Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next?

 

…the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount…In short, the government and the banking system it controls in effect “print” new money to pay for the federal deficit. Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public—Murray N. Rothbard

In this issue:

Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next? 

I. Bullseye! Q2 2024 Public Spending Hits All-Time High, Partially Affirming Marcos-nomics Stimulus! 

II. The Crowding Out Effect: Q2 2024 Revenue Spike Equals Lower GDP?

III. The 2024 Public Spending Surge: Pre-Election Expenditures via LGUs and COMELEC; Defense, and Infrastructure Budgets

IV. 6-Months Debt Servicing Costs Hit Another All-Time High! 

V. Marcos-Nomics Stimulus: Mounting Debt Servicing Burden Points to the Coming BSP Rate Cuts 

VI. The Inflationary Aspect of Deficit Spending: More Fuel to the Rising USDPHP; Conclusion 

Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next? 

The acceleration of June and Q2 2024 spending affirmed the emergence of the "Marcos-nomics stimulus." With debt burdens soaring, a rising public debt stock, and fiscal deficits widening, the BSP may soon cut interest rates.

I. Bullseye! Q2 2024 Public Spending Hits All-Time High, Partially Affirming Marcos-nomics Stimulus! 

Businessworld, July 25, 2024: THE NATIONAL Government’s (NG) budget deficit narrowed by 7.24% year on year in June, as revenue collection grew at a faster clip than spending, the Bureau of the Treasury (BTr) said on Wednesday.  Treasury data showed the budget gap shrank to P209.1 billion in June from P225.4 billion a year ago. Month on month, the budget deficit widened by 19.54% from P174.9 billion in May. In June alone, revenue collections jumped by 10.93% to P296.5 billion from P267.3 billion in the same month last year…On the other hand, state spending increased by 2.62% year on year to P505.6 billion in June. “The increase was mostly attributed to the implementation of capital outlay projects of the Department of Public Works and Highways, and the Department of National Defense under its Revised AFP Modernization Program, the preparatory activities of the Commission on Elections for the 2025 National and Local Elections, and the higher National Tax Allotment shares of local government units (LGUs),” the Treasury said. (bold added)

Defense spending. Domestic elections spending (direct and indirect).

Figure 1

Statistical base effects have played a large part in the government and media’s "smoke and mirrors" narrative of fiscal performance last June.  (Figure 1, topmost image)

That is, the lower public spending growth rate was entirely a function of its comparison from a higher base a year ago.

In contrast, distortions from the base effect magnified the revenue growth rate calculated from a lower base last year.

The devil is always in the details.

Yet here are the most important factors that were withheld from the public: 

-June 2024’s public spending was the sixth highest on record. (Figure 1, middle chart)

-Excluding public spending for December, June 2024 represented the third highest after May 2024 and June 2023.

-May and June represented the third-highest two-month public spending.

-Q2 2024 public spending was at an all-time high! (Figure 3, lowest graph)

Figure 2

-June’s deficit was the highest this year. (Figure 2 topmost chart)

-The gap between the 1H 2024 deficit and 2023 widened and was 14.3% and 8.95% below the 2022 and the 2021 historic high. Please take note that the latter two represented a fiscal stimulus in response to the pandemic recession. (Figure 2 middle window) 

Yet, June data was a bullseye for us! 

Authorities admitted that aside from infrastructure, defense, and pre-election spending accounted for its outgrowth. 

That, in essence, is our Marcos-nomics stimulus.

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

…

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May.

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! 

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus." (Prudent Investor, 2024)

In his third State of the Nation Address (SONA), the Philippine President advocated for numerous public spending programs, including "Walang Gutom 2027," a war on poverty measure aimed at feeding one million food-poor citizens by February 2027. He also proposed a nationwide "Free Wi-Fi Program" and promoted "green-lane certified" investments, amounting to approximately Php 3 trillion in business projects (PPPs?) related to renewable energy, digital infrastructure, food security, and manufacturing. He also addressed tourism infrastructure, water projects, and more.

"Marcos-nomics" is on a roll, with more free lunches ahead!

II. The Crowding Out Effect: Q2 2024 Revenue Spike Equals Lower GDP? 

What was the contribution of public revenues to the June and Q2 deficit?

Although aggregate collections reportedly grew by 10.93% in June, non-tax revenues, which experienced a remarkable 81.4% growth rate, comprised the bulk of these gains.

Further, Q2 2024 revenues soared by 16.74%.

