Inflation is taxation without representation—Milton Friedman
In this issue
Philippines Fiscal Health: The Forces Behind April’s Tax Revenue Boom
I. April’s Tax Revenue Carves a Record High
II. A Government Awash with Liquidity
III. Public Debt Hit a Fresh High Even with a Stunted Deficit
IV. Tax Revenue Boom a Product of Inflation from Public Spending and Bank Credit Expansion
V. Conclusion: Free Lunch Policies Sow the Seeds of "The Age of Inflation 2.0"
Philippines Fiscal Health: The Forces Behind April’s Tax Revenue Boom
The Philippine Treasury posted a fiscal surplus in April—the second time this year—thanks to booming revenues. This outperformance signified the belated effects of the record CPI.
I. April’s Tax Revenue Carves a Record High
Businessworld, May 30, 2023: THE NATIONAL Government’s (NG) budget surplus ballooned to P66.8 billion in April from P4.9 billion a year ago, as revenue growth outpaced expenditures, data from the Bureau of the Treasury (BTr) showed…In April, revenue collections jumped by 26.66% to P440.7 billion from P347.9 billion a year earlier…Meanwhile, government spending rose by 9% year on year to P373.9 billion in April “mainly to the subsidy release to Philippine Health Insurance Corp., larger capital expenditures of the Department of Public Works and Highways (DPWH) and Department of Transportation (DoTr),” the BTr said.
Fiscal conditions tell us why government desires inflation—it is a free lunch for them.
Let us examine this context using the fiscal's performance in the first four months.
Figure 1
What's the highlight of April? Public revenues rocketed!
In pesos, public revenues hit an all-time high last April and outsprinted spending, hence has resulted in a Php 66.8 billion surplus, the second for the year. Revenues ballooned by 26.7% YoY pushing its peso level of Php 440 billion to a milestone. (Figure 1, top and middle window)
A budget surplus? That should be great! But is it? The devil is in the details, as they say.
II. A Government Awash with Liquidity
For a better perspective, let us shift to the cumulative year-to-date (YTD) activities.
Revenues grew 11.2% YoY to a record Php 1.26 billion. However, its growth rate has been decelerating since the 26% peak in 2012. (Figure 1, lowest pane)
The revenue boost was mainly a function of the 13.31% collection growth of the BIR. Bureau of Custom collections also rose by 10.7%. BIR revenues accounted for 66.8% of the total, while the BoC's pie was 22.34%. That said, the load of this growth came from the BIR.
Figure 2
On the other hand, public spending also reached record nominal levels of Php 1.46 trillion, backed by a stifled YoY rate of 1.33%. (Figure 2, top chart)
But this rate was a speck compared with the 31.12% high in 2020 high when authorities used its fiscal tools as a stabilizer (stimulus) against the recession from the pandemic economic shutdown.
In turn, this year's fiscal deficit slowed to Php 204.087 billion YTD, its lowest level since the advent of the pandemic in 2020. (Figure 2, middle diagram)
And because of this, treasury financing growth slowed to 12% YoY since its acme in 2021. In pesos, financing fell by 29.6% from its zenith in 2021.
This year, the treasury's cash holdings (in pesos) fell 34.3% from its 2022 peak. Still, 2023 public cash holdings have been at the second-highest level.
By inference, liquidity inundated the government coffers while the banking system suffered from a partial drain, which diffused into the real economy through slower credit growth.
III. Public Debt Hit a Fresh High Even with a Stunted Deficit
Curiously, even when the treasury reported a decrease in its deficit, public debt grew by 9% YoY in April to Php 13.911 trillion, another landmark high. (Figure 2, lowest pane)
And though local-denominated debt growth decelerated to 5.84%, foreign debt jumped 16.4%.
With a slowing deficit, why the surge in public debt? Has this been about refinancing or debt rollovers? Could this also be about shoring up the BSP's foreign reserve assets?
