Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions

 

The picture of the free market is necessarily one of harmony and mutual benefit; the picture of State intervention is one of caste conflict, coercion, and exploitation—Murray N. Rothbard

 In this issue:

Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions

I. Crisis Without a Crisis

II. Oil Shock Politics and Organized Interests

III. The Ratchet Effect of Crisis Policy

IV. The Oil Shock Is Already Affecting the Real Economy

V. When Price Signals Are Suppressed

VI. Interventions Beget Interventions

VII. Markets Are Already Responding

VIII. Conclusion: Deepening Interventions Intensify Systemic Fragility 

Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions 

“Crisis Without a Crisis”: As officials urge calm, subsidies, price caps, and emergency policies spread across the economy. 

I. Crisis Without a Crisis 

The Marcos administration is urging the public not to panic: "Everything is normal. No need to hoard." 

Officials have repeatedly warned consumers against hoarding while insisting that the Philippine economy remains stable despite the surge in global oil prices. 

Yet the government’s own policy actions suggest a very different reality. 

Within days of the oil shock, authorities introduced a rapidly expanding set of interventions across multiple sectors of the economy: 

• fuel subsidies for transport operators, with discussions of extending support to commuters
• suspension of public transport fare increases
• 50 percent fare discounts for MRT and LRT passengers
• suspension of toll rate hikes and applying steep discounts
• investigations into gasoline stations accused of overpricing, imposing early unauthorized price hikes, and carrying out sudden closures
• voluntary price freezes from processed food manufacturers
• discussions on imposing price caps on imported rice
• plans to suspend mandatory biofuel blending requirements
• and signals from the Palace that a state of emergency remains under consideration 

At the same time, the political debate is widening. 

Senator Tito Sotto has filed legislation to repeal the Oil Deregulation Law, while economist Winnie Monsod has proposed a wealth tax to finance expanding subsidies. 

Taken together, these measures resemble a broad attempt to suppress the transmission of rising energy costs throughout the economy. 

But the deeper story may lie in the political incentives behind such policies. 

II. Oil Shock Politics and Organized Interests 

The response to the oil shock reflects dynamics long described by political economist Mancur Olson. 

In Olson’s theory of collective action, small, well-organized interest groups often exert disproportionate influence over economic policy. Because their benefits are concentrated while the costs are widely dispersed, these groups are able to secure subsidies, protections, or regulatory advantages from government. 

Energy shocks tend to accelerate this process. Some examples: 

• Transport operators seek subsidies to offset fuel costs.
• Food producers lobby for relief from input price pressures.
• Agricultural sectors push for price supports.
• Infrastructure operators also seek regulatory relief when shocks threaten profitability. 

For instance, the Energy Regulatory Commission (ERC) is considering power rate adjustments in April that would allow utilities to recover rising generation costs and financial losses. Similar pressures have already appeared in earlier policy discussions—from real property tax (RPT) relief for power producers to increased GEA-All subsidies benefiting renewable producers, as well as negotiated asset transfers in the SMC–Meralco–AEV energy deal—illustrating how fragile sectors increasingly rely on regulatory protection when market conditions deteriorate. 

Each group frames its demands as necessary for stability, employment, or consumer protection. 

The result is an expanding patchwork of sector-specific interventions. 

Individually, each measure may appear justified. Collectively, however, they create a growing system of economic management in which prices and incentives are increasingly shaped by political decisions rather than market signals. The result is an expanding patchwork of sector-specific interventions. Intensifying competition for public resources drives rising demands for government spending, crowding out the productive economy and accelerating the centralization of the economy. 

III. The Ratchet Effect of Crisis Policy 

Economic historian Robert Higgs described a recurring pattern in government responses to crises: what he called the "ratchet effect." 

During emergencies—wars, financial crises, pandemics, or commodity shocks—governments introduce extraordinary interventions to stabilize politically sensitive sectors of the economy. These measures are typically framed as temporary responses to exceptional circumstances. 

Yet once the crisis subsides, the state rarely returns fully to its previous size or scope. 

Instead, some interventions remain in place, while others leave behind new fiscal commitments, regulatory authorities, or political expectations of continued support. Each crisis therefore pushes the boundary of government involvement forward in a stepwise fashion—much like a mechanical ratchet that moves only in one direction. 

The Philippines’ pandemic episode illustrates this dynamic clearly.

