I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale―Thomas Jefferson
In this issue
The Philippine Political Economy: January 2023’s Rare Fiscal Surplus; The Fiscal Inflation
I. Reason for Surplus: After a Fiery December, Public Spending Plummet in January 2023!
II. Revenue Growth Powered by Inflationary Policies
III. What a Slowdown in Public Spending Entails
IV. January Surplus: Public Debt Swelled to a New Record!
V. The Fiscal Inflation
January's fiscal surplus emerged from an idiosyncratic dive in public spending. With a buildup in public debt and bank credit climaxing, deficit spending may be about to mount a fiery comeback.
The Philippine Political Economy: January 2023’s Rare Fiscal Surplus; The Fiscal Inflation
Milton Friedman famously said, "Inflation is always and everywhere a monetary phenomenon," which we agree with. Hence, statistical inflation represents a consequence of bank and central bank credit and monetary expansion.
With bank credit appearing to have peaked, deficit spending financed by monetary expansion represents the other principal source of inflation.
A terse inquiry on January's rare surplus is the topic for this outlook.
Businessworld, March 17: The National Government’s (NG) budget balance swung to a surplus in January as revenue growth outpaced state spending. The Philippines’ budget recorded a surplus of P45.75 billion, a turnaround from the P23.38 billion deficit a year earlier, the Bureau of the Treasury (BTr) reported on Friday. The last time the government recorded a budget surplus was in April 2022, with P4.94 billion. “This favorable outcome was a result of revenues outgrowing government spending: revenues grew by 25.2% while spending rose by 0.3%,” Finance Secretary Benjamin E. Diokno said in a Viber message to reporters.
When seen from a peso-based figure, the story presented by the media looks somewhat different.
I. Reason for Surplus: After a Fiery December, Public Spending Plummet in January 2023!
Figure 1
Why? Public spending, which spiked last December, collapsed in January! (Figure 1, topmost chart)
Public spending rocketed by 42% (Month-on-month) last December, only to plummet by 53.2% this January! It signified the largest-ever MoM plunge. (Figure 1, middle pane)
In YoY change, this decline was across the board for all expenditures.
In pesos, authorities gave up all the gains last December and more.
As it turned out, the slump in January signified a response to the record amount spent last December.
II. Revenue Growth Powered by Inflationary Policies
In contrast, peso revenues swelled to the second-highest level ever.
Helped by non-tax revenues, total revenues jumped 25.1% YoY or 29.8% MoM last January.
Non-tax revenues vaulted by 90.3% YoY, which increased its share to 12.2% from 5.3% in December. Still, BIR and the Bureau of Customs expanded by 20% YoY and 21% YoY.
So, the effects of the escalation of the bank credit boom filtered into revenues.
Bank lending and public revenue growth have coincided since 2021. Bank lending powered the GDP hence the increase in tax intake. (Figure 1, lowest chart)
Figure 2
And inflation, as represented by the CPI, had a crucial role in boosting public revenues. Higher selling prices bolstered the topline of corporations, which amplified revenue growth. (Figure 2, topmost chart)
Also, the companies that built inventories earlier benefited from rising prices through higher profit margins, thereby boosting the bottom line, which helped in the public revenue collections growth.
Authorities have also benefited from financial repression through negative "real" rates. With inflation higher than interest rates, it stripped or corroded the debt levels of major borrowers, primarily the government. This effectively transfers resources invisibly from the public to the government. (Figure 2, middle window)
III. What a Slowdown in Public Spending Entails
Although a month does not a trend make, if authorities cut back on public spending in the following months, it will negatively impact the GDP.
In 2022, public spending and fiscal deficit, which have been adrift at record levels, accounted for 23.4% and 7.33% of the NGDP, respectively. (Figure 2, lowest pane)
The rising share of public spending to the GDP demonstrates the increased use by the government of economic and financial resources at the expense of the public. And this represents the direct expenditures only.
But the private sector has also allocated resources to political projects via PPPs, subcontract work, and supply and services provisions, which means public spending numbers are broadly understated.
And, of course, because public spending plays a considerable role in influencing the CPI, its retreat translates to a temporary softening of price pressures.
On the other hand, given the path dependency on free lunches, we expect authorities to resume their bold spending plans to promote popularity ratings for the upcoming elections.
IV. January Surplus: Public Debt Swelled to a New Record!
Fiscal surpluses in a world of free lunches are uncommon. There have been only three incidences—twice in 2020 (January and June) and once in 2022 (April)—since January 2020.
Yet, deficits swelled to (near) record levels at the end of the year.
Oddly, even when the Bureau of Treasury (BTR) reported a surplus in January, the Treasury raised a substantial Php 366 billion, which increased its cash holdings to Php 591 billion. (Figure 3, topmost pane)
As a result, public debt surged to a new milestone, Php 13.7 trillion, as of January 2023—and counting. (Figure 3, middle window)
Distributed by (PSA 2020 survey) population and by household, the landmark public debt translates to Php 125,633 per person or Php 519,000 per household.
And rising debt levels, exacerbated by rising rates, have become evident in Treasury's interest rate budget allotment. (Figure 3, lowest chart)
Authorities seem to be preparing to increase expenditures over the coming months, hence the increase in public financing.
V. The Fiscal Inflation
But debt hasn't been the only instrument used to finance deficit spending.
Figure 4
The banking system and the BSP have jointly financed the record deficit via Net claims on the central government (NCoG). (Figure 4, top and middle charts)
While the BSP's NCoG has spiked and plunged alongside spending in the last two months, the banks pulled back slightly in January, that is, after having carved a new landmark in December.
Nevertheless, the central bank NCoG has been instrumental in determining changes in the BSP's assets. (Figure 4, lowest graph)
Here is the thing. If indeed banking loans recede from their current growth rate and levels, authorities would most likely reaccelerate the use of fiscal tools (expand deficit spending) to prop the GDP.
That said, after a slowdown in the CPI, a resurgent deficit spending will likely fuel the third wave of inflation.
Free lunches ultimately end when authorities run out of money.
But that would come only after exhausting other means of access to money, such as imposing onerous direct and indirect taxes on its constituency and the reduced availability of credit.
