Deficit spending is printing money, and it erodes the purchasing power of the currency while destroying the opportunities for the private sector to invest. The entire burden of higher taxes and inflation falls on the middle class and small businesses—Daniel Lacalle
In this issue
2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!
I. Unreported by Media: December 2023’s Record Public Spending and Historic Deficit
II. Statistical Charade? Expenditure Boom: The Soaring Share of Interest Payments on Debt
III. Above 1997 Asian Crisis Levels: Near Record 2023 Debt-to-GDP and Debt Servicing-to-GDP approaching 2011 Highs
IV. The Pandora’s Box of Risks: Increasing Dependency on Monetary Liquidity
V. Twin Deficits: The Bigger the Government, The Larger the Crowding Out Effect
VI. Crowding Out of Local Savings Means Increased Dependency on Foreign Money
VII. Crowding Out Effect: Historic Deficit Spending Equals Reduced Private Consumption
2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!
In 2023, Philippine deficit spending remains in a "stimulus mode." Yet risks continue to mount as the adverse impact from rising debt, debt servicing, and the crowding effect spreads.
I. Unreported by Media: December 2023’s Record Public Spending and Historic Deficit
Inquirer.net, March 1 2024: The government’s budget deficit hit P1.512 trillion in 2023, 6.32 percent smaller than the shortfall recorded in 2022 but overshot the target of P1.499 trillion, according to data released on Thursday by the Bureau of the Treasury. This meant that last year’s fiscal gap, as a share of the country’s gross domestic product, stood at 6.2 percent, significantly narrower than the 7.3-percent ratio in 2022, but slightly above the Marcos administration’s deficit cap of 6.1 percent for 2023…Explaining the latest outturn, the Treasury said the smaller year-on-year deficit demonstrates “progress of fiscal consolidation.”
Here is what the media didn't say (other media outlets also silent on this).
Though they cited the 2023 outcome relative to the targets, they missed explaining how the deficit breached the government's goals.
Figure 1
Pointedly, public spending and fiscal deficit (in peso) hit all-time highs in December! All. Time. Highs. (Figure 1, topmost chart)
In percentage, public spending numbers looked unimpressive. It grew by only 2.24% in December, 1.71% in Q4, and 3.42% in 2023. But statistics can be deceiving. The reason for this is the "high" base effects! This year's December record expenditures of Php 661 billion took the tiara from December 2022’s Php 646.6 billion.
But how about revenues?
Revenues contributed less to the 2023 deficit.
Revenue growth contracted by 3.03% in December, grew by 11.05% in Q4, and 7.9% in 2023 to a record Php 3.824 trillion. (Figure 1, middle window)
Briefly, public spending has become the primary determinant of the balance sheet health of the Philippine government!
Its relentless growth brings to the fore some burning questions:
-Is the Philippine economy in trouble to require an acceleration of "fiscal stabilizers?"
-How could Treasury officials describe this as "fiscal consolidation" when the deficit-to-GDP remains in highly accommodative "stimulus" mode? (Figure 1, lowest graph)
Figure 2
-Why does the BSP call its actions "tightening" when public debt skyrocketed to a fresh record of Php 14.79 trillion in January 2024? (Figure 2, topmost diagram)
-Or is it just the addiction to free lunch politics for the government?
II. Statistical Charade? Expenditure Boom: The Soaring Share of Interest Payments on Debt
The share of government expenditures (ex-construction) to the NGDP was at 14.2% in 2023.
However, using the same Bureau of Treasury (BoTr) data to get the 6.2% debt-to-NGDP, public spending-to-NGDP jumped to 22% in 2023!
So, which is accurate, the PSA's GDP data or the BoTr? Or is the government using an apples-to-oranges comparison to sugarcoat actual conditions?
Yet the mainstream impulse has been to ignore or discount the cost of government deficit spending to the (real) economy.
With its growing role, the carrying cost of the mounting debt levels represents a major negative factor.
The thing is, an expansive government, the higher the debt load. Higher debt levels, which weigh on the economy, increase various risk factors covering a wide swath of society (economic, financial, social, and political).
In 2023, aside from national expenditures, whose % share expanded from 63.5% to 66.7%, interest payments also soared from 9.75% to 11.8%. (Figure 2, middle pane)
While the BoTr data apportions interest payments in the expenditure data, it does not specify its treatment on amortizations.