Figure 1

During the COVID crisis, fiscal deficits widened to record levels, justified as emergency stimulus designed to cushion the economic collapse. (Figure 1, upper window) 

Yet much of that spending expansion became structurally embedded in the fiscal framework. Political pressures for continued subsidies and transfers, created under the purview of social democratic free-lunch politics, have made these programs difficult to unwind even after the emergency has passed. 

As a result, the country’s savings–investment gap widened to unprecedented levels, financed by historically high public borrowing and still-elevated liquidity conditions, as reflected in measures such as the M2-to-GDP ratio. These dynamics have increased the economy’s sensitivity to inflation while intensifying crowding-out pressures already evident in domestic output, consumption, and credit markets. 

Energy shocks historically amplify this ratchet dynamic. 

Subsidies introduced to stabilize transport costs become permanent programs. Temporary price controls evolve into long-term regulatory oversight. Emergency fiscal transfers create new political expectations that governments will shield key sectors from market fluctuations.

The Philippine response to the current oil shock risks reinforcing this pattern. Policies such as fare subsidies, price caps, toll suspensions, and regulatory enforcement may begin as short-term measures to contain inflation and social unrest. 

But once introduced, they often prove politically difficult to reverse. 

Over time, repeated crisis interventions accumulate into a broader system of economic management—expanding the role of the state while leaving the underlying structural vulnerabilities unresolved. 

IV. The Oil Shock Is Already Affecting the Real Economy 

Signs of strain were emerging. 

Automobile sales had already begun to decline, even before the latest surge in oil prices, suggesting that rising fuel costs have yet to add to the erosion of discretionary consumption. (Figure 1, lower chart) 

Transport activity is now reflecting the same pressures. 

Reports indicate that the MMDA expects vehicle traffic in Metro Manila to decrease by around 30,000 units. Meanwhile, bus trips at the Parañaque Integrated Terminal Exchange (PITX) have dropped significantly, as operators scale back services and commuters reduce their travel. 

Air travel is also absorbing the shock. Airlines have begun imposing higher jet fuel surcharges, raising the cost of domestic and international flights. 

The shock is also beginning to affect overseas labor flows. Filipino workers continue to be repatriated from conflict areas in the Middle East, with roughly 2,000 overseas Filipino workers (OFWs) already returning to the country. While still modest in scale, such movements highlight another channel through which geopolitical shocks can affect the Philippine economy. Remittances from OFWs have long served as a stabilizing source of foreign exchange for the peso. Disruptions to overseas employment—particularly in energy-sensitive regions—therefore risk amplifying pressures already visible in labor, currency and financial markets. 

These adjustments illustrate the normal transmission mechanism of an energy shock: rising fuel prices ripple through transport, logistics, and consumer spending. 

Instead of allowing those adjustments to occur through price changes, the government is intervening across multiple points in the transmission chain. 

V. When Price Signals Are Suppressed 

Economists such as Friedrich von Hayek emphasized that prices function as a decentralized information system: "the knowledge of the particular circumstances of time and place." 

Prices communicate knowledge about scarcity, costs, and consumer preferences across millions of economic actors. 

When governments suppress those signals—through fare freezes, price caps, subsidies, or regulatory pressure—the information embedded in prices becomes distorted. 

Consumers may continue to demand goods whose true costs are rising. 

Producers may reduce supply when prices no longer cover costs. 

Adjustments that would normally occur through prices instead emerge as reduced service, shortages, declines in quantity or quality, and even fiscal transfers. 

In this sense, partial price controls recreate elements of the problem identified by Ludwig von Mises in his critique of socialist planning: when prices are manipulated, rational economic calculation becomes increasingly difficult. As the great Mises explained, 

Without calculation, economic activity is impossible. 

VI. Interventions Beget Interventions 

Once price controls begin to distort economic signals, additional interventions often follow. 

This dynamic was emphasized by Murray Rothbard, who argued that government interventions frequently generate secondary effects that policymakers then attempt to correct with further interventions. 

• Fare caps create losses for transport operators, prompting subsidies.
• Price freezes create supply pressures, prompting enforcement actions.
• Rising fiscal costs generate calls for new taxes or regulatory changes. 

Each policy attempts to fix the unintended consequences of the previous one. 

Over time, what begins as a limited intervention can evolve into a broad regime of economic management, representing a gradual transition toward centralization. As the dean of Austrian economics, the great Murray Rothbard wrote,

Whenever government intervenes in the market, it aggravates rather than settles the problems it has set out to solve. This is a general economic law of government intervention. 

