Showing posts with label corruption. Show all posts
Showing posts with label corruption. Show all posts

Sunday, September 07, 2025

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal

 

Democratic socialism—thereby fusing populist authorization with bureaucratic command—inverts civil society’s logic: spontaneous coordination yields to electoral control, property, and precedent to administrative discretion. The quest for legibility breeds discretion, opacity, colonizing associations, and politicizing provision. The polity grows more ceremonially majoritarian as its structure turns illiberal. Human relations become increasingly politicized. The space for autonomous and dissenting freedom steadily recedes—Vibhu Vikramaditya 

In this issue: 

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal

I. Selective Framing: The "Smallest Deficit" Headline

II. Bigger Picture: Weak Revenues, Sluggish Spending, Cumulative Deficit Near Record Highs

III. Quietly Moving the Goalposts, Budget Gaps: Enacted vs. Revised

IV. Interventionist Mindset: The Root of the Fiscal Imbalance

V. The Economics of "Free Lunch" Politics: The Law of Scarcity Meets the Welfare State

VI. Debt Dynamics and the Savings–Investment Gap

VII Corruption as Symptom, Not Cause

VIII. Public Spending at Historic Highs and the DPWH Flood Control Scandal

IX. The DPWH Scandal: A Systemic Threat

X. A Policy Dilemma: The Impossible Choice 

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal 

What the DPWH scandal reveals about the fragility of a spending‑driven political economic order

I. Selective Framing: The "Smallest Deficit" Headline 

Inquirer.net, August 29, 2025: A modest increase in government spending narrowed the Philippines’ budget deficit in July to its smallest level in nearly five years, keeping the shortfall within the Marcos administration’s target. The state continued to spend more than it collected after recording a fiscal deficit of P18.9 billion, albeit smaller by 34.42 percent compared with a year ago, latest data from the Bureau of the Treasury showed.


Figure 1

The July budget deficit headline—“smallest in nearly five years”—is a textbook case of selective framing. 

While technically accurate, it obscures deeper fiscal concerns by exploiting the optics of quarterly VAT reporting, which front-loads revenue at the start of each quarter. Since 2023, firms have filed VAT returns quarterly instead of monthly, so revenues at the start of each quarter appear inflated, producing artificial “surpluses” or unusually slim deficits. (as discussed last year, see reference) [Figure 1, upper image] 

This makes July look exceptional, but it is little more than a timing quirk—not a sign of genuine fiscal improvement.

II. Bigger Picture: Weak Revenues, Sluggish Spending, Cumulative Deficit Near Record Highs 

In reality, the cumulative January–July shortfall has ballooned to Php 784.4 billion, the second-largest on record. [Figure 1, lower chart] 

Revenues grew by only 3.26% while expenditures posted a meager 1.02% increase. The Bureau of the Treasury itself attributed the spending slowdown to the "timing of big-ticket disbursements of the Department of Public Works and Highways, Department of Social Welfare and Development, and Department of National Defense for their respective banner programs." 

Year-to-July, expenditures are up 8.2%, slower than 13.2% in 2024, but the bigger story lies in revenue weakness: collections grew just 4.8% this year compared with 14.75% in 2024. The 24.9% contraction in non-tax intake and the sharp deceleration in Bureau of Customs growth (1.5% vs. 5.8% in 2024) dragged overall revenues down. 

III. Quietly Moving the Goalposts, Budget Gaps: Enacted vs. Revised 

July’s Php 491.2 billion in expenditures also fell sharply below the Php 561 billion monthly average needed to meet the Php 6.326 trillion enacted budget. 


Figure 2

Compounding this, the Bureau of the Treasury reported that 2025 fiscal targets had been revised downward (by the DBCC) for both revenue and spending, now pegged at Php 6.08 trillion. [Figure 2, upper table] 

Authorities attributed the adjustment to "heightened global uncertainties," but the subtext is clear: the government is quietly recalibrating expectations to preserve its 5.5% deficit ceiling, even as structural weaknesses deepen. The headline may offer comfort, but the underlying trajectory points to fragility, not fiscal strength. 