Figure 3
The BSP has reported ten consecutive months of FX assets YoY contraction. April's .2% deflation was the smallest, which likely means that the increase in Treasury FX borrowings could have eased part of the BSP's deficit. (Figure 3, topmost window)
To be clear, Net foreign assets are "claims on non-residents and liabilities to non-residents of ODCs and the BSP." On the other hand, Gross International Reserves (GIR) are "foreign assets of the Bangko Sentral ng Pilipinas."
ODCs (Other Deposit Corporations) and the BSP have posted decreases YoY in FX assets.
Though the borrowing could be related to expanding the BSP's FX assets, which represent part of their operations under the tacit USD standard, let us focus on fiscal health. (Figure 3, middle chart)
In gist, revenues boomed in the first four months, but spending flourished too. The smallest deficit expanded the Treasury's cash holdings, which lowered financing requirements. Ironically, authorities remained on a debt binge—partly to fill in their FX requirements.
IV. Tax Revenue Boom a Product of Inflation from Public Spending and Bank Credit Expansion
But what spurred the upsurge in revenues?
Seasonal factors have signified a factor. April represented the annual tax filing deadline. But there are the more important ones.
The headline GDP has decelerated in the last two quarters: Q4 7.1% and Q1 6.4%. So the GDP may be inadequate to explain the revenue boom.
Instead, it was the Headline and the Core CPI that were on fire: Q4 2022 (7.9%, 6.43%) and Q1 2023 (7.9%, 7.73%), which likely points to the CPI as the most influential force that determined the fiscal health in 2023.
That credit-funded public spending fueled the surge in CPI, which eventually percolated into tax collections, represents no surprise for us.
The deceleration in public spending has—with a time lag—affected prices, hence, the recent slowdown in the CPI. (Figure 3, lowest chart)
Figure 4
And because of its decline, the BSP’s direct exposure (via QE) has also been reduced. But banks remain the chief liquidity provider of the Treasury. (Figure 4, topmost and second to the highest charts)
April's net claims on public debt of the banking system (in pesos) remain close to their all-time high level reached last December. (Figure 4, second to the lowest window)
And banks' record acquisition of public debt has been consonant with record Treasury (debt) issuances in April.
As it stands, banks and financial institutions continue to flood the public sector with liquidity.
Or, the liquidity flows from banks to the public sector (via public spending) and to the economy (credit expansion) bolstered the transactional prices (CPI), thereby subjected to taxation. Tax revenues captured a substantial increase in the growth of these receipts, including international merchandise trade, as well as income/profits.
That being said, aside from prior spending, public revenues benefited from bank credit expansion, exhibited by the synchronous lending growth of Universal-Commercial Banks. (Figure 4, lowest chart)
Figure 5
But there is more. Since the foundations of the CPI are bank credit expansion and (bank and BSP-funded) deficit spending, the recent accelerated growth of these factors spurred the latest upside spike in the CPI.
However, the causation link comes with time lags.
V. Conclusion: Free Lunch Policies Sow the Seeds of "The Age of Inflation 2.0"
In the end, with authorities benefiting immensely from direct taxes and indirect channels—through the inflation tax—why wouldn't they implicitly push for more of the latter?
In case you haven't noticed, the mainstream has been drooling or salivating over the prospects of rate cuts, reserve cuts, and other forms of credit easing soon! ASAP. Like Pavlov's dogs, they believe that balance sheets have no constraints. Therefore, unfettered credit expansion can only have benefits.
But they’re in a pickle. Given their path dependencies, the BSP would resort to these measures when the risks of substantial economic slowdown or financial market instability become apparent.
For now, the agitprop is about bringing down inflation through non-monetary means. Yes, they even formed a "task force or inter-agency advisory committee" for this! Amazing!
Or, should the economy keel over, we should expect authorities to launch a similar unprecedented rescue package used during the pandemic. But fiscal and monetary "stabilizers" would not only fail, these are likely to surprise the consensus negatively.
That's because the pandemic blueprint should only stir up the third wave of the current inflation cycle.
It is precisely this deep-seated addiction to free lunches that galvanizes the inflation cycle.
We call this yet unrecognized era "the Age of Inflation 2.0."