VII. Markets Are Already Responding 

While policymakers attempt to stabilize prices and shield consumers from the oil shock, financial markets appear to be reacting to the broader macroeconomic implications.

Figure 2

The PSEi 30, the primary equity benchmark of the Philippine Stock Exchange, has declined, although the drop has been relatively muted—likely reflecting institutional support and collateral management dynamics. (Figure 2, topmost graph) 

Other markets are sending a more cautionary signal. The peso has weakened significantly, with the USD/PHP exchange rate reaching a record high of 60.1 this week, making it one of the worst-performing currencies in Asia. 

At the same time, the government bond market has undergone a structural shift. 

Philippine Treasury yields have moved from bearish flattening to bearish steepening, with long-term yields rising faster than shorter maturities over the past week. Such shifts often reflect growing concerns about inflation persistence, fiscal sustainability, or sovereign risk. (Figure 2, lower chart)

Figure 3

As of March 19, Philippine 10-year Treasuries ranked as the worst-performing bond market segment in Asia (Figure 3, upper table) 

Although the current spike in T-bill yields may not yet prompt a response from the BSP, it is important to note that its policies are shaped more by market developments than by its own actions. The directional movement of one-month T-bill yields has historically preceded BSP policy shifts, including rate cuts in 2018 and 2023–2024, and rate hikes in 2022. (Figure 3, lower image) 

Thus, if the upward trajectory of T-bill rates persists, rate hikes are likely to come onto the BSP’s radar.

Figure 4

These concerns are not unfounded. The Philippines already faces record debt-service burdens amid persistent fiscal deficits. (Figure 4, topmost pane) 

Expanding subsidies and price controls risk adding further pressure on the government’s balance sheet. 

According to ADB data, the Philippines has recorded the largest increase in credit default swap (CDS) spreads since the outbreak of the Middle East conflict—indicating that markets are pricing in higher default risk for Philippine debt. (Figure 4, middle and lower charts)

VIII. Conclusion: Deepening Interventions Intensify Systemic Fragility 

What is unfolding may not simply be a temporary response to a spike in global oil prices. 

Rather, the episode illustrates how modern interventionist economies evolve when confronted with external shocks. 

As Mancur Olson observed, mature political systems tend to accumulate powerful distributional coalitions—organized groups capable of securing targeted protections, subsidies, and regulatory advantages from the state. Energy shocks often accelerate this process as sectors facing sudden cost increases mobilize to shift those costs elsewhere. 

The result is a widening network of state interventions designed to stabilize politically sensitive sectors. 

But crisis interventions rarely remain temporary. Economic historian Robert Higgs described this dynamic as the ratchet effect: during periods of emergency, governments expand their role in managing the economy, and once the crisis passes, those powers rarely return fully to their previous limits. 

Each shock therefore leaves behind a larger structure of fiscal commitments, regulatory authority, and political expectations of continued support. 

Once prices begin to be suppressed in this way, the informational role of markets deteriorates—a problem emphasized by Friedrich Hayek. Prices no longer convey reliable signals about scarcity and cost, making economic coordination increasingly difficult. 

This is where the broader critique developed by Ludwig von Mises becomes relevant. When governments repeatedly intervene to correct the unintended consequences of earlier policies, economic management gradually expands across more sectors of the economy. Mises described this process as the dynamic of interventionism—a cycle in which policy distortions generate new problems that invite further intervention. 

The Philippine response to the oil shock increasingly reflects this pattern. 

• Fare caps require subsidies.
• Price freezes invite enforcement.
• Rising fiscal costs trigger proposals for new taxes or regulatory changes. 

Each populist band-aid policy attempts to stabilize the distortions created by the previous one. 

What emerges is not a single intervention but an expanding system of economic management—one reinforced by the ratchet effect of successive crises. 

And when such systems face external shocks—particularly commodity shocks that simultaneously affect inflation, trade balances, and fiscal accounts—the pressures tend to migrate toward the weakest macroeconomic points: the government’s fiscal position, the sovereign debt market, and the currency. 

The oil shock may therefore be revealing something deeper about the Philippine economy. 

Rather than simply confronting higher energy prices, policymakers appear to be navigating the accumulated tensions of an interventionist regime already stretched across multiple sectors—and increasingly across the economy as a whole. 

