Deficit spending can only be financed in one of two ways: printing money or borrowing money. The first method threatens inflationary distortions and instability that retard a country’s development. The second threatens to crowd out private sector borrowing because the government absorbs portions of the country’s pool of savings and prices some private borrowers out of the market by the resulting higher rates of interest—Richard M. Ebeling
In this issue
The Grand Political-Economic Experiment of 2020: A Year of Records!
I. Neo-Socialism: Public Spending to GDP Soars to 23.5%, the Highest Ever
II. Record Fiscal Deficit from Record Drop in Revenues and Record Nominal Public Spending!
III. Will Intensified Political Transfers and Crowding Out Produce Stronger Economic Growth?
IV. Historic Public and Banking Debt Predicated on Cheap Money
V. Unprecedented QE and Record Money Supply Growth
VI. Statistical Charades: Predicting Growth Spikes from Low Base Effects, the Macau Example
The Grand Political-Economic Experiment of 2020: A Year of Records!
I. Neo-Socialism: Public Spending to GDP Soars to 23.5%, the Highest Ever
2020 will be remembered in history for its string of records, which likely accounts for a pivotal acceleration trend of the political economy.
Figure 1
The first among milestones is the most significant: Public expenditures to GDP rockets to 23.52%! The National Government controlled nearly a quarter of the nation’s resources!
True, the recession of 2020, which was also historic in magnitude, may have been instrumental for the decrease in the denominator, but this ratio has been in an uptrend since 2016!
You never let a crisis go to waste.
Under the mandated cover of implementing health protocols of restricting social activities, the National Government became the sole dispenser of economic opportunities: it picked winners and losers. In 2020, only the primary beneficiaries of the political bail-out, the Public and the Banking and Financial sector, as well as the Information and Communication sector reported positive GDP.
In nominal terms, public spending reached a record Php 4.23 trillion in 2020 but was almost at par with 2019 in the context of % YoY growth (11.32% and 11.42% in 2019).
As it is, the ascendant rate of spending growth in the face of the sharp decline in GDP magnified the role of public spending in 2020.
But this statistical ratio covers only the DIRECT public expenditures.
Unreported in the statistical data is the indirect allocation of private resources or the diversion of resources from the private sector to serve political institutions or objectives. Public-Private Partnerships and other contracting arrangements serve as examples.
In all, the 24% share of the GDP serves as the baseline for political spending. So the NG commands substantially more than a quarter of the nation’s resources!
Until a crisis emerges, this trend can be expected to grow over time.
II. Record Fiscal Deficit from Record Drop in Revenues and Record Nominal Public Spending!
It wasn’t just spending, poor revenue performance added to the picture.
Figure 2
The plunge in the rate of change in (-8.97%) fiscal revenues in 2020 was unmatched since 1987, which was supported by record declines in Bureau of Internal Revenues (-10.32%) and Bureau of Customs (-14.7%) collections.
Here is the thing. Although media paints the collection shortfalls as a function of the pandemic induced recession—the data I think has been understated—the decline of the trend of growth rates of tax revenues, in particular, BIR collections originated in 1987.
That said, collections from the 2018 TRAIN reform exhibited little signs of improvement. On the other hand, the 2020 recession strengthened the downside dynamics embedded in the collections growth rate trend.
Figure 3
As such, a historic fiscal deficit emerged from last year’s record public spending in the face of such milestone shortfalls in collections.
2020’s fiscal deficit registered a monumental Php 1.37 trillion or 7.83% of the GDP! Although a milepost, the 2020 figures are lower than the DBCC’s projection of a 9.6% deficit last August 2020.
From the perspective of NG activities, 2020 was a milestone.
III. Will Intensified Political Transfers and Crowding Out Produce Stronger Economic Growth?
So what has this record budget deficit wrought?
The popular perspective is that spending, regardless of its quality, has magical properties of boosting the economy. It is the alpha and omega of economic development. And the GDP was designed to measure this.
Unfortunately, even the NG's data disputes it.
Since government activities represent a transfer from people’s savings to public consumption, the declining trend of the headline GDP, even before the pandemic, has signified a casualty of expanded deficits.
So, what happened to the Keynesian multiplier?
Moreover, with the government taking control of more resources through material increases in public spending, such has coincided with lower household spending per capita.
Should it be a wonder that in a world of scarcity, increases in public spending and fiscal deficit crowd out household or consumer spending?
Exactly how will redistribution, centralization, and crowding out enrich the citizenry?
IV. Historic Public and Banking Debt Predicated on Cheap Money
And yet with revenues down, how has such an unprecedented deficit been financed?
The first recourse is through debt.
Figure 4
It is public knowledge that based on Bureau of Treasury’s data, public debt soared by 25% or Php 2.033 trillion in 2020.
The NG borrowed Php 662 billion above the Php 1.37 trillion budget deficit. While repayment of existing debt constituted part of this, much had been part of the BSP’s debt monetization program channeled through the banking system.
As an old saw goes, there are many ways to skin a cat. There are also many ways to read and interpret statistical data.
And since debt-to-GDP levels haven’t reached alarming zones, it is widely held, more borrowing is justified to bail-out the system. When the GDP recovers, public debt tends to melt-away. Borrow immense sums now, they urge, to save the economy, then pay it later.
Such is the economics of free lunch.
