-fascist or crony capitalist model, (3) the expansion of the bureaucratic state due to welfare and warfare sectors, and (4) the increasing reliance on the inflation tax, the lower the productivity.
Simply put, a big government comes at the expense of a healthy market economy.
Given these circumstances, could this scenario catalyze a third wave of inflation?
When has the Philippine economy truly returned to a pre-pandemic "normal?"
___
References:
Bureau of Treasury September 2024 Budget Deficit at P273.3 Billion Nine-Month Deficit Narrowed to P970.2 Billion, October 24, 2024 Treasury.gov.ph
Office of the Ombudsman, I. Basic Concepts in Budgeting, December 2012, www.ombudsman.gov.ph
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