Suppressing the immediate price effects of the shock may buy time—but it also risks amplifying underlying maladjustments. 

Importantly, it cannot eliminate the adjustment the economy must eventually make. At best it postpones that process, increasing the risk that the eventual correction will be larger and more disorderly. 

And markets—especially currency and sovereign bond markets—tend to recognize that reality long before policymakers do.

 

The March to a Neo-Socialist Society; 2017’s Fiscal Deficit Down by 27% from Target

The power of the Executive to cast a man into prison without formulating any charge known to the law, and particularly to deny him the judgment of his peers, is in the highest degree odious and is the foundation of all totalitarian government whether Nazi or Communist—Sir Winston Churchill

In this issue

The March to a Neo-Socialist Society; 2017’s Fiscal Deficit Down by 27% from Target

-“We are threatened by something worse than Martial Law”

-A State of War Justifies Mass Interventionism

-Policies of Good Intentions as Cover for Politicization Centralization

-The March to a Neo-Socialist Society

-Uprooting Democracy Through the Burning of the Nation’s Treasury; 2017’s Fiscal Deficit 27% Less than Expected!

-Did the Bureau of Treasury Inflate December Revenue Statistics?

The March to a Neo-Socialist Society; 2017’s Fiscal Deficit Down by 27% from Target

“We are threatened by something worse than Martial Law”

"We are threatened by something worse than Martial Law”.

That’s an observation made by a religious personality during the 32nd anniversary of the EDSA revolution.  The strong arm tactics or “creeping dictatorship” supposedly employed by the current leadership prompted for such warning.

Though the general perception seemed right, it, unfortunately, lacked substance, other than the “loss of moral fiber, the loss of respect for people, for life, for law”.

A more perceptive approach would be from the holistic standpoint or the direction of governance viewed from an ideological spectrum.

A State of War Justifies Mass Interventionism

The fact of the matter is that the present administration embraces a warfare mentality.

The war on drugs served as the staging point. As I have stated here from the start, the war on drugs signifies nothing but a diversion to expand political control over the economy. The war on drugs is a social war, or an implicit war on the citizenry, designed to impose draconian intrusions on the economy and on civil liberties.

“War is the health of the State” wrote the late writer Randolf Bourne in the State[1]. That’s because war “automatically sets in motion throughout society those irresistible forces for uniformity for passionate cooperation with the Government in coercing into obedience the minority groups and individuals which lack the larger herd sense. The machinery of government sets and enforces the drastic penalties. The minorities are either intimidated into silence, or brought slowly around by subtle process of persuasion which may seem to them really to be converting them”

Given that wars provide a sense of purpose and mission, it rallies the people around the leadership. So doing, justifications for the expansion of political power, redistribution, and control over the economy, finance, and resources are provided for by a state at war.

The administration’s social war has expanded DIRECTLY to encompass campaigns against mining, the “oligarchy”, media, gaming, telecoms andlabor “contractualization”.

As a side note, the war on labor contractualization is an assault against small and medium scale enterprises and the informal labor sector which benefits elite companies. Ironically, the largest exploiter of labor contractualization is the government!

The rapidly expanding dragnet of the social war has expanded to cover an indirect offensive against the consumers and in industries catering to the consumers (e.g. Coca-Cola and Sardine Manufacturing), as well as, the general economy through higher prices from tax hikes bourne out of the newly implemented tax regime.

And the implicit war against the minority groups has also been waged against public utility vehicles, Transport Network Vehicle Services, OFWs and the tourism industry.

On the side, in the name of the environment, the National Government plans to rehabilitate Boracay by closing it for one year. And this action is supposed to signal the embrace of “federalism”???  Paradoxically, having been blighted a “cesspool”, record number of tourists have only poured into Boracay! Have people become so dense as to find leisure and entertainment in a “polluted environment”??!! On the contrary, I have come to realize that the political controversies can serve as fantastic advertisements! And another irony, having been labeled by the NG as an environmental disaster, Boracay was named as the second best beach in Asia by an international travel site! Have cesspools become symbols of aesthetics??? Or is the international site an implicit protégé of the International Criminal Court, which the Philippine government withdrew fromlast week? Or could it be that the crackdown on Boracay had been intended to accommodate plans to build a grand $500 million casino on the island? Nevertheless, how ironic for a proposed $500 million investment from Macau’s Galaxy Entertainment and Leisure and Resorts on a property benighted as “cesspool”! Has everyone, but the government, become so blind? Other tourist spots such as Bohol and Palawan (Puerto Princesa, El Nido) have reportedly been the next targets of an environmental clampdown.

