In this issue
Duterte Regime’s Paradigm Shift? Public Underspending, Record Debt Servicing and Record Cash Hoarding!
-Rationalizing Public Underspending, Spending on Net Lending Hits Record!
-Political Achievements: Nothing Is Easier Than Spending The Public Money!
-As Public Spending Falters, The National Government HOARD Tons of Cash!
-A Shift In Political Economic Priority: From Build, Build, Build to Forcing Rates Down?!
Duterte Regime’s Paradigm Shift? Public Underspending, Record Debt Servicing and Record Cash Hoarding!
From the Inquirer (June 28, 2019): “The Philippines’ economic growth in the second quarter could turn out to be a disappointment amid government underspending, bad weather and the escalation of trade tensions between economic giants United States and China, debt watcher Moody’s Investors Service said.”
Rationalizing Public Underspending, Spending on Net Lending Hits Record!
Why the continued rationalization on public underspending?
Though the political leadership signed the Php 3.7 trillion 2019 budget last April, public fund allocation has begun to normalize last May. From the Inquirer (June 15): But while the DBM already released 79.6 percent of the P3.276-trillion net spending program as of end-May, it was a slower pace compared to 88.5 percent, or P3.33 trillion of the P3.77-trillion 2018 appropriations during the first five months of last year. The total releases as of May nonetheless climbed from the authorization allowing agencies to obligate for their programs and projects in the first four months, during which the national government operated under a reenacted 2018 budget amid squabbles in Congress for pork funds… Releases from January to May included P1.537 trillion under the 2019 GAA—P1.515 trillion for departments on top of P21.109-billion worth of special purpose funds (SPFs).
Public spending grew by 7.81% in May, reported by the Bureau of Treasury (BoTr). But contrary to the headlines, the released earmarks from the 2019 budget have hardly benefited build, build and build. (figure 1, upper window)
Figure 1
That’s because the National Government (NG) disbursements, which accounted for 71.34% share of the aggregate crawled 3.79% higher to Php 224.5 billion. (figure 1, lower window)
Allotment to Local Government Units (LGU), which consisted of 15.24% share, shrunk 1.44% for the second month to Php 47.96 billion last May. (figure 2, upper window)
Figure 2
Instead, interest payments soared 229% to Php 2.29 billion while net lending rocketed by 960% to Php 14.963 billion last May! (figure 2, lower window)
Net Lending (NL), according to the Department of Budget and Management’s glossary (DBM) has been defined as “Advances by the national government for the servicing of government guaranteed corporate debt during the year, net of repayments on such advances. Includes loan outlays or proceeds from program loans relent to government corporations.” (bold mine)
For the first five months, net lending zoomed 1,458% to Php 18.642 billion in 2019 from last year’s Php 1.196 billion while Interest payments jumped 23.01% to Php 9.184 billion from Php 7.47 billion over the same period. Meanwhile, LGU allotment dropped 4.22% to Php 245.4 billion in 2019 from Php 256.232 billion and NG disbursements stagnated up .78 to Php 870.4 billion from Php 863.7 billion. See Bureau of Treasury’s expenditure data here.
Based on Demonstrated Preference, once the 2019 budget was activated last April, the NG prioritized DEBT SERVICING over other spending allocations!
Political Achievements: Nothing Is Easier Than Spending The Public Money!
With public spending serving as the primary anchor to the economic development model of the incumbent leadership, a slowdown in spending should translate to lower statistical GDP!
"Bad weather" and "trade tensions" serve as merely side influences.
Proof? Here is a laundry list of the so-called achievements enumerated by Palace spokesperson.
