2023 YTD Philippine Fiscal Deficit: Lowest Since 2019, The Inflationary Financing of Deficit Spending, Record 2024 Government Budget

Inflation is essentially antidemocratic. Democratic control is budgetary control. The government has but one source of revenue— taxes. No taxation is legal without parliamentary consent. But if the government has other sources of income it can free itself from this control—Ludwig von Mises 

 

In this issue 

 

2023 YTD Philippine Fiscal Deficit: Lowest Since 2019, The Inflationary Financing of Deficit Spending, Record 2024 Government Budget  

I. CPI Falls: May BIR Collections Stalls, Revenue Growth Decelerates 

II. Slowdown in Public Spending, CPI Slides; The Inflationary Financing of Deficit Spending  

III. Jan-May (YTD 2023) Performance Echoes May 2023 Fiscal Activities 

IV. Record 2024 Government Budget, Record 2024 Programmed Borrowings, and Policy Uncertainties 

 

2023 YTD Philippine Fiscal Deficit: Lowest Since 2019, The Inflationary Financing of Deficit Spending, Record 2024 Government Budget  

 

Jan-May YTD deficit represents the smallest since 2019 as revenue and public spending growth stalled.  The slowing CPI played a substantial role in it.  Yet, the 2024 budget points to an elevated CPI. 

I. CPI Falls: May BIR Collections Stalls, Revenue Growth Decelerates 

 

Manila Standard, June 27: The government’s budget deficit fell 16.7 percent in May to P122.2 billion from P146.8 billion a year ago as the 9.35-percent growth in revenues outpaced the 0.88-percent increase in expenditures, the Bureau of the Treasury said Tuesday. This brings the cumulative budget gap for the first five months of the year to P326.3 billion, lower by 28.86 percent or P132.4 billion than a year ago. 

Figure 1 

 

To begin with, from an all-time high in pesos last April, May revenue growth slowed to 9.4% while expenditures had nearly been flat or up by .9%.   But due to the base effects with a higher tilt on spending, the May deficit ballooned to Php 122.2, the second highest in 2023. (Figure 1, upper chart) 

 

Because of the BIR's 1.54% contraction last May, Tax revenue growth slowed to only 2.4%.   The BIR comprised about 64% of Total revenues and 73% of Tax Revenues in May. 

  

The Bureau of Customs and Non-Tax revenues filled this slack with growth rates of 17.6% and a spike of 111%, respectively.  

 

The demand-fired CPI rates have been instrumental in shaping tax revenue activities.  (Figure 1, lower window) 

Figure 2  

 

The BIR spike and decline echoed the oscillations of the CPI, which peaked in February.  (Figure 2, topmost graph) 

 

Aside from public spending, bank credit expansion has been a source of the CPI.  For example, credit card activities have dovetailed with the gyrations of tax revenue performance. (Figure 2, middle pane) 

 

Receipts serve as a basis for VAT and excise tax collections.  Therefore, price levels are a factor in collections performance.  

 

Ironically, the Department of Finance revised higher its target even when it expects the CPI to fall to the 5-6% level by the yearend.   

 

Is the DoF expecting an avalanche of volume in place of higher prices?  Where from? 

 

Are they expecting a productivity boom—principally from public spending—to finance it?  Or have their econometric models been designed to conjure numbers to suit the public's palate for political goals? 

 

II. Slowdown in Public Spending, CPI Slides; The Inflationary Financing of Deficit Spending  

 

And while the growth rate of public spending was nearly little changed—mainly due to the 16% slump in Local Government allocations—interest payments spiked 22.2%. Central government disbursements expanded by 6.07%. 

 

With LGU allocations contracting in the last 5-months, the share of the National Government outlays of the public spending pie have sharply increased.  (Figure 2, lowest diagram) 

 

Even from the expenditure perspective, budget allocations indicate an increasing trend of centralization.  

 

Or, despite the Mandanas ruling, which gives a larger revenue share for the LGUs, central government spending has dominated public spending. 

Figure 3 

Think of it this way, inflation contributes to revenue performance, but public spending represents one of inflation's primary drivers.  