That’s just one side of the seismic transformation.

Policies of Good Intentions as Cover for Politicization Centralization

Good intentions have always served as foundations for political interventions or conflicts.

Security, environment, social stability, public service, equality and the economy are among the contemporary goals used to justify state interventionism or the war against the citizenry!

As an old saw goes,  the road to hell is paved with good intentions

The real agenda has been to concentrate power and control towards a centralized political structure.

As the great Nobel Laureate Milton Friedman, wrote in Capitalism and Freedom, "Concentrated power is not rendered harmless by the good intentions of those who create it."

As a flashback, the Marawi war authorized the leadership to impose martial law in Mindanao.

Mindanao’s martial law has paved the way for the administration to call for the expansion of the police state nationwide. For some unknown reasons, the call for a nationwide martial law hit a wall. The military, most likely, hasn’t been amenable to it.

Yet…

The thrust to broaden the state’s role as a centralizing force has emerged in the form Revolutionary Government (RevGov), No elections (No-El) and to Charter Change (Cha-cha)

Though current activities have only been cementing this centralized agenda; the public has hardly been aware of this evolution much more its ramifications.

Paradoxically, instead of realizing the potential adverse ramifications from such changeover, it has even been serenaded by the populace as economically salubrious!

People hardly ever ask why Mr. Duterte’s predilection and repeated utterances for a “revolutionary government”? Has it not been because that the path to a socialist paradise requires the realization of the Marxist doctrine of “revolutionary socialism”, viz. a revolution as a precondition for the transition from capitalism to socialism?

While Mr. Duterte occasionally pays lip service to democracy, a revolutionary government, the repeated gripes over the democratic process and his calls for absolute virtuous obeisance or submission (“If people chose an SOB president, bear it and obey!”) to the state demonstrates hisdeepseated ideological persuasion.

Even the US government’s US Intelligence Community has recognized Mr. Duterte a threat to democracy.

This week, through a decree, the heads of the Philippine National Police and the director and deputy director of the PNP Criminal Investigation and Detection Group (CIDG) have been empowered to issue subpoenas which would authorize the police to bypass the judiciary. Yes, welcome to a police state!

The transformation of ideology into reality is being realized through radical changes in policies.

The March to a Neo-Socialist Society

The populist desire for political solutions on economic predicaments predicated on short-term fixes, has ushered in this transition towards socialism. 

The previous dictatorship was mostly about entrenched statism than about the establishment of socialist institutions.

And to establish a socialist state, while interventionism is a necessary condition, it is not sufficient. Limited acts of interventions will not lead to such an outcome. It would require systematic interventions functioning as an integrated system for socialism to be attained.

Current developments have hardly been about isolated acts of interventions.

To identify the path of the transformation of the political-economy, incorporating critical aspects of political science should be helpful in one’s analysis

The generic or pristine form of socialism is the ownership of the factors of production by the state which the bureaucratic apparatus operates. As the Soviet Union chief Vladimir Lenin once wrote, “An entire society will be one office and one factory with equal work and equal pay”.

The other form of socialism allows for private ownership or enterprises. This method represents the “Hindenburg plan” used by the Hitler’s Germany, which operated on the ideals of central planning as to substitute for private enterprise[2]. Because the state controls and directs the actions of every firm, the owner was no longer an entrepreneur but a “shop manager”.[3]

The second method had another strain. While the private sector was allowed to operate, the political economy has mainly been organized under a system of cartels and tightly controlled environment through regulation, licenses, subsidies and protectionism[4].

Moreover, it exalts the police state as the source of order, thereby denying fundamental rights and liberties to individuals, which makes the executive state the unlimited master of society[5].

This variant socialist method is known as Fascism or “Corporativism/Corporatism”.

Italian dictator and fascist leader Benito Mussolini once said that fascism would “lead inexorably into state capitalism, which is nothing more nor less than state socialism turned on its head. In either event, [whether the outcome be state capitalism or state socialism] the result is the bureaucratization of the economic activities of the nation"

The short of it is that methods of fascism constitute the cog of “State capitalism” where the means of production are organized and managed by the state through state-owned enterprises or through corporatized government agencies, or through publicly listed corporations or a combination thereof.  Ultimately, State Capitalism is about state control of the private sector.