Nevertheless, total public debt reached a record Php 14.62 trillion in 2023, while debt servicing (interest + amortization) costs surged to an unprecedented Php 1.603 trillion. (Figure 2, lowest graph)
Figure 3
The share of debt servicing has been rising in the context of the budget, viz., revenues (45%) and expenditures (30%) in 2023. (Figure 3, topmost chart)
Since bottoming in 2019, the debt onus has started to climb and accelerated in 2023.
III. Above 1997 Asian Crisis Levels: Near Record 2023 Debt-to-GDP and Debt Servicing-to-GDP approaching 2011 Highs
That's not all.
"This time is different." So they say.
While we are no fan of comparing public debt to GDP because of its crucial flaws, after a historic 62.6% in 2021, debt-to-GDP in 2023 was at 60.2%—the third highest!
In the meantime, debt servicing to GDP has swiftly been closing to its 2011 highs!
Please note that both variables are HIGHER than the pre-1997 Asian Crisis levels—where debt and debt servicing to GDP exploded when the denominator (GDP) shrank. (Figure 3, middle graph)
While debt levels have been constantly rising, a sudden or precipitate slowdown in the GDP (or a recession) would push these ratios to unseen levels!
Add to this conditions that debt-financed public spending accounts for about a fifth to a quarter of the GDP—which excludes private sector resources and finances committed to public projects—meaning the economy has transformed into increasing dependence on big government.
This fact disputes all purported actions intended supposedly to liberalize the economy, e.g. economic cha-cha.
Yet, the debt amortizations—possibly including the unsustainable military pensions—continue to grab a larger share of overall debt payments. But most of the time, public’s attention has been directed towards interest payments alone.
That's right.
Statistical opacity may have disguised the actual leveraged conditions of the Philippine balance sheet. The widening gap between Philippine debt levels and public spending exhibits this likely anomaly.
Yes, the rolling over of public debt may be one of the contributors, but this does not account for the black hole in amortizations.
2023 reinforced the uptrend in the share of amortization and the downtrend in interest payments, which accounted for a 60:40 distribution ratio. (Figure 3, lowest diagram)
IV. The Pandora’s Box of Risks: Increasing Dependency on Monetary Liquidity
Unlike mainstream wisdom, debt levels don't melt away. Everything is interconnected. Public debt is entwined with the financial system and the political economy.
The previous decline in public debt to GDP (2009-2019) was a function of financial juggling.
While public spending rose marginally (compared to the present), bank credit substituted for economic financing. Or, growth financed by bank credit expansion filled the Philippine treasury's coffers.
In 2020, the government shifted from relying on bank credit expansion to public spending to support the GDP. The pandemic recession amplified this shift, where public debt financing reasserted its dominance.
Figure 4
Overall, systemic leveraging (public and Universal and Commercial bank credit) has been cumulative and accounted for a staggering 109% of the GDP in 2023! (Figure 4, topmost graph) The numbers exclude informal debt.
Except for the slowdown in 2009-2010 and 2012-2014, which represented noise, the uptrend in systemic leverage exploded in 2020.
The ramification of the collaboration to inject liquidity by the BSP and its banking cartel was a massive expansion in leverage.
The concerted efforts of the BSP and the banks (as well as other financial institutions) resulted in the unparalleled monetization of public debt (net claims on central government or NCoCG) intended to keep the system afloat in liquidity and support collateral values that backed the financial industry's leverage or loans. (Figure 4, middle chart)
Aside from repos, the BSP recently included "BSP Securities" (short-term bills) to augment bank liquidity operations. Bank credit expansion and these combined operations boosted the money supply levels to historic proportions.
As further proof, money supply growth from the BSP and the banking system has entirely financed the record deficits (and debt amortization).
M3-to-GDP rocketed to an all-time high of 79% in 2021, and despite the recent slide, it still accounted for a whopping 72% in 2023! (Figure 4, lowest window)
As a stand-alone metric, debt-to-GDP doesn't capture such interrelationships and its attendant risks.
Behind the buoyant GDP and other macro indicators lies a Pandora's Box of disguised risks.
As Austrian economist Peter St. Onge recently tweeted, "Statistics aren't designed to inform, they're designed to hide the truth."
V. Twin Deficits: The Bigger the Government, The Larger the Crowding Out Effect
There is also the crowding out effect.
The government doesn't create wealth. It is funded by taxing its constituents. Or, since the government taxes, borrows (future taxes), or resorts to inflation to fund its consumption, this constrains the finances and resources of the private sector—the crowding out effect.
Yes, the government sells some of its consumption activities as "investments," even though they limit the role of the marketplace, which distorts "returns" and increases economic misallocations.
Besides, because there is no market price for government functions, such as police, etc., economic calculation barely exists.