 

Therefore, as public spending has eased and so with the decline of the CPI rates. (Figure 3, topmost window) 

 

The BSP's direct financing of the slowdown in public spending (net claims on central government or QE) has also decreased. 

 

Aside from borrowing from savers, where public debt was at an all-time high, banks continue to finance such deficits and provide liquidity to the government.  Net claims on the central government of the banking system was at the second highest level last May. (Figure 3, middle and lowest window) 

Figure 4 

 

The declining peso deposit growth rate also became pronounced when the authorities embarked on this aggressive deficit spending program. (Figure 4, topmost pane) 

 

Since authorities intensified deficit spending from 2019 to the present, the benchmark M3, money supply/liquidity growth, has also diminished. 

 

The thing is, aimed at providing stability measures against a recession, fiscal deficits remain at pandemic emergency levels, despite the normalization of the economy.   

 

Of course, the previous administration ramped up deficit spending even before the health crisis, but the justification for its accelerated use emerged during the pandemic economic shutdown.   

 

III. Jan-May (YTD 2023) Performance Echoes May 2023 Fiscal Activities 

 

Does the YTD performance manifest the same conditions? 

 

Let us make a quick take on these. 

 

First, Tax revenues and its primary contributor, BIR collections, were at record highs.  But the growth rates of the former represented the slowest in the last three years.  Meanwhile, BIR growth rates had been at par with 2022 while posting growth of over 9% since 2018, except in 2020 and 2021, which registered downside and upside spikes. (Figure 4, middle and lower panes) 

Figure 5  

 

Next, while public spending was at an (all-time high) ATH, pushed by a milepost in central government outlays, both rates have declined.  Public spending posted a growth rate of 1.22% in 2023, lower than 4.69% in 2022, while the central government disbursements registered rates of 7.5% in 2023, higher than 5.11% in 2022. (Figure 5, topmost graph) 

 

After a record LGU outlay in 2022, the peso level and growth rates fell YTD.   LGU contracted by 14% compared to last year's 17.7% growth. (Figure 5, middle window) 

 

Finally, while the YTD deficit of Php 326.32 billion signified the smallest since 2019, the Treasury's cash position posted the second highest since last year.  (Figure 5, lowest chart) 

 

What is more, public financing bumped higher to Php 1.168 trillion, 32% higher than last year's Php 883 billion but lower than 2020's Php 1.34 trillion and 2021's ATH of Php 1.56 trillion.  So, we should expect public debt to rise in May from its historic Php 13.911 trillion in April.  

 

So, bank and debt-financed public sending boosted inflation.  In turn, elevated inflation bolstered revenues.   Negative rates, on the other hand, provided an implicit subsidy to public debt.  Or creditors are paid with reduced value/purchasing power of the peso.  

 

With the central government benefiting immensely from inflation, why should we expect them to curb it drastically? 

 

We should not forget that "Inflation Targeting" represents the anchor of the BSP's monetary framework, which means that the central bank pursues "price stability" through "low and stable inflation." 

IV. Record 2024 Government Budget, Record 2024 Programmed Borrowings, and Policy Uncertainties 

 

The government proposed to increase 2024's budget to a record Php 5.768 trillion, or a growth of 9.5%.     

 

How will the government finance this? 

 

Some of it will be through taxes increases. 

 

The BIR has proposed to "impose a creditable withholding tax on gross remittances of online platform providers." (CNN Philippines, April 21, 2023) 

 

Controlling vice as justification, "THE Philippines is pursuing plans to tax junk food and hike levies on sweetened beverages to boost revenue and reduce incidence of diabetes, obesity and other diseases linked to poor diet." (Business Times Singapore, June 21, 2023) 

 

Another suggested avenue is through vehicle ownership, "The House of Representatives tax panel will consider proposed increases in the motor vehicle user’s charge (MVUC)..." (Inquirer.net, June 29, 2023) 

 

There will be more coming.  As forecasted here many times: One day, they will raise VAT rates. 

 

The other means of funding is through more borrowing.  