The enacted budget sets the ceiling—what government aims to spend—while the revised budget marks the floor, revealing what it can realistically afford as conditions shift. 

Yet the jury is still out on whether the current administration will break its six-year trend of exceeding the enacted budget—or whether this implicit admission of slower growth will instead spur even more spending in the second half of the year. 

IV. Interventionist Mindset: The Root of the Fiscal Imbalance 

Of course, the fiscal imbalance is merely a symptom. 

As previously discussed, it is driven by behavioral factors—such as the heuristics of recency bias and overconfidence—combined with an overreliance on a technocratic bureaucracy fixated on flawed econometrics as the fountainhead of interventions. (see reference on our previous post dealing with the rising risks of a Fiscal Shock) 

Most importantly, it is fueled by a populace increasingly dependent on social democracy’s "free lunch" politics, anchored in a deepening interventionist mindset. 

As Mises Institute’s Joshua Mawhorter lucidly describes, "by living under a modern, highly interventionist modern nation-state, the default paradigm of political elites and the general public is that, whenever a problem arises, the government must do something, that not doing something would be irresponsible and disastrous, that it can only help, and that the worst possible option would be doing nothing. This might be called the interventionist mindset or interventionist paradigm." (bold added)

V. The Economics of "Free Lunch" Politics: The Law of Scarcity Meets the Welfare State 

This mindset lays the policy framework for trickle-down Keynesian spending programs financed by the BSP’s easy money. 

Public spending on an ever-widening scope of social services—including the proposed "universal healthcare" for all Filipinos—illustrates this. [Figure 2, lower left image] 

In simple terms, while such programs may appear ideal, the law of scarcity dictates that there must be sufficient savings to sustain a welfare state. 

If the rate of redistribution exceeds the growth of savings, funding must come from elsewhere—either by borrowing from future taxpayers or through the inflation tax, via financial repression and fiscal dominance enabled and facilitated by central bank accommodation. 

Yet a persistent reliance on borrowing or inflation is not sustainable. Both are subject to ‘reversion to the mean’ and will eventually face a reckoning through crisis.

VI. Debt Dynamics and the Savings–Investment Gap 

The thing is, while some authorities acknowledge the burden of public debt—"every Filipino now owes P142,000"—most attribute it to "corruption," a convenient strawman. [Figure 2, lower right picture]


Figure 3

Alongside rising expenditures, public debt surged to a record Php 17.56 trillion last July, sustaining its upward trajectory and accelerating in both scale and velocity! MoM changes depict this uptrend. [Figure 3, topmost and center graphs] 

All told, the Philippines suffers from a record savings–investment gap, which hit a new high in Q2 2025. [Figure 3, lowest chart] 

But "savings" in national accounts is a residual GDP-derived figure that is deeply flawed; it even includes government "savings" such as retained surpluses and depreciation, when in reality, the fiscal deficit reflects dissaving (as discussed during CMEPA last July; see reference). 

With public debt up Php 296.2 billion month-on-month, Php 1.873 trillion year-on-year, and Php 1.512 trillion year-to-date, the government is suggesting a forthcoming decline in public debt by the end of 2025. 

Technically, while a ‘slowdown’ may occur, this is a red herring—it omits the fact that soaring deficit spending inevitably translates into higher debt, higher inflation, or both.

VII Corruption as Symptom, Not Cause 

Social democrats fail to heed the lessons of EDSA I and EDSA II: corruption is a legacy of big government. 

What is often forgotten is that corruption is not the disease but a symptom of vote-buying politics—of a system built on free-lunch populism, where political spending buys loyalty, entrenches dependence, transfers wealth, consumes savings, and simultaneously erodes institutions through ever-deepening interventions. 

