The core economic problem created by deficit financing is resource waste. (The core ethical problem is living at the expense of others.) The ability of people today to stick future generations with the obligation to service government debt is, it bears repeating, the ability of people today to live at the expense of other people. This ability causes resources to be wasted today but with the cost of such resource-waste borne by people tomorrow. Thus, even those citizens-taxpayers who tomorrow will roll-over the debt suffer a burden from today’s deficit financing because tomorrow’s economy will be less productive than it would be absent the resource waste caused by today’s deficit financing—Donald J. Boudreaux
In this issue
2019: A Year of Records: Deficit, Public Spending, Debt and More! Honda’s Pullout: The Crowding-Out Syndrome
-Honda’s Pullout: A Textbook Example of the Crowding-Out Syndrome
-Higher Deficits Translates to Lower GDP; 6.4% GDP? Domestic Trade Crashed 28% in the 4Q!
-2019 Fiscal Deficit Hits an ALL-TIME HIGH! Public Spending & Subsidies Soars to Record!
-2019 a Year of Records! Money Printing, Public Spending to GDP Hits Record too!
2019: A Year of Records: Deficit, Public Spending, Debt and More! Honda’s Pullout: The Crowding-Out Syndrome
Honda’s Pullout: A Textbook Example of the Crowding-Out Syndrome
On the Honda closure, last week, I wrote:
Robust domestic demand? Where?
When you tax something, you get less of it!
The fact that Honda is pulling out says that domestic operations have neither been optimal nor even profitable here.
Falling car sales, and a major producer closing shop are symptoms of the crowding out syndrome in motion. The NG gets the money and the resources at the expense of the productive sector and the consumer!
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From the Inquirer (February 24, 2020): “Honda Motor closed its Philippine assembly plant because it was no longer strategic to keep a factory that makes too few cars as other car manufacturers warned the government against any future policy that could be seen as a punishment for auto companies that decided to stay…This could be traced to the Duterte administration’s move to slap higher excise on new vehicles in 2018 under the TRAIN law, or the Tax Reform for Acceleration and Inclusion Act. This, coupled with high inflation rates that kept people from buying new cars, pulled Honda and the rest of the industry back from selling as many cars as they should. Honda’s sales dropped 26.7 percent in 2018 to 23,294 units, and then fell further by nearly 13 percent to 20,338 units in 2019, industry data showed.”
So, the proverbial cat jumped out of the bag!
Aside from job losses suffered by employees, the media has captured the angst of some segments of Honda’s supply chain.
From the Inquirer (February 27): “Some 1,200 employees of parts suppliers and indirect contractors would also lose their jobs, according to Ferdinand Raquelsantos, president of the Philippine Parts Makers Association. Some of these suppliers have opened their businesses in the Philippines, specifically because of Honda, he noted.”
In effect, Honda’s closure has not only affected its labor force, but has likewise rippled through its supply, and subsequent demand chains, signified by losses in revenues and employment. With this, the dislocations from Honda’s chains have helped undermine consumer spending.
The departure of Honda represents the high profile cost of the regime’s aggressive public spending or redistribution of resources and finances from the private sector to the National Government, through taxation and inflation.
This episode should be a textbook example of the crowding out syndrome.
Nevertheless, Honda’s production facilities, assured the National Government, may be taken over by a competitor soon. Like the Hanjin debacle or pullout, media has been bombarded by supposed interests by other commercial parties to replace the bankrupt shipyard operator. However, once the public’s attention on it has waned a year after, the vacated shipyard will partly be taken control by the NG, through the Philippine Navy, leaving a smaller space for the private sector (or perhaps even none at all). So much for the spin.
Higher Deficits Translates to Lower GDP; 6.4% GDP? Domestic Trade Crashed 28% in the 4Q!
Honda isn’t just a poster boy for the crowding out syndrome, even the deficit-to-GDP data relative to GDP has been showing the same dynamic. That is, the higher the deficit-to-GDP ratio, the lower the GDP! (Figure 1, upmost window)
And considering the likely statistical inflation of the GDP, this deficit to GDP ratio should be higher.
Figure 1
Proof?
Just how do we square this 4Q domestic data with the GDP figure?
From the Philippine Statistics Authority: (February 26) “The total quantity of domestic trade during the fourth quarter of 2019 decreased to 3.95 million tons or by 45.4 percent, from 7.24 million tons in the same quarter a year ago. Almost all or 99.8 percent of the commodities were traded through water (coastwise) while the remaining commodities were through air.”
And…“Domestic trade value is equal to the outflow value which refers to the value of commodities that goes out from a specified region or province. The total value of domestic trade during the fourth quarter of 2019 totaled to PhP127.76 billion. It went down by 27.8 percent from the PhP177.00 billion value recorded in the fourth quarter of 2018.
The crash in 4Q’s domestic trade represents the BIGGEST in years! And COVID19 hasn’t even been a factor here. Furthermore, this would signify one of the rare moments where the GDP and domestic trade growth traipsed into OPPOSITE directions!
Importantly, the 4Q data exhibits the stunning meltdown of domestic supply chains! If the data is accurate, then how has the trade GDP data been able to manage an 8.6% (real) and 8.5% (nominal) growth over the same period? How were consumers (HFCE) been able to grow the rate of their spending at 5.6% (real) and 6.8% (nominal)? (Figure 1, lower window)
In contrast to the GDP, which data inputs are derived from surveys, actual declarations from various ports serve as the sources of the domestic trade. “The PSA compiles domestic trade statistics from coasting manifests and coastwise passenger manifests from major ports and other active seaports listed by the Philippine Ports of Authority (PPA) all over the country. It also collects air waybills from Philippine Airlines (PAL) as source of domestic trade statistics from air.”