 

That is borrowing from mostly domestic savers via capital markets, "The Philippines will raise its borrowing program by more than 10 percent to P2.46 trillion next year, in favor of domestic creditors." (Philstar.com, June 21, 2023) 

 

So, authorities will borrow Php 2.46 trillion to fund Php 5.768 trillion of outlays.  Taxes supposedly will finance the rest.   

Figure 6 

 

But how about the financing of existing debt and their rollovers?  Though interest payments remain 54% below last year's annual level (YTD in May), amortizations have been fast closing in on last year's levels (only 25% below). (Figure 6, top and middle charts) 

 

Of course, no political authority will say that they would inflate away their liabilities.  That would be like saying, "Hey, I love the smell of inflation in the morning!" 

And so explains their media campaign against inflation. Remember, inflation, from their perspective, is about the supply side (supply chain disruptions, hoarding, Russia-Ukraine war and etc.)

 

But again, their actions come with nasty consequences. 

 

For instance, deficit spending's crowding-out effect has been manifested not only in prices (inflation) but also through diminished savings, aptly demonstrated by the bear market of the PSEi 30.   Of course, boom-bust policies represent the other primary contributor.  (Figure 6, lowest chart) 

 

Finally, an "optimistic" foreign business group bellyached on some of the structural defects of the Philippine political economy. 

 

ABS-CBN, June 30, 2023: A recent survey conducted by the German-Philippine Chamber of Commerce and Industry (GPCCI) showed that German businesses in the country generally see better conditions and developments in the country in the next 12 months.  Majority also see more local investments and jobs in the next year. But the group says investors are also concerned about uncertainties in the economic policies of the Philippines.  “They also have identified certain risks such as shortages of skilled labor, disruptions in supply chains, and economic policy uncertainties,” said Tristan Loveres, who sits on the GPCCI Board of Directors.  “These of course anticipate the increase in geopolitical obstacles such as inflation, trade barriers, and also cybersecurity threats,” he added.  (bold added)

 

Aside from the other (not in bold) reasons, have they not been saying what we have been reiterating here for the past decade or so?    

 

Yet, these represent the impact of centralization through policy uncertainties in the context of a barrage of mandates, regulations, subsidies, the crowding-out effect, and inflation. 

Here is an example of policy-induced economic uncertainties: Authorities recently increased minimum wages in NCR, which penalizes SMEs while reducing competition for big companies.   

Here is the thing, politicians and the bureaucracy resort to politically convenient palliatives at the expense of economic coordination and cooperation.  

That said, it should not surprise that populist politics lead to regime uncertainty.  

 

So, how can one be bullish to increase investments and jobs with all these uncertainties and obstacles in place?  That's almost a gamble—a surefire way to absorb business losses.  

 

Instead, the group sugarcoats its outlook to avoid political backlash. 

But, for as long as this political-economic framework is in place, the bias is for inflation to accrue, which together with other anti-market policies, reduces the standard of living of Philippine residents.

 

With a 2nd Policy Rate Pause, a Victory Lap for the BSP? Philippine Treasury Markets and the PSEi 30 Slumps

Inflation is a tax. Money for the government. A tax that people don’t see as a tax. That’s the best kind, for politicians—Lionel Shriver

With a 2nd Policy Rate Pause, a Victory Lap for the BSP? Philippine Treasury Markets and the PSEi 30 Slumps  

 

After the second interest rate pause, the outgoing BSP Chief seemingly declared "triumph" over inflation.  But Philippine financial markets expressed dissent. 

I. The BSP’s Victory Lap over Inflation: "Ending Its Most Aggressive Tightening Cycle In Years" 

 

Predicting that it contained inflation, the BSP's Monetary Board kept its policy unchanged for a second straight time. 

 

GMA News, June 22: Following its policy meeting, BSP Governor Felipe Medalla said the Monetary Board kept the key rate for the overnight deposit facility at 5.75%, the overnight borrowing facility at 6.25%, and the overnight lending facility at 6.75%. This comes as the central bank now expects inflation to average 5.4% this year, slower than the 5.5% it projected during its meeting in May, citing the slower increases in prices of food and energy-related items in the past month. 