This is because, after the April growth surge in collections by the Bureau of Internal Revenue (12.7%) and the Bureau of Customs (19.5%), the subsequent monthly performance almost ground to a halt: both tax agencies registered paltry gains in the following months—BIR grew by 2.8% and 4.7% in May and June, respectively, while the BoC was 4.3% and 0.7% higher over the same period.

Despite this growth, revenue year-on-year (YoY) growth spikes have historically accompanied a GDP slowdown, except for one occasion in 2014. This anomaly aside, revenue growth has typically preceded a slowdown in GDP growth.

The crowding-out effect could be a possible reason for this phenomenon.

Figure 3

So far, revenues from the private sector, which have been involved in government projects, bank lending expansion, and inflation (e.g. CORE CPI), have driven the aggregate performance of public revenues. (Figure 3, topmost and second to the highest diagrams)

Notwithstanding historic public spending, record revenues have also kept the fiscal deficit from spiraling out of control. For now. (Figure 3, second to the lowest chart)

But what if the law of diminishing returns on these factors worsens the current economic conditions?

III. The 2024 Public Spending Surge: Pre-Election Expenditures via LGUs and COMELEC; Defense, and Infrastructure Budgets

In the meantime, after providing a crucial perspective on the aggregates in public spending, we will delve into more details. (Figure 3, lowest graph)

Due to base effects, LGU allocations were up by only 2.6%, a decline from 8.54% in May. However, their share of total expenditures rose from 14.6% in May to 16.6% in June.

Firstly, the Mandanas ruling has also been instrumental in driving this uptrend. The previous spike in LGU collections occurred in the second half of 2021, prior to the 2022 national elections. The collections decreased in late 2022 (post-elections), which extended through most of 2023.

Implemented in 2022, the Mandanas ruling (EO 138) decrees an increased share of revenue allocation from the national government to 40%, which includes collections from the Bureau of Customs.

The second wave of increased allocations to the LGU appears to have emerged since Q1 2024 as the 2025 national elections approach.

Another pillar supporting this is the programmed annual increases in budget allocations.

Increased LGU allocations likely include budgets to market or improve the electoral chances of administration candidates in the 2025 general elections.

Also due to base effects, the National Government’s disbursement grew by 8.6% YoY, though this was substantially lower than 22.32% in May. Nonetheless, its share of the aggregate also declined from 72.5% in May to 69.2% in June.

These increases reflected direct election spending via the Comelec, indirect spending via LGUs, as well as infrastructure and defense allotments.

IV. 6-Months Debt Servicing Costs Hit Another All-Time High!

The thing is, the media has omitted a very critical factor: interest payments. On the other hand, the Bureau of Treasury glossed over the discussion of overall debt servicing costs.

Figure 4

Though interest payments increased by only 5.22% in June, down from 47.8% last May due to base effects, their share of the total rose slightly from 10.97% to 11.01%. (Figure 4, topmost image)

However, total debt servicing in the first semester of 2024 vaulted by 41.3% YoY. It hit an UNPRECEDENTED high of Php 1.283 trillion compared to its semestral predecessors and is down by only 20% relative to last year's annual or the 2023 data. (Figure 4, middle and lowest charts)

Again, compared to 2023, the gap has been closing dramatically: June amortization was only 7.16% lower, and interest payments were down by 39.96%.

Figure 5

Importantly, since 2019, authorities have minimized foreign debt servicing, but this trend appears to have reversed in 2024. (Figure 5, topmost diagram)

Nevertheless, it is incredible to see the media put a spin on the lower monthly external debt-servicing ratio (at the end of April) as 'good news' while ignoring the fact that the external debt-service burden spiked in 2023.  The recent decline likely represents a hiatus. (Figure 5, middle window)

Most of all, the surge in the external debt servicing burden has pulled down the GIR-to-debt service ratio, implying reduced liquidity for debt servicing and other domestic FX requirements. (Figure 5, lowest graph)

And one shouldn’t forget that the Philippine GIR also consists of external debt and derivatives or "borrowed reserves."

V. Marcos-Nomics Stimulus: Mounting Debt Servicing Burden Points to the Coming BSP Rate Cuts

Statistics are about the past. They signify historical data predicated on a limited set of assumptions and barely evince or explain the complex causal relationships that led to these captured outcomes.

The fact that the "Marcos-nomics stimulus" is on a roll means that widening fiscal deficits, which should also reverberate into "trade deficits" and expand the "twin deficits," should escalate public debt levels and, correspondingly, increase the debt burden.

