DOF’s TRAIN Departs from the Station: The Upcoming Challenges of Spend, Spend and Spend

Entwined Events: TRAIN Passage, Revolutionary Government and Supreme Court Chief Justice’s Impeachment

Three critical political events occurred last week.

First, the Department of Finance’s Tax Reform for Acceleration and Inclusion (TRAIN), through Senate Bill 1592, was passed by the Senate. The Senate tax package included the reduction of income taxes for the lower income bracket, an increase in excise taxes for fuel and for select beverages, a 2-tiered tax scheme for automobile, specific VAT exemptions, doubling of documentary taxes, a 1,000% increase in coal excise tax and the doubling of excise taxes on the mining industry.

The tax reform program appears to have been popular, for instance, it was lauded by credit agency Moody’s last June.

The income tax reduction was hurriedly approved by the bicameral committee this weekend.

Generally speaking, with a watered down bill, the DOF will unlikely get what it wanted.

Second is the RevGov. RevGov is an abbreviation for Revolutionary Government. Supporters of the Philippine President made use of the November 30 Bonifacio Day holiday to rally in support of the establishment of a “revolutionary government” across the nation. Unfortunately, given the sparse crowds, President did not make an appearance to bolster this initiative. And as part of its promulgation, the House Speaker said he is open to the idea of abolishing the Congress.

Third was the ongoing impeachment case against the incumbent Supreme Court Chief Justice, an appointee of the previous leadership.  A Supreme Court Associate Justice made a controversial appearance at the House of Representatives to testify on the alleged 4 impeachable offenses by the Supreme Court Chief.

The evolution of these three events virtually highlights its relatedness.

The reduction of income taxes has been designed to increase the popularity of the President especially for the working class and labor groups.  A popular president would likely sway much of the public to support his Revolutionary Government initiative. A trial balloon was floated to test the RevGov’s acceptability during the Bonifacio day rallies.

And lastly, the ongoing impeachment case against the Supreme Court Chief Justice has likely been engineered to portray a corrupt and incorrigible system to reinforce the cause of the Revolutionary Government.

From a contingent point of view, should the Supreme Court Chief Justice be successfully ousted, this should cement the President’s hold on the three branches of the government. That said, the forging of Revolutionary Government would not be necessary. Instead, the likely path would be to push for a change in the 1987 constitution, extending his term as President.

That said, it would not be necessary to forge a Revolutionary Government once the three branches will be under his complete control. The likelihood is for a push for a change in the 1987 constitution which should extend his term as President. And it is unlikely that there ‘federalism’ (quasi-decentralization) would be an agenda under a revolutionary government (centralization)

Tax Cuts in the Face of Spend, Spend and Spend; October Deficit Financed by Debt

Since our beat is on the money, let us now focus on the coming tax reform.  The DOF’s initial intention had been to significantly reduce exemptions from the coverage of the Value Added Tax to expand the government’s tax base in exchange for the populist income tax reduction.

The reduction of income taxes and the lifting of the VAT threshold should be a wonderful thing. That’s because it leaves more money in the pockets of the people.

However because many of the exemptions will be retained (rents, social housing, BPOs and etc.), the DOF will most likely have serious collection problems.

Moreover, with manifold VAT exemptions in place, this will continue to serve as legal loopholes for the circumvention from paying taxes by the monied class.

That said, expect increases in the lapses from tax collections as administration efficiency falls

With the publication of the Bureau of Treasury’s October report, we should be worried.

First the good news. Government revenues (Tax and non-tax) in October soared by 17.42%. Revenues from three sectors registered vibrant growth, namely, BIR (+16.94%), Bureau of Customs (+28.62%) and Non-Tax revenues (+7.71%). The tax segment of the government revenues surged 18.5%, but was lower than September’s 24.1% (lower pane).

Next the bad news. Government expenditures in October rocketed by 28.18%.

Because October’s strong government revenues had been insufficient to offset the much stronger increase in spending, the government’s deficit expanded to Php 234.9 billion, up by 8.7%, from last year’s Php 216 billion. The 10-month deficit has now surpassed the last year’s level. And the current trajectory indicates that last year’s record annual deficit of Php 353.4 billion will mostly be surpassed with 2 months

The National Government must have financed October’s deficit through debt. Domestic debt grew by 7.6% to Php 27.6 billion from a year ago. Though external debt also increased by 6.21%, this was mostly due to the peso’s depreciation.

The BSP will reveal if it continued with its subsidies to the national government through its publication of the Depository Corporations Survey next week. The likelihood is that the BSP could have backtracked from using it, hence the rally of the peso.

The Rubber Meets the Road: “Spend, spend and spend” and the Realities of Economics and Finance

The establishment has been peddling that government spending represents an economic elixir. Had this been true, North Korea would be the most prosperous country in the world.