Per the great Frédéric Bastiat, 

"When plunder has become a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it." (Bastiat, 1848) 

Still, social democrats cling to the illusion that electing an "angel" leader can deliver an ideal command-and-control economy. They overlook that forced redistribution—or legalized plunder—breeds societal tensions and unintended consequences, triggering a vicious cycle of interventions and power concentration —exactly what Tocqueville warned against when he said absolute power corrupts absolutely. 

Again, Bastiat reminds us: 

"legal plunder may be exercised in an infinite multitude of ways. Hence come an infinite multitude of plans for organization; tariffs, protection, perquisites, gratuities, encouragements, progressive taxation, free public education, right to work, right to profit, right to wages, right to assistance, right to instruments of labor, gratuity of credit, etc., etc. And it is all these plans, taken as a whole, with what they have in common, legal plunder, that takes the name of socialism." (Bastiat, 1850) 

The bigger the government, the greater the corruption. 

VIII. Public Spending at Historic Highs and the DPWH Flood Control Scandal


Figure 4

Today, public spending as a share of GDP is at its highest level (!!) compared to pre-EDSA I and pre-EDSA II—and that’s counting only direct public expenditures, excluding construction and private sector participation in government projects such as PPPs and other ancillary ventures. [Figure 4, upper diagram] 

From this perspective, the ongoing flood control scandal is merely the tip of the iceberg, with contractors and select authorities in the “hot chair” serving as convenient fall guys for a much larger, systemic issue. 

IX. The DPWH Scandal: A Systemic Threat 

These X.com headlines provide a stark clue as to how public spending and GDP might be affected: [Figure 4, lower images]

The unfolding DPWH scandal threatens more than reputational damage—it risks triggering a contractionary spiral that could expose the fragility of the Philippine top-down heavy economic development model. 

With Php 1.033 trillion allotted to DPWH alone (16.3% of the 2025 budget)—which was lowered to Php 900 billion (14.2% of total budget)—and Php 1.507 trillion for infrastructure overall (23.8% and estimated 5.2% of the GDP), any slowdown in disbursements could reverberate across sectors. 

Many large firms are structurally tied to public projects, and the economy’s current momentum leans heavily on credit-fueled activity rather than organic productivity. 

Curtailing infrastructure outlays, even temporarily, risks puncturing GDP optics and exposing the private sector’s underlying weakness. 

Or if infrastructure spending is curtailed or delayed, growth slows and tax revenues fall—VAT, corporate, and income tax collections all weaken when economic activity contracts. 

This means the deficit doesn’t necessarily shrink despite spending restraint; the “fiscal hole” may, in fact, widen—imperiling fiscal stability and setting the stage for a potential fiscal shock. 

The irony is stark: efforts to contain corruption by tightening spending could deepen the very gap they aim to close.

To be clear, this is not a defense of corruption but rather a reminder of how dependent GDP growth has become on public spending, leaving it vulnerable to the vagaries of political oscillation—including the ongoing flood control corruption scandal.

X. A Policy Dilemma: The Impossible Choice


Figure 5

With debt servicing already absorbing a growing share of the budget (7-month interest payment accounted for 14.8% share of expenditure), and revenue buoyancy dependent on infra-led growth, the administration faces a dilemma—either sustain spending through a compromised political pipeline or risk a broader economic and fiscal unraveling. 

The lesson is, the real danger lies not in the scandal itself, but in the systemic exposure it threatens to reveal: 

  • A growth model overly reliant on state-led spending
  • A fiscal framework vulnerable to both political shocks and bureaucratic paralysis
  • A debt trajectory that leaves little room for error when revenues falter 

In short, the interventionist mindset at the core of social democracy’s "free lunch" political economy entrenches structural fragility, as shown by the mounting fiscal imbalance. 

The DPWH scandal crystallizes a deeper tension—forcing the political economy to weigh popular demands for ‘good governance’ against the imperatives of a development model structurally reliant on public spending. 

As Roman historian Tacitus warned (The Annals of Imperial Rome): 

"The more corrupt the state, the more numerous the laws."

