Nothing in this world is certain, says a maxim, except for death and taxes
Perhaps not 100%, but I would include government insatiability - as expressed in expenditures - as almost a certain thing.
The Bureau of Treasury recently released its July National Cash Operations report.
The good news was that government revenues jumped 14.31%, the best monthly growth for the year and largest since November 2016.
Economic sectors provided the substantial improvements in the headline intake. Tax revenues from BIR (+17.6%) and Bureau of Customs (+12.93%) surged 16.39%, the biggest increase since May 2016. BIR collections have registered less than 6% growth from April to June. So perhaps the surge in banking system’s credit distribution combined with the BSP’s stealth operations in support of the NG during the past two months have momentarily reinvigorated collections (see chart above).
This good news, unfortunately, was not enough to produce a surplus. It only reduced the gap between collections and expenditures. Since July expenditures grew by 11%, the margin from revenue growth was slim. Nominal based yoyrevenues added Php 24.4 billion against expenditure’s Php 24.22 billion. This implies that July 2017 conditions signified a carryover from July 2016’s numbers
As such, the month’s deficit burgeoned to Php 50.51 billion. So for the first seven months, fiscal deficits had tallied to Php 205 billion the second largest since 2008. At Php 229 billion, 2010 was the largest. So the 7-month or January to July 2017 deficit had already surged past 2016.
Although the 7-month growth trend of both spending and revenues has declined, the deterioration has been most pronounced in the revenue segment. Current revenue growth rates have dropped to the 2010 level. (upper right)
The revenue growth slack of 2010 was reflected in its 7-month deficit. 2017’s activities have only resonated with 2010.
For July 2017, what has the NG spent on?
Year-on-year, the sectors that registered most of the spending growth had been the following: Allotment to Local Government Units (19.31%), Interest payments (+11.51%) and others (+28.3%). The share of expenditures as % of total 17.42%, 18.21% and 57%, respectively. Others may be about (allotment class) Personal Services, Maintenance and Capital Outlays.
Since the government has been raring to spend on free education, infrastructure and to expand military capabilities, all which should also mean a BIGGER bureaucracy, a deficit blowout at the year’s end should be expected!
Such spending trend is almost close to certainty. Thus this would be my biggest bet.
Re: infrastructure.
5% of GDP annualized represents the government’s target for infrastructure spending
Do you know how big this is?
2016 GDP was at Php 14.5 trillion. At 5%, infrastructure spending would account for Php 725 billion.
Total NG revenues for 2016 recorded at Php 2.2 trillion which means that the government revenue share of the GDP was 15%.
At Php 725 billion, the targeted infrastructure spending should translate to 33% of tax revenues!
Simple logic tells us that the government would need to increase its tax revenues by 33%.
But the 20-year CAGR for revenues was at 8.7%. Unless there would be magic, a big hole from such spending spree would emerge. And this hole has become visible.
Again that’s just infrastructure.
So where the heck will the government draw funds to finance a boondoggle of such magnitude?
And how gullible has the public been to believe that Tax Reform for Acceleration and Inclusion Act (TRAIN) has been about tax cuts!
A massive expansion in spending in the face of tax cuts? Such would be a recipe for a crisis.
No one seems to understand that those tax cuts would be REPLACED or SUBSTITUTED by the lifting of most VAT exemptions.
To be able to draw funds to even partly fill such spending binge, the DOF would have to enforce a stringent CRACKDOWN or a dragnet on just every sector (Sari-sari stores, professionals, informal economy, etc…)! No one seems to have a grasp on these.
As I have been saying here, a misstep in the phasing in of the TRAIN could lead to a sudden rocketing of the fiscal deficit.
And if the economy further slows from the “crowding effect” of these expenditures, then what?
There would be TWO options left for the government
The DEBT option…
The NG borrowing slowed this July. Total debt grew by only 6.73%, down from the 7-8% pace during the months April to June. This slowdown was mostly due to domestic borrowing which grew by only 7.51% down from 9 to 10.4% pace in April to June.
Domestic debt accounted for 65% share of the total.
From January to July, the NG borrowed Php 212 billion in local currency and Php 83 billion in foreign currency for a total of Php 295 billion. Given that foreign debt has partly been influenced by the foreign exchange movements, the gist of new borrowing comes from domestic instruments.
The 7-month domestic borrowing of Php 212 billion supposedly should be sufficient to cover the 7-month deficit of Php 205 billion.
However, both the NG and the BSP has a change of mind.
This brings us to the NUCLEAR option…
DEBT MONETIZATION by the BSP
From the start of the year through April, the net claims on the NG had been reduced or tapered. The NG and the BSP opted to use the debt market to substitute on the BSP’s debt monetization program.
However, as I said earlier, the BSP working in conjunction with the DoF seem to have a change of mind.
To stem the falling M3, it bought Php 136 billion of NG liabilities in April to July. It bought Php 37.57 this July. Partly because of July’s activities, the year-to-date BSP’s net claims on the NG turned to a positive Php 47.7 billion.
So while the growth rate of debt monetization bounced back, nominal figures reveal the return to the record levels (upper chart)
As such, M3 has rocketed to 13.5%! M3 has essentially been propelled the BSP’s debt monetization program (lower window). This means real economy prices should be expected to pick up.
To reiterate a quote from the BSP’s Dr. Canlas in 2012 [BSP Has Been Right: No Foreign Exchange Crisis…For Now; But Devaluation Policies Amplify Risks! August 27, 2017]
[**Dr. Dante Canlas, BSP Sterling Professor of Monetary and Banking Economics, Business Fluctuations and Monetary Policy Rules in the Philippines: Lessons from the 19841985 Contraction April 30, 2012 p 14-17 BSP.org.]
"A prior issue is this: is inflation a monetary phenomenon Friedman had said “inflation is always and everywhere a monetary phenomenon.” With a quantity theory of money in mind, if the central bank increases the money supply from a position of balance, then the real money stock exceeds the demand for it. To restore balance,the general price level must rise, which means inflation rate, defined as the percentage change in the general price level must rise.
And also that this would affect the peso…
"Money growth that is inconsistent with a fixed exchange rate or a tightly managed float tends to be unsustainable. A fixed exchange rate collapses in finite time, particularly if money growth, rooted in persistent deficit financing of the government budget is excessive. Likewise, a managed float based on interventions in the foreign exchange market designed to keep the exchange rate within a narrow band is vulnerable to speculative attacks, resulting in a sharp depreciation
As you can see, the peso is purposely being devalued!
The BSP and the NG have already been resorting to the “nuclear option” even when revenue growth has been declining but has yet to turn negative.
What more if government revenues do turn negative?
The NG’s proclivity to voraciously spend, which will be expressed as gaping fiscal deficits, will be accompanied by a combination of the following forces: RISING real economy prices, LARGER debt, HIGHER taxes and a BIGGER depreciation of the peso!
Think of just how all these will affect the real economy!