Popular wisdom has little idea that government’s spending competes for resources and finances with the private sector, which it eventually crowds out. 

Moreover, much of such political spending mostly ends up being wasted or misallocated, increases society’s debt burden, benefits cronies, and special interest groups, causes economic distortions, promotes corruption, reduces the society’s standard of living through inflation and a weak currency, and heightens risks of a crisis from accrued imbalances.

If an 18.5% spike in tax revenue growth has failed to fill the revenue-spending gap, then what will?

An official was quoted saying, “the administration has not yet started the construction of its 75 flagship infrastructure projects”. Wow.  

Record fiscal deficit as appetizers! Wait ‘til the main course comes!

It has really been beyond “build, build and build”. The crux of the matter is about “spend, spend and spend”. The government will wantonly give away money through free-wheeling spending programs such as the Marawi’s rehabilitation, free college tuition, substantially increase ‘double’ the salaries of the police, modernize the AFP, modernize PUV and more.

Think of where all the funding for these spending binges will come from. How much more if the real economy slows?

If you haven’t noticed, 2017’s GDP has been MOSTLY about the government. Investments in durable goods and fixed capital, which includes public sector construction, continued to fall in the 3Q. (lower pane)

 

Yes, the headline numbers LOOKED GREAT. But even from the government’s own GDP statistics, investments have been falling sharply. Investments have dived in the face of record credit expansion!

 

I’m running out of time. So I’d have to cut this short.

The government’s spending will have to be financed either by debt or by the BSP’s monetization.

But there is such a thing as the costs of financing.

The longer end of the Republic of the Philippine bond curve rose substantially at the week’s close. The 10-year benchmark soared by 16.4 bps to 5.7% to another 5-year high. The 20-year benchmark surged by even more: 57.4 bps to 5.855%. Though the yield curve steepened, surging coupon yields have likely been signaling that the BSP will tighten.

IF so, then higher rates translate to the reduction of credit subsidies to the private sector and to the National Government. This means higher costs of financing for all these proposed “spend, spend and spend” projects.

Furthermore, once credit growth ebbs, the strength or the weakness of domestic demand will be revealed.

Lastly, should rising international coupon yields persists, as benchmarked by the 10-year US Treasury notes, then the cost of overseas funding will also rise.

It is here where the rubber will meet the road. “Spend, spend and spend” will come face to face with the realities of economics and finance.

A Predecessor To The Resorts World Manila Attack: Mexico August 2011

"Kung ISIS siya, namaril na siya doon (If he was from ISIS, he would have shot the people there)," Dela Rosa also said, explaining that a terrorist would have carried out a suicide bombing to inflict maximum casualties.”-Rappler.com,  June 2, 2017

Because of the lack of evidence of the use of firearms to shoot people down and also because the assailant “stuffed his backpack with P113 million in stolen casino chips” (Inquirer June 3, 2017), the administration declared that the attack at the Resorts World Manila was a work of a “crazy man” who “did not want to kill” (Inquirer June 4). 

And because terrorism was ruled out in the Resorts World Manila attack which unfortunately and sadly claimed 38 lives, the administration allayed concerns that martial law would be imposed nationwide (GMAJune 3). 

Martial law (Proclamation 216) was imposed over Mindanao last May 23 supposedly in response to the outbreak of violence by a rogue ragtag group of ‘terrorists’ in Marawi City. The Marawi siege and mopping up operations reportedly continues (GMA June 3)

Earlier, the administration floated the idea of a nationwide martial law “if the threat of ISIS persists” and spread elsewhere outside Mindanao (Rappler, May 24)

So in spite of the claim by ISIS that the Resorts World Manila incident was their handiwork (Rappler June 2), it’s probably better to just accept the administration’s interpretation of the current events.

Today, the Inquirer posted RWM's in-house video of the assailant’s “methodological” actions which implied premeditation or a planned set of actions.

But let me share a little secret.

What happened to Resorts World Manila would hardly seem unparalleled.

Flashback in August 2011, a group of armed men barged into a casino in Mexico.  Similar to the Manila, instead of shooting people, the group set ablaze a segment of the casino. The unfortunate incident trapped and claimed 52 lives. But in contrast to Manila, the Mexican president declared that the killing was “perpetrated by "terrorists" motivated by greed” (CNN August 26, 2011)

And unlike current events where the risks of violent actions have been targeted at religion based terrorism, the Mexican episode was blamed on drug cartels in reaction to the war on drugs implemented by the administration (CBS August 26, 2011)

Thanks to the gambling chips the scenario changed for Philippine politics - where events are all subject to the 'desired' official interpretation.

The reason why this should be kept a secret is that the alternative likely political option - nationwide martial law - would be harsh and drastic if this would be labeled as a 'terror event'. 

Ignorance is, thus, a bliss.