____

References 

Vibhu Vikramaditya How Democratic Socialism Inverts the Logic of Civil Society Mises.org, September 3, 2025 

Prudent Investor Newsletter, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing September 1, 2024 Substack 

Prudent Investor Newsletter, June 2025 Deficit: A Countdown to Fiscal Shock, August 3, 2025 Substack 

Joshua Mawhorter Interventionist Non-Interventionism Mises.org, September 5, 2025 

Prudent Investor Newsletter, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, July 27, 2025 Substack 

Frédéric Bastiat Economic sophisms, 2nd series (1848), ch. 1 Physiology of plunder ("Sophismes économiques", 2ème série (1848), chap. 1 "Physiologie de la spoliation"). Econolib 

Frédéric Bastiat, The Law (1850), Ludwig von Mises Institute 2007 Mises.org

 

Monday, May 09, 2022

The Impact of Vote-Buying; the April CPI Breakout; The Structural Foundations of Inflation

 

The obsession with the "price level" has done much harm to the conduct of monetary policy. Most modern central banks practice so-called inflation targeting without being fully aware that the inflation rate as their indicator is a chimera. By following this concept, central banks ignore that their guidepost is a phantom and additionally that the idea that the price level should rise steadily itself makes no economic sense. In the perspective of the monetary theory of the Austrian school, the consternation of the monetary policy makers in the face of their repeated failure is neither a surprise nor historically new. The official inflation rate misleads the central bankers as well as the financial market operators—Antony P Mueller 

The Impact of Vote-Buying; the April CPI Breakout; The Structural Foundations of Inflation  

 

I. The April CPI Breakout: Food CPI Spiked, Transport Industry Suffer from Sustained Real Income Losses 

II. Income Squeeze: Household Resort to Credit Card Debt!  

III. Growth or Stagflation? PPI-CPI Margin Squeeze, Inflation Psyche Hounds the Manufacturing Sector 

IV. Demand Side Pressures from Higher Bank Lending; Financial Assets Under Pressure from Tightening Liquidity 

V. The Relationship of Vote-Buying with Politicized Economic Distribution and Public Spending; The Seeds of Political Dynasty, Cronyism and Corruption 

VI. The Influence of Publicly Financed Election Spending on the Economy 

VII. The Money Supply Cycle of National Elections; Milestone Deficits and Debt! 

VIII. Domestic Price Pressures from the Weakening Peso  

IX. The Structural Foundations of Inflation: A Centrally Planned Government 

 

The Impact of Vote-Buying; the April CPI Breakout; The Structural Foundations of Inflation  

 

The April CPI raced to 2019 highs.  

 

While the mainstream casts surging oil prices as the primary culprit, we try to explain below the many interdependent factors driving it.   

 

Election spending, signifying part of the public outlays, represents one of them.  

 

And vote-buying is one of the symptoms of politicized economic distribution and public spending. 

 

Finally, while the consensus portrays high inflation as an anomaly, the thrust to centralize the economy underscored by the free money policies of the BSP provides structural support for its long-term rise. 

 

Figure 1 

I. The April CPI Breakout: Food CPI Spiked, Transport Industry Suffer from Sustained Real Income Losses 

 

CNN, May 5: The Philippine Statistics Authority on Thursday reported an annual inflation rate of 4.9% for April, the fastest in more than three years, with food and energy costs leading the rise in prices. The recent pace, which is the quickest since 5.2% in December 2018, marks the first time that inflation breached the 2-4% target band of the Bangko Sentral ng Pilipinas for this year. April’s rate also brings average inflation for 2022 to 3.7%. 

Authorities still provide a limited set of data on the CPI based on 2018 prices, which it has yet to expand to equip the public with a better perspective of the statistical inflation. 

 

Why are authorities keeping the public in the dark? 

 

From the current data set, the CPI of April 2022 accounted for the highest since 2019!   

  

But the rebasing of the CPI translates to the omission of about .5 to .6% from the 2012 base or about 1% from the 2006 base. Or, the latest CPI could have reached 5.5% and 5.9%, respectively, had both been calculated from the previous bases.  