With fiscal deficits likely to bulge ahead, prompting more borrowings, the logical sequence would be for the BSP to cut rates to ease the onus of debt servicing.

And that’s only the argument for Philippine government debt.

The BSP’s case for rate cuts will also involve private sector’s mounting debt burden or systemic debt in general. And that excludes shadow banking or informal finance.

Figure 6

Yet, the current spending dynamics also imply that the Bureau of Treasury’s declining cash position in the face of higher deficits translates to a coming reversal in the recent downdraft in the BoTr’s financing (borrowing), which ironically has been celebrated recently by some quarters. (Figure 6, topmost visual)

Above all, such transfers should worsen the strain on public savings and diminish the amount available for investments.  Rising deficits have coincided with slower growth of bank deposit liabilities. (Figure 6, middle chart)

Therefore, BSP rate cuts represent the next phase of the "Marcos-nomics stimulus."

VI. The Inflationary Aspect of Deficit Spending: More Fuel to the Rising USDPHP; Conclusion

With insufficient taxes and borrowings, the government would have to produce more currency to fund it: this translates to higher inflation ahead.

While the government is yet to publish June’s debt burden—slated for next week—banks and other financial institutions have been a primary source of financing for the public debt-financed record deficit and the conduit of unparalleled financial liquidity. (Figure 6, lowest graph)

Banks and financial institutions will be loaded with increasingly riskier government debt.

Figure 7

Furthermore, the BSP’s net claim on the central government (NCoCG), which has shadowed the uptrend in public spending, has fed into the CPI. It will continue to do so. (Figure 7, topmost and middle graphs)

In conclusion, the mounting imbalances from the trickle-down policies manifested by the historic savings-investment gap, supported by an ever-growing dependence on fiscal deficits and asset bubbles to bloat the GDP, translate not only to higher demand for the USD-Philippine peso (USDPHP) but also signify signs of rising systemic risks. (Figure 7, lowest chart)

Inflationary government policies, rather than symptoms like trade deficits and real FX rates, are the root cause of the weak peso. The BSP's interventions may delay or defer its effects, but ultimately, they cannot forestall the inevitable.

Good luck to those who see this as a free lunch for the economy and "bullish" for financial investments.

____

References:

Murray N. Rothbard, Ten Great Economic Myths, September 9, 2023, Mises.org 

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? June 30,2024

 

2023 YTD Philippine Fiscal Deficit: Lowest Since 2019, The Inflationary Financing of Deficit Spending, Record 2024 Government Budget

Inflation is essentially antidemocratic. Democratic control is budgetary control. The government has but one source of revenue— taxes. No taxation is legal without parliamentary consent. But if the government has other sources of income it can free itself from this control—Ludwig von Mises 

 

In this issue 

 

2023 YTD Philippine Fiscal Deficit: Lowest Since 2019, The Inflationary Financing of Deficit Spending, Record 2024 Government Budget  

I. CPI Falls: May BIR Collections Stalls, Revenue Growth Decelerates 

II. Slowdown in Public Spending, CPI Slides; The Inflationary Financing of Deficit Spending  

III. Jan-May (YTD 2023) Performance Echoes May 2023 Fiscal Activities 

IV. Record 2024 Government Budget, Record 2024 Programmed Borrowings, and Policy Uncertainties 

 

2023 YTD Philippine Fiscal Deficit: Lowest Since 2019, The Inflationary Financing of Deficit Spending, Record 2024 Government Budget  

 

Jan-May YTD deficit represents the smallest since 2019 as revenue and public spending growth stalled.  The slowing CPI played a substantial role in it.  Yet, the 2024 budget points to an elevated CPI. 

I. CPI Falls: May BIR Collections Stalls, Revenue Growth Decelerates 

 

Manila Standard, June 27: The government’s budget deficit fell 16.7 percent in May to P122.2 billion from P146.8 billion a year ago as the 9.35-percent growth in revenues outpaced the 0.88-percent increase in expenditures, the Bureau of the Treasury said Tuesday. This brings the cumulative budget gap for the first five months of the year to P326.3 billion, lower by 28.86 percent or P132.4 billion than a year ago. 

Figure 1 

 

To begin with, from an all-time high in pesos last April, May revenue growth slowed to 9.4% while expenditures had nearly been flat or up by .9%.   But due to the base effects with a higher tilt on spending, the May deficit ballooned to Php 122.2, the second highest in 2023. (Figure 1, upper chart) 

 

Because of the BIR's 1.54% contraction last May, Tax revenue growth slowed to only 2.4%.   The BIR comprised about 64% of Total revenues and 73% of Tax Revenues in May. 