Nominal public debt per capita hit a landmark high of Php 94,264. Or, this number translates to Php 10.253 trillion debt divided by the population (108.3 million—using the PSA’s national income data as of end-2020).
Indeed, last year’s 57.06% share of per capita public debt to per capita GDP, on a nominal or current price basis, is far from the 87.26% zenith in 2014, the standard view.
But then the perspective radically changes when real per capita GDP is applied. 2020’s 58.5% share of per capita public debt would signify an all-time high! I know, comparing real versus nominal may be said as apples-to-oranges, but the point here is what you see depends on where you stand.
Last January, public debt increased to Php 10.327 trillion. By the end of this administration’s tenure in 2022, debt levels have been projected to hit Php 13.7 trillion. So between February 2021 to June 2022 or the transition from the incumbent to the new administration, if such projections are to be fulfilled, public debt will surge by about Php 3.373 trillion in 16 months!
So, on the pipeline is a tsunami of public debt.
By extension, from the standard point of view, it is true that since 2009 per capita public debt to per capita GDP, from a nominal basis, has trended downward. But looking at public debt alone misleads.
The reason for this is that under a fiat money standard, which emphasizes spending as an economic elixir, debt financing spending must be undertaken, if not by the public sector, the private sector. That is, the private sector carries the burden of debt-financed spending in good times. For this reason, bank credit to current GDP zoomed, more than doubling from 22.5% in 2007 to a record 49.6% in 2020.
Under this premise, there is no melting away of debt. There is only a juggling of debt.
While it may be true that not all debt is toxic, surely prone to financing unproductive undertakings or malinvestments are debt acquired from an artificially low-interest rate regime.
Austrian Economist and Professor Joseph Salerno explains,
Fractional-reserve banking inflicts another great harm on the economy. In order to induce businesses and consumers to borrow the additional dollars created, banks must reduce interest rates below the market-equilibrium level determined by the amount of voluntary savings in the economy. Businesses are misled by the artificially low interest rates into borrowing to expand their facilities or undertake new long-term investment projects of various kinds. But the prospective profitability of these undertakings depends on expectations that bank credit will remain cheap more or less indefinitely
Joseph T. Salerno, Let Unsound Money Wither Away Mises.org
If the banking system is sound, why then has the BSP engaged in an unprecedented bailout program, consisting of various measures including gargantuan liquidity injections and operational and regulatory reliefs, mandated lending, and more?
And what constitutes tenor mismatches according to the BSP’s Financial Stability Reports?
So the notion of bailing out the economy by borrowing now, pay later depends entirely on the perpetuity of cheap rates, seamless access to savings, and debt stock, which will have an impact on tax rates and revenue intake, and subsequently, economic performances. Naturally, there will be countless feedback loops.
V. Unprecedented QE and Record Money Supply Growth
Figure 5
The private sector is not the only source of public debt, the BSP now engages in the direct financing of the National Government.
Net claims on central government of the banking system reached an unparalleled 17.64% of the NGDP in 2020. The BSP extended a Php 540 billion loan to the National Government last January 2021.
With core operations of the banking industry down, financial liquidity mainly emanated from the unprecedented BSP’s injections via QE, RRR and policy rate cuts, and more.
This grand experiment will have unforeseen and unintended intertemporal feedback loops on the economy and the financial system.
VI. Statistical Charades: Predicting Growth Spikes from Low Base Effects, the Macau Example
Finally, the mainstream sees big jump in the 2Q GDP
From the ABS-CBN News (March 8): Gross domestic product growth will likely remain weak in the first quarter, even negative, but there will be a strong rebound in the second quarter with the economy coming off a low base, the head of the Bangko Sentral ng Pilipinas said on Monday. “Of course, the first quarter will probably be a little bit slow, or it could be negative, slight negative or slight positive,” said BSP Governor benjamin Diokno in an interview with ANC Market Edge. Diokno however said GDP growth will pick up in the April to June period due to a low base effect as it was “the worst quarter last year,” Diokno added.
Macau’s gaming revenues should serve as an example of predicting statistical outcomes using low base effects.
From Reuters (March 1): Gambling revenue in Macau surged 135.6% in February year-on-year even as the world’s biggest casino hub struggled to boost visitors from its key market of mainland China as authorities there urged residents to limit travel.
Yay! Such a big growth number right?
But hold a minute. Nominal Gaming revenues have drifted from about 7 million (MOP) patacas to 8 million MOPs in the last five months through February 2021. It registered revenues of 7.312 million MOPs in February 2021. But compared to the low base of 3.1 million MOPs in February 2020, hence, the 135% spike! In early February 2020, Macau’s government requested casinos to halt activities for 2 weeks during the onset of the COVID-19 outbreak in China.
Macau’s casinos barely recovered from the 2014 meltdown. Slammed hard were the small and medium scale enterprises, mostly retail, dependent on tourism and casinos.
The brunt of the economic toll manifested by large numbers of store vacancies was evident especially in areas located distant from the casinos or the center. That was a personal account way back in December 2018.
Then this COVID-socialism struck.
Despite the statistical boom, Macau's real economy must be floundering in a deeper rut today.
Back home, again, the consequences and feedback loops representing the grand experiment imposed on the Philippines, manifested by the string of records, will become apparent in 2021 and the coming years.
Importantly, 2020 may also reflect a pivotal shift in the political-economic environment towards the deepening entrenchment of centralization and central planning.
Statistical distortions won’t override the human economy.