  

Nevertheless, April CPI represents a BREAKOUT of the consolidation phase of the uptrend since 2019 or the longer-term trend starting from 2015.  

  

Despite the ballyhooed boom from the reopening and the April breakout, the CPI remains repressed. The treasury markets say so.  

 

Nevertheless, food CPI belatedly spiked, which pushed the CPI to its breakout level in April.  

 

Because the mainstream attributes the rising CPI mainly to oil, we provide a perspective using this premise. 

 

First, the correlation between oil prices and the Food CPI appeared to have broken in 2021 but may have started to recover. (Figure 1, upmost pane) 

 

The boost in the food CPI had been also due to double-digit increases in corn, and Oil & fats, which jumped by 27.1% and 11.7%.  Although the weightings of both items, .48% and .57% in the basket, render them negligible. Of course, it is not insignificant to consumers of these items who suffer from more lost purchasing power than the rest. 

 

Demand for the other food items should increase once they opt to substitute, whereas the high-priced items should fall.  That's the theory. 

 

But the ramifications of credit financed demand in the face of supply constraints are likely to diffuse price pressures across the food product universe. 

 

Raging oil prices are just part of the complex feedback loop altered by the disruption of the division of labor. 

 

Next, the transport sector continues to bleed from surging energy prices. With price controls reducing the 'real' income of the industry, how can growth occur? (figure 1, middle window) 

  

II. Income Squeeze: Household Resort to Credit Card Debt!  

 

The households are also in the same boat.  

 

With utility fees soaring, the household disposable income also shriveled. How will this enhance spending on a broader scale?  (Figure 1, lowest window) 

 

 

Figure 2 

 

With the squeeze in real income by the rising CPI, households appear to be increasing their reliance on credit cards to supplement their consumption. Household credit card use expanded by 12.06% in March (YoY), from 8.06% a month ago, despite rising rates.  (Figure 2, upper pane) 

  

The increasing use of leverage seems anchored on expectations that the higher CPI and interest rates are 'transitory.'   

 

The credit card from the universal and commercial banks reached Php 446 billion and is just off by .9% from its January 2020 record of Php 450 billion.  

 

Nota bene: This author does not believe in the accuracy of the CPI simply because averaging different goods such as potatoes, cars, laptops, and Netflix subscription fees represent a ridiculous and impractical exercise, and thus, does not reflect a realistic demonstration of price changes experienced by individuals writ large (community). Furthermore, since the CPI is a political-economic sensitive number, as per the PSA, "it is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy", hence to advance the political-economic agenda of the incumbent such statistics are vulnerable to interventions. But anyway, using the lens of the mainstream, we extrapolate this data alongside the others to arrive at some clues of the political economy heading forward.  

 

III. Growth or Stagflation? PPI-CPI Margin Squeeze, Inflation Psyche Hounds the Manufacturing Sector 

 

But how about the industry?  

 

The difference between the PPI and CPI turned negative in the last three months through March. (Figure 2, lower pane) It points to a margin squeeze for wholesalers and retailers.  

 

How will this translate to income and economic growth?  

 

Further media sees anything rising as growth. They cannot seem to differentiate the effects of inflation on economic activities. 

Here is the $&P Markit on the Philippine manufacturing conditions last April.  

 

S&P Markit, May 22 (bold added): Output and new orders increased for the third month running in April, with the respective rates of growth both accelerating from March to the quickest since November 2018. Anecdotal evidence indicated that looser pandemic restrictions had supported the latest upturns in customer demand and production schedules. That said, demand from international markets decreased for the second month running. Russia’s invasion of Ukraine, higher shipping costs and limitations due to the pandemic had reportedly hampered new export orders. Concurrently, raw material shortages and transportation delays led to a further lengthening of average suppliers’ delivery times. That said, the extent to which lead times for inputs increased was the least severe for nearly two-and-half-years. The improvement in customer demand and rising production requirements led to a further increase in buying activity in April. Notably, the rate of growth was the fastest in more than three years. At the same time, firms increased their holdings of raw materials and semi-finished items. Furthermore, the rate of accumulation in stocks of inputs accelerated to one of that fastest seen since the survey began in January 2016. The level of work-in-hand (but not yet completed) declined again in April, and at a solid pace. A number of firms commented that rising production had helped them to process and complete orders. Meanwhile, April data pointed to a stabilisation of workforce numbers across the Filipino manufacturing sector. Improving economic activity resulted in no change in employment in the latest survey period, thereby ending a 25-month period of job shedding. However, reports of worker resignations were widespread, often due to the pandemic, which weighed on companies’ abilities to expand staff numbers overall. 