Let us see how state capitalism applies to domestic conditions

-“Cartelizes the private sector”: NAIA 'super consortium' submits P350-billion airport proposal February 13, 2018

-“Centrally plans the economy to subsidize producers”: Dutertenomics: ‘Golden age of infrastructure’, April 19, 2017

-“Exalts the police state as the source of order”: Philippine police return to war on drugs, cannot promise to avoid bloodshed January  29, 2018and Duterte Signs Police Subpoena Law March 10, 2018

-“Makes the executive state the unlimited master of society”: Duterte declares Martial Law in Mindanao May 23, 2017 and Nationwide martial law? Duterte says all options on the table December 13, 2017

And a functioning example of state capitalism would be China’s political economy. Mr. Duterte’s economic goal of “Matatag, Maginhawa andPanatag na Buhay” seems to have been taken from a page of China’s Socialist Harmonious Society. Mr. Duterte has unabashedly adored China. Mr. Duterte recently even joked about making the Philippines one of China’s province! 

One of his first acts was to visit the Chinese leadership and business community to promote the Philippines, which his team followed up last year.

Part of Mr. Duterte’s deal reportedly had been about excessively price loans which were backed by natural resources which of course, the Chinese government has denied. Such deal has been known as China’s debt trap diplomacy. And it seems that when it comes to foreign policy, China and the US share the same imperialist goals.

China’s President Xi Jinping has been reappointed with no term limit. Mr. Xi as President for life will likely inspire Mr. Duterte to be upfront on the present push for Charter Change to include either the extension or suspension of his term limits.

These events, developments and circumstances exhibit the seismic shift of the Philippine political economy towards a fascist/corporatist state capitalism. This should be coined as Neo-socialism.

Uprooting Democracy Through the Burning of the Nation’s Treasury; 2017’s Fiscal Deficit 27% Less than Expected!

Since interventions require resources and financing, another manifestation of the transformation to a neo-socialist state would be the scale of government spending

Uprooting democracy would be best done by burning the nations’ treasury.

The great Austrian economist Ludwig von Mises warned[6] (bold mine)

The prime means of democratic control of the administration is the budget. Not a clerk may be appointed, not a pencil bought, if Parliament has not made an allotment. The government must account for every penny spent. It is unlawful to exceed the allotment or to spend it for other purposes than those fixed by Parliament. Such restrictions are impracticable for the management of plants, mines, farms, and transportation systems. Their expenditure must be adjusted to the changing conditions of the moment. You cannot fix in advance how much is to be spent to clear fields of weeds or to remove snow from railroad tracks. This must be decided on the spot according to circumstances. Budget control by the people’s representatives, the most effective weapon of democratic government, disappears in a socialist state.

Thus socialism must lead to the dissolution of democracy. The sovereignty of the consumers and the democracy of the market are the characteristic features of the capitalist system. Their corollary in the realm of politics is the people’s sovereignty and democratic control of government. Pareto, Georges Sorel, Lenin, Hitler, and Mussolini were right in denouncing democracy as a capitalist method.Every step which leads from capitalism toward planning is necessarily a step nearer to absolutism and dictatorship.

National Government activities played a critical role in the shaping of 2017’s GDP.

 

The National Government reported a fiscal deficit of Php 350.64 billion in 2017.

Because of the stunning avalanche of revenues across the board, December’s deficit recorded a lower than expected Php 107.15 billion.

According to this Philstar article, the reported deficit accounted for a whopping 27% shortfall from the projected Php 482.1 billion! Wow!  

By measuring the actual fund flows with a model derived GDP, the notion is that such deficit would have little or no adverse impact on the REAL economy! Because 2017’s fiscal deficit to GDP was a paltry 2.2%, the NG has now targeted 3%. So if the Nominal GDP expands by 9% similar to 2016, NG’s projected deficit would accrue to a staggering Php 516.6 billion! A 3% deficit based on 2017’s GDP would translate to Php 473 billion!

If the NG attains the deficit target relative to 2018 NGDP, this would account for a 47% increase! Or, if the deficit hits the level based on 2017 GDP that would still tabulate to a 35% increase!

It is shocking to know how the NG sees virtually no risk from their endeavors! And the like the BSP, such projections are so optimistic that leaves no margin for errors.

The NG is clueless on the crowding out effect from such gargantuan deficits. And like the BSP they have come to believe in the perpetuity of free lunches.