  

The Bureau of Customs and Non-Tax revenues filled this slack with growth rates of 17.6% and a spike of 111%, respectively.  

 

The demand-fired CPI rates have been instrumental in shaping tax revenue activities.  (Figure 1, lower window) 

Figure 2  

 

The BIR spike and decline echoed the oscillations of the CPI, which peaked in February.  (Figure 2, topmost graph) 

 

Aside from public spending, bank credit expansion has been a source of the CPI.  For example, credit card activities have dovetailed with the gyrations of tax revenue performance. (Figure 2, middle pane) 

 

Receipts serve as a basis for VAT and excise tax collections.  Therefore, price levels are a factor in collections performance.  

 

Ironically, the Department of Finance revised higher its target even when it expects the CPI to fall to the 5-6% level by the yearend.   

 

Is the DoF expecting an avalanche of volume in place of higher prices?  Where from? 

 

Are they expecting a productivity boom—principally from public spending—to finance it?  Or have their econometric models been designed to conjure numbers to suit the public's palate for political goals? 

 

II. Slowdown in Public Spending, CPI Slides; The Inflationary Financing of Deficit Spending  

 

And while the growth rate of public spending was nearly little changed—mainly due to the 16% slump in Local Government allocations—interest payments spiked 22.2%. Central government disbursements expanded by 6.07%. 

 

With LGU allocations contracting in the last 5-months, the share of the National Government outlays of the public spending pie have sharply increased.  (Figure 2, lowest diagram) 

 

Even from the expenditure perspective, budget allocations indicate an increasing trend of centralization.  

 

Or, despite the Mandanas ruling, which gives a larger revenue share for the LGUs, central government spending has dominated public spending. 

Figure 3 

Think of it this way, inflation contributes to revenue performance, but public spending represents one of inflation's primary drivers.  

 

Therefore, as public spending has eased and so with the decline of the CPI rates. (Figure 3, topmost window) 

 

The BSP's direct financing of the slowdown in public spending (net claims on central government or QE) has also decreased. 

 

Aside from borrowing from savers, where public debt was at an all-time high, banks continue to finance such deficits and provide liquidity to the government.  Net claims on the central government of the banking system was at the second highest level last May. (Figure 3, middle and lowest window) 

Figure 4 

 

The declining peso deposit growth rate also became pronounced when the authorities embarked on this aggressive deficit spending program. (Figure 4, topmost pane) 

 

Since authorities intensified deficit spending from 2019 to the present, the benchmark M3, money supply/liquidity growth, has also diminished. 

 

The thing is, aimed at providing stability measures against a recession, fiscal deficits remain at pandemic emergency levels, despite the normalization of the economy.   

 

Of course, the previous administration ramped up deficit spending even before the health crisis, but the justification for its accelerated use emerged during the pandemic economic shutdown.   

 

III. Jan-May (YTD 2023) Performance Echoes May 2023 Fiscal Activities 

 

Does the YTD performance manifest the same conditions? 

 

Let us make a quick take on these. 

 

First, Tax revenues and its primary contributor, BIR collections, were at record highs.  But the growth rates of the former represented the slowest in the last three years.  Meanwhile, BIR growth rates had been at par with 2022 while posting growth of over 9% since 2018, except in 2020 and 2021, which registered downside and upside spikes. (Figure 4, middle and lower panes) 

Figure 5  

 

Next, while public spending was at an (all-time high) ATH, pushed by a milepost in central government outlays, both rates have declined.  Public spending posted a growth rate of 1.22% in 2023, lower than 4.69% in 2022, while the central government disbursements registered rates of 7.5% in 2023, higher than 5.11% in 2022. (Figure 5, topmost graph) 

 

After a record LGU outlay in 2022, the peso level and growth rates fell YTD.   LGU contracted by 14% compared to last year's 17.7% growth. (Figure 5, middle window) 

 

Finally, while the YTD deficit of Php 326.32 billion signified the smallest since 2019, the Treasury's cash position posted the second highest since last year.  (Figure 5, lowest chart) 

 

What is more, public financing bumped higher to Php 1.168 trillion, 32% higher than last year's Php 883 billion but lower than 2020's Php 1.34 trillion and 2021's ATH of Php 1.56 trillion.  So, we should expect public debt to rise in May from its historic Php 13.911 trillion in April.  