-free tuition in state universities and colleges
-free irrigation to farmers
-free internet access in public places
-institutionalization of feeding programs for public school students
-universal health care program
-free medicines and financial support to indigent patients
-mandatory Philhealth coverage for persons with disabilities (PWDs)
-huge and unparalleled subsidies in favor of government hospitals
-increase of SSS pensions for seniors
-improvement of the wages of government employees
-doubling the salaries of soldiers, policemen, jail officers and firemen
-prohibition on illegal labor subcontracting resulting in the regularization of hundreds of thousands of workers
-establishment of work-from-home arrangements
The common denominator for the ten of the twelve so-called achievements of the regime can be described as FREE, FREE, and FREE!
And more alleged accomplishments, from the same Inquirer article: “In terms of economy, Panelo said the President helped in making the country “one of the strongest economies and growth leaders in the region, by changing its business climate that prompted the influx of foreign investments thereby ushering the Golden Age of Infrastructure in the country with his Build Build Build Program.” “Under his leadership, the Philippines earned the highest credit rating in our economic history with a BBB+ upgrade from global debt watcher Standard and Poor’s,” Panelo said. “The President has similarly intensified revenue collections of the government to new record-highs, including the collection of around Six Billion Pesos from Philippine Airlines for overdue navigational fees and the landmark settlement by the government of about Forty Billion Pesos with Mighty Corporation for the latter’s failure to pay excise taxes,” Panelo added.”
As 30 US President John Calvin Coolidge once said “Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody.”
As a former classical liberal, the erstwhile Federal Reserve Chair Alan Greenspan warned “Deficit spending is simply a scheme for the “hidden” confiscation of wealth.”
The incumbent government believes in free lunches or the Santa Claus principle.
It has been exercising and expanding various interventions intended to control the allocation of resources and finances (both the demand and supply aspects) of the domestic economy through redistribution.
While on the surface the public is supposed to be the beneficiary, instead, the welfare, warfare and bureaucratic state, and their private sector appendages have been the primary recipients of the thrust to centralize the economy.
Such serves as proof to the drift of the Philippine political economy towards a neo-socialist state (or in different nomenclature: state capitalism or fascist economy).
And yet, as noted by the great Austrian Economist Ludwig von Mises of the Santa Claus princiiple, “any attempts the governments and their propaganda offices make to conceal this concatenation of events are in vain. Deficit spending means increasing the quantity of money in circulation. That the official terminology avoids calling it inflation is of no avail whatever. The government and its chiefs do not have the powers of the mythical Santa Claus. They cannot spend except by taking out of the pockets of some people for the benefit of others.” (bold highlights mine)
As Public Spending Falters, The National Government HOARD Tons of Cash!
Now to see whether empirical evidence validates the NG’s claims.
Government revenues jumped 22.5% year on year last May, the highest growth rate since July 2018 to a record Php 317.236 billion, according to the Bureau of Treasury. Tax revenues zoomed 17% to Php 265.45 billion mainly from collection growth of the Bureau of Internal Revenue (BIR) which sizzled at 19.07% to Php 204.84 billion and the Bureau of Customs (BoC) at a modest 10.3% to Php 58.17 billion.
Meanwhile, dividends of shares of stocks at Php 30.848 contributed 86% to the 61.3% spike in non-tax revenue growth to Php 35.67 billion last May.
Figure 3
It is interesting to note that figures of the Bureau of Treasury exclude the BIR data of net income and profits, excise taxes, sales and licenses and other domestic taxes for the past two months. The BoTr has aggregate figures for the BIR with no details on them. So we are blind to which of these factors made the most contributions to May’s sudden renascence in revenue collections.
Nevertheless, despite the May “improvement” in government collections, which boosted the 5-month performance, its growth rate of 10.73% year-on-year has been sharply down from 19.05% in 2018. (figure 3, lower window)
On the other hand, five-month public spending contracted .8% from a year ago, for the first time since 2011.
As a result, the 5-month fiscal deficit was at Php 809 million in 2019 compared to last year’s Php 138.73 billion. (figure 3, table)
Interestingly, in spite of reduced public spending, the NG continues to borrow relentlessly from the public’s savings.