As Keynesian zealots, it is the spending that is of paramount importance!  That’s because spending or transfers from the private sector is what nourishes the government.

The more the interventions, the bigger the spending required to finance such actions. Therefore more problems must arise to justify even more interventions!

Thus, 2017’s spending target gap must be remedied!

With that in mind, expect the NG to ramp up spending significantly in 2018! Concealed behind the headline “build, build and build” is the key essence of “Spend, spend and spend”!

Did the Bureau of Treasury Inflate December Revenue Statistics?

2017’s lower than expected deficit was a result of the outsized gain in revenues

According to the Bureau of Treasury, a torrent of money fell on the laps of the NG last December.

Total Revenues rocketed by a colossal 35%! The Bureau of Internal Revenue and the Bureau of Customs absorbed gigantic 29.03% and 29.39% increases in collections. Amazingly, non-tax revenues more than DOUBLED (105.4%)!

The DoF, BIR, BOC and the BoTr were blessed with an enormous largesse from Santa Claus!

And the profusion in revenue collections virtually eclipsed spending! Public spending hiked by only 16.5%. Nevertheless, nominal numbers exhibit the acceleration in spending.

I do not BUY the Bureau of Treasury’s revenue data.

First of all, 4Q real GDP fell to 6.6% from 7.0% in the 3Q. Yet, 4Q revenue collections zoomed by 22.03% compared to 14.54% in the 3Q or an increase of 51%. The variance between revenue collections and RGDP in the 4Q at 15.5 was the largest since the 1Q of 2011.

Second, the government and hardly the private sector was the instrumental force behind the 2017 GDP. So if the tax-paying segment of the economy underperformed, who filled the gap?

Third, bank credit expansion (production plus consumer loans) and tax collections (BIR plus BOC) went in opposite directions, which is a rarity.

 

Fourth, NG borrowed a gigantic Php 233.03 billion in December, accounting for 46% of the year’s domestic borrowing of Php 507 billion! Since the 11 month deficit at Php 243.5 billion was more than fully covered by the Php 274.1 billion debt issuance over the same period, why borrow so much?

Was the NG unprepared for the avalanche of revenues for them to borrow massively? If true, given the humungous two-month debt surplus of about Php 156 billion, the NG should refrain from tapping the debt market for at least a quarter.

But the NG raised Php 74 billion mostly in foreign loans last January!

However, if revenues were inflated, then the annual budget deficit had been understated. Because the Philippines can’t show signs of weakness, boosting the topline which undervalues the budget deficit may have been designed to prevent the peso from a freefall.

 

The BSP liquidated its Net claims on the NG by Php 21 billion in December and by Php 10.8 billion in January 2018. Nevertheless, for the year 2017, a net Php 31.94 billion had been added.

With so much money raised from the capital markets and from the BSP relative to the declared deficit, just where has the surpluses been channeled to?

The NG’s aggressive target for 2018 fiscal deficit means that either the capital markets or the BSP will fund this.

If the NG taps the capital markets, a tight race with the private sector for the access to the public’s savings will ensue. The private sector, mainly the publicly listed companies, will be raising funds through either debt or equity. The deluge in the supply of credit is likely to siphon off liquidity from the system! Thus bond yields will continue to soar which will eventually reflect on interest rates. And the massive draining of liquidity will pose a crucial menace to the domestic equities

If the BSP funds the NG’s requirements, prices in the real economy will soar, which should likewise reflect on bonds and on the peso.

The BSP has been terrified to raise rates even by just a token because of the above. The other reason could be that the BSP sees easy money as contingent against any adverse effects from the TRAIN edict. It could be both.

This “all or nothing” policies from the NG and the BSP places the entire system at a tremendous risk!

Nevertheless, as American politician Rahm Emmanuel famously uttered,

You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before.

An economic downturn would provide a fertile ground for Mr. Duterte to implement his ideological utopia.

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[1] Randolf Silliman Bourne, The State, p.9, Mises.org

[2] Ludwig von Mises Middle-of-the-Road Policy Leads to Socialism Mises.org

[3] Ludwig von Mises, 3rd Lecture: Interventionism, Economic Policy: Thoughts for Today and Tomorrow Mises.org

[4] Sheldon Richman, Fascism, Econolib.org

[5] Llewellyn H. Rockwell Jr., What is Fascism? November 1, 2001 Mises.org

[6] Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War [1944] p.53-54

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