 

What media misconstrues as 'growth' represents inflationary dynamics instead.  

 

The accelerated demand experienced by producers is primarily due to supply scarcities, accentuated by the lengthening of delivery times.  

 

For the same reason, producers have intensified their accumulation of input inventories at unprecedented rates.  

 

But if producers foresee such expansion as sustainable, why haven’t they been hiring?  

 

Yes, producers have ended the string of cutting jobs, but the workers are on exodus. So the workers have done the task of their employers. 

 

Companies should be hiring on a massive scale under current conditions. But they have opted to store up on inventories instead.  

 

The choice of inventories over personnel is a sign that firms are working to protect their margins against further input price surges. 

 

In any case, demand for money has been falling materially relative to goods and services. That isn’t growth in the textbook sense.  

 

Instead, it is a symptom of the entrenchment of the psychology of inflation. Or these are signs of the strengthening transition towards stagflation. 

 

IV. Demand Side Pressures from Higher Bank Lending; Financial Assets Under Pressure from Tightening Liquidity 

 

The April CPI was hardly about oil prices, material shortages, shipment delays, and supply bottlenecks. 

 

A revival of bank lending activities signifies the demand component.  

 

Figure 3 

But increases in bank lending don’t necessarily imply growth unless used for investments. 

 

In March, the biggest bank borrowers were the real estate, trade, and information and communications sectors. Universal and Commercial banks saw their portfolio increase by 8.9% (YoY) (Figure 3, upper pane)  

 

Are these industries raising money for liquidity purposes than expansion?  

 

As noted above, consumer lending grew too.  It was up by 3.62% in March, primarily due to credit card debt.  

 

But the partial pullback of the BSP’s QE has diminished financial liquidity manifested by a seeming plateau in M3. (Figure 3, middle pane) 

 

And financial liquidity conditions haven’t been helped by increased bank credit expansion. 

 

The thing is, the brunt of the liquidity drawdown has been in financial assets. The peso, fixed income securities, and stocks had been under pressure.   

 

Reduced bank credit expansion to the financial industry (monthly) has coincided with the decline of the PSEi 30. (Figure 3, lowest window) 

 

The pruning of institutional margin trades may have incited low volume liquidations 

 

V. The Relationship of Vote-Buying with Politicized Economic Distribution and Public Spending; The Seeds of Political Dynasty, Cronyism and Corruption 

 

But there is more. 

 

Credit financed public spending, including election spending, also plays a crucial role in the price pressures. 

 

People hardly connect the relationship between public spending, politicized economic distribution, and central planning with economic imbalances, governance issues, and corruption.  

 

The great journalist Henry Louis Mencken wrote, 

 

The state—or, to make the matter more concrete, the government—consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can’t get, and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time it is made good by looting A to satisfy B. In other words, government is a broker in pillage, and every election is a sort of advance auction sale of stolen goods. 

 

H. L. Mencken 1956, A Carnival of Buncombe, Edited by Malcolm Moos, Sham Battle by H. L. Mencken Start Page 323, Quote Page 325, (“Baltimore Evening Sun” article dated October 26, 1936), Published by Johns Hopkins Press, Baltimore, Maryland, Quote Investigator. 

 

Take vote-buying.  

 

Generally, direct vote-buying is considered immoral.  