Against surveys, I would rely on the actuals.
2019 Fiscal Deficit Hits an ALL-TIME HIGH! Public Spending & Subsidies Soars to Record!
Back to the deficit.
Spending other people’s money is the easiest thing to do. Thus, the NG ensured the compliance of public spending and deficit targets in the last month of the year.
Public spending rocketed to an ALL-TIME high, in terms of growth rate and nominal peso value, last December!
With an astonishing 57.83% growth rate, public spending spiraled to the sky to reach Php 494.4 billion, a new record!
Meanwhile, public revenue growth decelerated anew to register a lackluster 4.8% growth to Php 243.3 billion. The cocktail mix of RECORD spending in the face of a lackadaisical revenue growth prompted a fiscal deficit of Php 251.1 billion, another ALL-TIME high!
Figure 2
December's deficit accounted for 38% of the 2019's total of Php 660.236 billion, another milestone. The annual deficit was 4.6% above the regime's target of Php 631.5 billion!
Since the historic deficit has been established mainly by spending growth, the following are the details.
The National Government’s disbursements jumped by a record 63.7% to an unmatched Php 381.66 billion last December. Infrastructure outlays have been expected to be twice the fiscal deficit, the Department of Budget and Management reported. (Figure 3, upmost pane)
Meanwhile, Allotment to LGUs increased by 21.8%, the third-highest rate of the year, to Php 53.8 billion. NG disbursements and LGU budgets controlled 77.2% and 11% share of the total, respectively last December.
Figure 3
Public subsidies spiked by 47.47% in 2019 to reach another ALL-TIME high of Php 201.524 billion! (Figure 3, middle pane)
Subsidies to the corruption scandal racked Philhealth rocketed 37.3% to Php 72.7 billion, Landbank subsidies jumped 19% to Php 30.49 billion, while National Irrigation Administration (NIA) subsidies zoomed 29% to 36.64 billion. In 2019, Philhealth, Landbank, and NIA commanded a 69.4% share of the total.
Oddly, Fitch rating recently raised Landbank’s credit ratings even when its lifeline depended on subsidies.
Debt Servicing Nears Record, Debt Levels Hit Record too!
The Government spent substantial amounts on servicing debt.
Nominal debt servicing, which comprises domestic and foreign interest payments and amortizations, surged 8.62% to Php 842.45 billion in 2019, the second-highest since 2006. (figure 4, upmost pane left)
Figure 4
Though debt service to revenues ratio remains at near-historic lows at 26.85%. That’s primarily because of the interest rate subsidies by the BSP (on domestic debt), and by global central banks (on foreign debt). (figure 4, right upmost pane)
Interest rate subsidies not only benefit the public debt but also provides a windfall to the GDP through the credit channel. Since credit expansion boosts sectors/enterprises that avail of it, the growth it derives translates into tax revenue growth for the NG.
And though the slowdown of bank lending has resonated with the economy as manifested by the credit intensity (figure 4 lowest pane), recent tax hikes have partly offset the pressures in tax collections.
Moreover, the record deficits have prompted the government to partly raise its funding via debt markets. Such newly acquired debt will add to the stock of debt payments from which interest rates will apply. In 2019, the NG’s financing grew by 12.02% to a milepost Php 876.3 billion.
And while debt servicing depends on interest rates and the stock of outstanding liabilities, revenues relies on the performance of the economy and tax administration.
That said, any slowdown in the economy should affect the NG’s topline and push up the various indicators on debt.
And with total leverage consisting of the outstanding stock of bank credit plus public debt reaching 92% of the GDP, a declining GDP should expose the fragility of the nation’s debt onus. (Figure 5, upmost window)
2019 a Year of Records! Money Printing, Public Spending to GDP Hits Record too!
And not only has the unprecedented fiscal stimulus been financed by debt, through the BSP, the massive spending has been financed by debt monetization or money printing, which also zoomed to uncharted territory!
Figure 5
Net claims on central government soared by 24.4% to an ALL-Time high of Php 2.377 trillion or 12.77% of the NGDP in 2019, a share level reached last in 2009.
Unknown to most, 2019 was a year of records in the context of policy stimulus! 2019 registered ALL-TIME highs in public spending, deficit, debt levels, and debt monetization in nominal peso, and some, on the rate of change.
Notwithstanding, the BSP’s aggressive cuts in the banking system's Reserve Requirement Ratio (RRR) and policy rates also contributed to the supposed easing intended to bolster liquidity, and shore up spending.
2019’s fantastic milestone deficit has signified a massive Keynesian spending “stimulus” to the economy; why require so much public spending if the economy is structurally sound? Should the economy falter, what tools have the NG left to stabilize it?
And there’s one more record I have left out, public spending as a share of GDP has rocketed to an ALL-TIME high of 20.4% of the inflated GDP. Had the GDP been lower, this ratio would be higher. And that’s the direct aspect. How about the multitude of private-sector spending on political projects, many through PPPs? How much would the share of political spending be to the GDP?
The corralling of a substantially larger share of the economy by the NG, both direct and indirect, demonstrates the transition of the Philippine political economy to the neo-socialist state.
Even more, to finance a deficit of Php 660.236 billion with Php 1.342 trillion from fiscal debt financing of Php 876.3 billion and the BSP’s net claims of Php 465.5 billion indicates that either the deficit may have been bigger or that government statistics haven’t been forthright.
COVID-19 is about to expose the frailties, fragilities, and the grand delusions of this central planning and big government bubble!