Its May borrowings of Php 118.348 billion have increased the NG’s cash hoard by Php 104.53 billion even as the month generated a fiscal surplus of Php 2.6 billion! (figure 3, table)
In the first five-months of 2019, published financing totaled Php 733.682 billion 223.7% higher than 2018’s Php 226.66 billion in the face of Php 809 million deficit in 2019 compared with Php 138.73 billion deficit in 2018. (figure 3, table)
As a consequence, the NG’s 5-month cash hoard swelled to Php 566.44 billion compared to a cash deficit of Php 90.127 billion over the same period last year! (figure 3, table)
Figure 4
And diminishing budget deficits have come about with cascading money supply growth, as Mises pointed out. (figure 4, upper window)
A Shift In Political Economic Priority: From Build, Build, Build to Forcing Rates Down?!
Why has the NG been amassing so much cash with such intensity?
The massive buildup of cash in the NG’s balance sheet reinforces my theory that “The NG sopped up liquidity in the system that “kept ample cash in government coffers” to bring down interest rates!” Was the Massive 4-Month Public Borrowing Meant to Drive Down Rates? Banking System’s April Cash Reserves Hit 2015 Lows, June 17, 2019
And because of its decision to stockpile on liquidity through debt issuance, the NG appears to have prioritized the paying down of interest liabilities than spend on its pet projects at the likely cost of the statistical GDP.
Or, to push down interest rates with whatever it takes seems to be the NG’s paramount priority.
As they see it, lower rates would not only provide subsidy to the government and to the banking sector, but likewise help stabilize the financial system.
Falling yields and firming peso have, so far, worked to their favor. For how long?
It stands to reason, however, that such neglects the perspective that MORE government liquidity translates to REDUCED liquidity to the banking and non-bank private sector: the CROWDING OUT syndrome.
As an aside, the BSP has yet to publish the financial conditions of the Banking System, Loans and Liquidity conditions for May. The BoTr has yet to publish May’s official debt conditions.
And the NG seems to bet heavily against the adverse impact of the crowding out with the belief that the Philippine economy will hardly be affected by a dilution of financial liquidity.
But there’s the rub, should the economy slow, as the yield curve has been indicating, a drain of liquidity should readily emerge once cash-starved levered entities scramble for access to them.
Rate cuts from the BSP and the Fed have recently helped alleviate the Philippine Treasury’s previously inverted curve, as shown by the 10-year and 1-year spread. (figure 4, upper window)
A system floating on a torrent of credit requires further growth of credit to maintain its beneficial impact, otherwise, like a sand castle, the system crumbles.
From slow growth, the concerns should shift into decaying credit conditions.
And with NG corralling the nation’s resources and finances, as well as dictating on its allocation, the consumption of capital will increase the risks of economic and financial distress.
And more proof of political policy predicated on economic ignorance and hubris.
From the Inquirer (June 22, 2019): President Rodrigo Duterte has ordered the faster development of ecozones in rural areas and halted the applications in Metro Manila ecozones. Through Administrative Order 18, Duterte ordered to “hasten human capital and infrastructure, as well as to provide needed interventions to strengthen ecozones in the countryside, and ensure the development of backward and forward linkages of industries in and around such ecozones.”
Expected profits and losses dictate on the investment horizons and decisions of the marketplace and not political populism. If investors see profit opportunities shut by politics, they retreat or move elsewhere.
The backlash has been swift.
From Nikkei Asian Review: (June 29) Philippine outsourcing companies are raising alarm about a move by President Rodrigo Duterte to halt the creation of special economic zones around the capital, the latest step in his efforts to promote development in other parts of the sprawling archipelago…What is formally known as the business process outsourcing sector is concerned that call centers and software support service centers may not be able to find the infrastructure and manpower they need in other parts of the country.” (bold mine)
An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole doctrine of interventionism collapses when this fountain is drained off. The Santa Claus principle liquidates itself.