What's more, popular themes and implicit agendas of the political leaders determine political actions and policies rather than P/L statements.
A reduction in production is a repercussion of the "crowding out effect," or when the government competes with the private sector for resources, which leads to increasing dependence on imports.
A colossal transformation in the banking system has augmented this structural shift towards record deficit spending: the metamorphosis towards consumer credit.
It is no surprise that record trade deficits have accommodated these monumental developments.
Figure 5
The TWIN DEFICITS translate to a splurge in spending or overspending to boost the GDP funded by household savings and external borrowing. (Figure 5, topmost graph)
The Philippine economic model embodies the Keynesian framework of (indiscriminate debt funded) spending to achieve prosperity.
VI. Crowding Out of Local Savings Means Increased Dependency on Foreign Money
Instead of utopia, we witnessing a boom-bust cycle in motion.
Another consequence of the increasing dependence on the leviathan is the crowding out of liquidity—as the government competes with the financial industry and non-financial enterprises for access to household savings.
The banking system's decaying cash-to-deposits have corresponded with the swelling of the fiscal deficits. The deteriorating ratio is a function of decreasing cash and deposit growth rate. (Figure 5, middle image)
The drain in household savings translates to reduced investment capacity from local investors. This shortfall extrapolates to increasing dependence on FDIs, meaning the domestic economy becomes more sensitive to global developments.
However, debt flows have comprised the majority of Philippine FDIs, which comprised an average of 68.5% from January to November 2023, which could mean bridge financing than new investments. (Figure 5, lowest chart)
Figure 6
As evidence of savings shortfall, the deteriorating peso volume of the PSE correlates with the enlarged budget deficit. (Figure 6, topmost illustration)
The BSP’s external debt levels have also risen in tandem with the deficit-to-GDP ratio, which underscores the increasing dependence on foreign savers. (Figure 6, middle graph)
Remember, someone has to fund such spending binges!
VII. Crowding Out Effect: Historic Deficit Spending Equals Reduced Private Consumption
Finally, with the government reducing savings and investments, it would be natural to expect a decline in the private sector's household sector's consumption. (Figure 6, lowest diagram)
At present, the supposed interim trend "recovery" in per capita household spending reflects the outsized growth in bank consumer loans rather than productivity growth.
Figure 7
Mounting leverage of one's balance sheet also pulls forward future consumption. The spike in public debt per capita also led to reduced (private sector) liquidity and diminished consumption—as more resources are diverted to debt servicing. (Figure 7, topmost visual)
Declining production, increasing dependence on imports (contributes to the weakening peso), and record liquidity expansion have combined to push higher demand, therefore, the uptrend in the CPI (inflation) cycle, which also contributes to the decrease of the consumer's purchasing power. (Figure 7, middle image)
So even with the employment rates reportedly hitting a record high last December, consumers have reported reduced spending growth rates! Ironic, right?
VIII. The BSP as the Keyman Role for Deficit Financing, The Erosion of Fiscal Latitude
Government spending also redistributes financial and economic resources to those allied, affiliated, popular demands of the moment, logrolling, underhanded deals, by coercion, or to preferred political subjects (patronage politics).
Once again, this means increased misallocations, concealed losses, and the erosion of productivity, which result in a massive pileup of deficits, exacerbating corrosion in savings and purchasing power and the increased use of leveraging to disguise risks.
Widening inequality is a consequence of such political redistribution—favoring political agents and politically connected entities at the expense of the population.
Of course, the BSP assumes a principal role in the massive growth in the imbalances in fiscal, trade resource allocation, and credit buildup.
Despite the growth in public debt, the BSP’s low rates regime accommodated the decline in general debt servicing costs (2008-2019). (Figure 7, lowest chart)
Yet, rising rates have failed to contain the massive debt growth, which, along with its increasing stock, has caused debt servicing costs to spike to record levels in 2023.
Could a third wave of inflation translate to a "game over" for the addiction to financial and monetary leveraging?
Not only private sector credit bubbles, the BSP's easy money regime feeds on political boondoggles—responsible for the present and upcoming intensifying growth in twin deficits and their associated risks in the financial system, political economy, and social order.
In summary, unlike the US, which has been privileged with the "exorbitant privilege" or the de facto reserve currency of the world, the Philippines can't afford to print its way to prosperity.
If the Philippine government continues to use its fiscal tool to bolster the GDP at the present pace, it could lose its latitude to unleash policy "stabilizers" when the "sturm and drang" emerge—unless it decides to play with the Russian Roulette of hyperinflation.
Good luck to those who believe in the perpetuation of free lunches.