 

But most people seem to forget that when political candidates promise to spend other people’s money, more specifically taxes, for a specific interest group to acquire their votes, also represents vote-buying! 

 

With the exception that such promises represent an indirect means to buy votes.  

  

The next item is, what drives political candidates to buy votes? How will it be paid?  

 

The simple answer is that the expected payoffs from the political rent-seeking opportunities are much greater than the unscrupulous election investments.  

  

All these go to demonstrate the close connections between direct and indirect vote-buying. 

 

For instance, promises to build infrastructure. Political-economic agents benefiting from infrastructure spending, whether PPP or direct, are likely to shell out money to buy votes directly to have their preferred politicians elected to secure their financial and economic interests 

 

Furthermore, the more resources and finances spent by the government, the greater the incentive for political-economic agents to engage in underhanded means to have their preferred politicians get elected. 

 

Briefly, rent-seeking and public spending breed and nurtures political dynasties, cronyism, and corruption. 

 

In this context, a change of leaders from democratic elections will not resolve such issues but only rearrange the assignment of political-economic agents in charge of the politicized economic distribution from centrally planned governance 

 

I call these "personality-based politics." Elections mostly deal with the symptoms than the disease. 

 

VI. The Influence of Publicly Financed Election Spending on the Economy 

  

While the growth aspects of the prospects of election spending enthrall many mainstream economists, they seem to forget that there are other adverse ramifications. Aside from the ethical dilemma, since credit expansion or monetary inflation finances it, such affects prices, the allocation of resources, debt, and many more.  

 

The point is: taxpayer money financed election spending also contributes to economic imbalances. 

 

Data from the Bureau of Treasury provides circumstantial evidence of it. We suspect that election spending has fired up the recent surge in LGU allocation. 

 

Figure 4 

 

Bureau of Treasury allocations to LGUs reached near-record levels since Q4 2021. In %, growth of LGU allocations has soared by at least 25% since December 2021. (Figure 4, upmost pane) 

 

Yet, what if the LGUs spent a substantial segment of this budget on the printing, distributing, and affixing election campaign materials in their locality? Did they also hire people for such tasks? 

  

Also, what if LGUs used treasury allocations instead to mobilize, transport, and pay for crowd participation in massive election rallies? What if LGUs used indirect channels to bankroll organizers and poll watchers? 

 

If our suspicion is accurate, then who pays for the election binges? Won't the taxpayer and the peso holders bear the brunt?  

 

Since there is little skin in the game, would this not motivate the incumbent politicians to entrench their positions by whatever means possible in the elections? 

 

A news anecdote reinforces the insatiable pre-election spending appetite by LGUs.   

 

Aside from the allocations, LGUs even borrowed to finance their spending! 

Inquirer, March 15: Separately, the latest data of the DOF’s Bureau of Local Government Finance (DOF-BLGF) also on Tuesday showed that local government units (LGUs) borrowed a total of P5.7 billion from January to February this year, as reflected in the certificates of net debt service ceiling and borrowing capacity (CNDSCBCs) they submitted to the BLGF…In February alone, the BLGF issued 22 CNDSCBCs worth P3.5 billion to 22 LGUs — one province, six cities and 15 municipalities — which had a combined borrowing capacity of P13.7 billion. LGUs’ borrowings in February were mostly intended for the procurement of heavy equipment. as well as construction of public markets, hospitals, roads, solid waste facilities, sanitary landfills, cemeteries, and housing projects, among other local infrastructure, BLGF data showed. Last year, LGU borrowings hit a record P96.7 billion, as a flurry of local projects were started and fast-tracked a year before the elections in May and despite LGUs’ larger share in the national budget from all tax collections alongside their devolved functions and bigger responsibilities. 

 

Huh? Panic borrowing by LGUs to spend on assorted 'public goods' right before elections? What's the hurry?  

 

That’s unless one would milk the pre-election period for personal agenda.  

 

VII. The Money Supply Cycle of National Elections; Milestone Deficits and Debt! 

 

And the borrowing and spending spree of the LGUs are in part manifested in the monetary system. 