 

So, bank and debt-financed public sending boosted inflation.  In turn, elevated inflation bolstered revenues.   Negative rates, on the other hand, provided an implicit subsidy to public debt.  Or creditors are paid with reduced value/purchasing power of the peso.  

 

With the central government benefiting immensely from inflation, why should we expect them to curb it drastically? 

 

We should not forget that "Inflation Targeting" represents the anchor of the BSP's monetary framework, which means that the central bank pursues "price stability" through "low and stable inflation." 

IV. Record 2024 Government Budget, Record 2024 Programmed Borrowings, and Policy Uncertainties 

 

The government proposed to increase 2024's budget to a record Php 5.768 trillion, or a growth of 9.5%.     

 

How will the government finance this? 

 

Some of it will be through taxes increases. 

 

The BIR has proposed to "impose a creditable withholding tax on gross remittances of online platform providers." (CNN Philippines, April 21, 2023) 

 

Controlling vice as justification, "THE Philippines is pursuing plans to tax junk food and hike levies on sweetened beverages to boost revenue and reduce incidence of diabetes, obesity and other diseases linked to poor diet." (Business Times Singapore, June 21, 2023) 

 

Another suggested avenue is through vehicle ownership, "The House of Representatives tax panel will consider proposed increases in the motor vehicle user’s charge (MVUC)..." (Inquirer.net, June 29, 2023) 

 

There will be more coming.  As forecasted here many times: One day, they will raise VAT rates. 

 

The other means of funding is through more borrowing.  

 

That is borrowing from mostly domestic savers via capital markets, "The Philippines will raise its borrowing program by more than 10 percent to P2.46 trillion next year, in favor of domestic creditors." (Philstar.com, June 21, 2023) 

 

So, authorities will borrow Php 2.46 trillion to fund Php 5.768 trillion of outlays.  Taxes supposedly will finance the rest.   

Figure 6 

 

But how about the financing of existing debt and their rollovers?  Though interest payments remain 54% below last year's annual level (YTD in May), amortizations have been fast closing in on last year's levels (only 25% below). (Figure 6, top and middle charts) 

 

Of course, no political authority will say that they would inflate away their liabilities.  That would be like saying, "Hey, I love the smell of inflation in the morning!" 

And so explains their media campaign against inflation. Remember, inflation, from their perspective, is about the supply side (supply chain disruptions, hoarding, Russia-Ukraine war and etc.)

 

But again, their actions come with nasty consequences. 

 

For instance, deficit spending's crowding-out effect has been manifested not only in prices (inflation) but also through diminished savings, aptly demonstrated by the bear market of the PSEi 30.   Of course, boom-bust policies represent the other primary contributor.  (Figure 6, lowest chart) 

 

Finally, an "optimistic" foreign business group bellyached on some of the structural defects of the Philippine political economy. 

 

ABS-CBN, June 30, 2023: A recent survey conducted by the German-Philippine Chamber of Commerce and Industry (GPCCI) showed that German businesses in the country generally see better conditions and developments in the country in the next 12 months.  Majority also see more local investments and jobs in the next year. But the group says investors are also concerned about uncertainties in the economic policies of the Philippines.  “They also have identified certain risks such as shortages of skilled labor, disruptions in supply chains, and economic policy uncertainties,” said Tristan Loveres, who sits on the GPCCI Board of Directors.  “These of course anticipate the increase in geopolitical obstacles such as inflation, trade barriers, and also cybersecurity threats,” he added.  (bold added)

 

Aside from the other (not in bold) reasons, have they not been saying what we have been reiterating here for the past decade or so?    

 

Yet, these represent the impact of centralization through policy uncertainties in the context of a barrage of mandates, regulations, subsidies, the crowding-out effect, and inflation. 

Here is an example of policy-induced economic uncertainties: Authorities recently increased minimum wages in NCR, which penalizes SMEs while reducing competition for big companies.   

Here is the thing, politicians and the bureaucracy resort to politically convenient palliatives at the expense of economic coordination and cooperation.  

That said, it should not surprise that populist politics lead to regime uncertainty.  

 

So, how can one be bullish to increase investments and jobs with all these uncertainties and obstacles in place?  That's almost a gamble—a surefire way to absorb business losses.  

 

Instead, the group sugarcoats its outlook to avoid political backlash. 

But, for as long as this political-economic framework is in place, the bias is for inflation to accrue, which together with other anti-market policies, reduces the standard of living of Philippine residents.