 

Don’t you know, the money supply has its cycle during the elections?  

  

The mini-cycle starts in Q4 of the year before the elections. Then it peaks in March to June of the election year. (Figure 4, middle window) 

 

From the nadir of December, the growth of cash in circulation continues to accelerate. It was up 13.5% in March 2022, despite the slowing M3.  

 

While its growth rate in 2022 has lagged two of the three previous elections, it ascended from a high base. At Php 1.869 trillion in March 2022, this represents 1.44x, 3.27x, and 7.7x the levels of 2016, 2010, and 2004, respectively! 

 

At the end of the day, inclusive of elections, public spending magnifies demand that contributes to the price pressures in the economy. 

 

Public spending (monthly) has been on an uptrend since at least 2019, coinciding with the rising trend of the CPI. (Figure 4, lowest pane) 

 

Nominal spending currently hovers at the record highs of December 2021 and has been eclipsed by two other episodes in December 2019 and 2020. 

 

That’s right. Spending boosters usually happen at the end of the year. Yet here they go, spending like a drunken sailor headed through the National Elections! 

 

Figure 5 

 

The relentless increase in public spending has pushed fiscal deficits to the second-highest in history as public debt etched a fresh milestone of Php 12.7 trillion! (Figure 5, topmost window) 

 

VIII. Domestic Price Pressures from the Weakening Peso 

 

There is the currency effect too.  

 

Aside from surging inflation worldwide, the surging USD magnifies domestic price pressures.   

 

The USD-Php was up .59% this week to nestle at its resistance. The rising cost of international financing should weaken the hands of the BSP to maintain the Gross International Reserve (GIR) and the peso at the current levels. (Figure 5, middle pane) 

 

The BSP’s GIRs this April slightly dropped by .88% (YoY). But it looks as if it is on a topping phase. (Figure 5, lowest window) 

 

Therefore, domestic price pressures will not only stem from higher global inflation but also from a weaker peso. 

 

IX. The Structural Foundations of Inflation: A Centrally Planned Government 

 

 

Figure 6 

 

And why would price pressures in the economy not persist? 

  

With monetary policies exceedingly "behind the curve," the BSP seems to adhere to the use of the inflation tax to relieve outstanding public liabilities. Or, by keeping the CPI artificially down, part of its unpublished goal is probably to "inflate away" the public debt.  

  

"Real" interest rates are at record lows represented by the spread between BVAL 10-year and 1-year rates. (Figure 6, top) 

 

Also, the difference between the PDS 10-year bond yield and the ON RRP of the BSP has surpassed the 2018 highs. (figure 6, bottom) 

 

In 2018, the BSP ON RRP rate was at 3% and the 2012 base anchored the CPI, while public leverage, measured by the outstanding bank credit portfolio and public debt, was 30.8% lower than March 2022. 

 

Then, the surging CPI prompted the BSP to spike its ON RRP by 175 bps in 7 months!   

 

Even with all the relief measures in place, can the BSP afford that today? 

 

As noted above, the CPI has been on an uptrend since 2015.  

 

Its uptrend is structurally supported, which means it is not "transitory." 

 

Critical forces such as the mounting leverage in the financial system, the escalating malinvestments, the fiscal, and most importantly, the BSP's response to these only embeds its upward trajectory.  

 

Most of these have been anchored on the thrust to centralize the political economy. 

 

Regardless of how authorities sanitize it, street inflation will continue to the upside, with occasional speed bumps from a downdraft in the economy.  

 

Despite the CPI pronouncements, the Treasury markets continue to ignore the data and see a sustained march upwards.  

 

Blaming the US Federal Reserve and the Ukraine war should be a strawman.  While some factors from these events influence the economy, the CPI has been rising since 2015 or at least has re-accelerated since 2019. 

  

That said, ascendant stagflation risks notwithstanding exploding debt and systemic leverage will remain a critical obstacle to the economy and financial system regardless of who wins the election. 

 

Yours in liberty, 

 

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