 

Businessworld, June 23: PHILIPPINE CENTRAL BANK Governor Felipe M. Medalla said on Friday monetary policymakers had done enough to tame inflation, in his clearest signal yet that the Bangko Sentral ng Pilipinas (BSP) was ending its most aggressive tightening cycle in years. Mr. Medalla said the central bank’s future policy decisions will largely be driven by inflation data, which current forecasts show is on track to settle back within the bank’s 2%-4% target by the fourth quarter. (bold added) 

 

Figure 1 

 

The establishment seems to have forgotten or discounted the "stickiness" of the Core CPI in its forecasts. Figure 1 

 

Though the outgoing BSP chief seems confident to declare that they have surmounted the inflation dilemma, "ending its most aggressive tightening cycle in years," he contradicted this with a contingent, "largely be driven by inflation data." 

 

Because data is history, and addressing inflation extrapolates to the future, such mismatch points to the risks of policy errors.  In a word, BSP policies are reactionary.  

 

Since the authorities denied from the get-go the emergence of the inflation crisis and blamed it instead on supply and private sector "hoarding," the BSP—in certainty—will be remiss in their prognosis of the inflation malady.  

 

The fact that the BSP seems to deliberately ignore the imbalances forged from record liquidity injections, bank credit expansion, and BSP and bank-financed deficit spending translates to the concealment of the primary roots of inflation.  This represents a policy of plausible deniability or "deny knowledge of or responsibility for actions committed by or on behalf of members of their organizational hierarchy." 

 

Figure 2 

 

For instance, as evidence, there is a tight correlation between the gyrations of the CPI and fiscal spending as well as the BSP’s net claims on the National Government (QE). (Figure 2) 

 

Aside from these factors that help embellish the GDP, political authorities attain their objectives via increased taxes, expansive regulations, and mandates through a bigger government. 

 

One can only maintain this privilege by whitewashing the role of the BSP and the Central Government as the source of inflation. 

 

II. Response to the BSP’s "Rate Pause": Peso Rebounds Slightly, Treasury Yields Surge! 

 

So did the markets agree with the BSP "pause?"  

 

The most interesting is the response of the traders of the Treasury markets.  

Figure 3 

 

This week, BVAL rates rose, particularly in the belly—partly reversing the steep inversions—to flatten the curve.  (Figure 3, upper chart) 

 

Since June 9, the higher yield and the flattening dynamic have become more conspicuous. (Figure 3, lower chart) 

 

If such a dynamic holds or even escalates, treasury traders could have started pricing in a comeback of inflation! 

Figure 4 

 

Yet, we see a close correlation between the flows and ebbs of the USD-Peso, CPI, and 10-bond yields. If so, a rebound in the USD-Php should not be a surprise. (Figure 4, upper graph) 

  

Besides, authorities raised the issue of replacing Libor rates, which serve as a basis for the local Phiref.   

 

Businessworld, June 22: In the Philippines, the LIBOR is still used for some fixed-income securities available in the market, as well as for interest rate and cross-currency swaps. The Philippine Interbank Reference Rate (PHIREF), which is used for interest rate swaps, cross-currency swaps and some peso corporate loans, is also computed using dollar LIBOR. (bold added) 

 

Yet, rising Phiref or local interbank FX swap rates point to increasing USD liquidity strains in the banking system, therefore, a higher USD-Php. (Figure 4, lower chart) 

 

It should also be noted that supply-side issues have also re-emerged.  

 

The media reported the increasing rice prices and poor fish catch in May. 

 

III. PSEi 30 Dismissed the Rate Pause; an Ominous Technical Chart; Record Systemic Leveraging 

And it shouldn't be a surprise that with the re-escalation of rates, declining Philippine equities prices reinforced its bear market conditions. 

 

The PSEi 30, down by 1.76% this week, closed at 6,393.55—a similar low it reached in March 2023 before the bounce.   

 

Peso volume remains lackluster, while market breadth has been awful.  While the principal equity barometer could bounce off to create an interim 'double bottom,' its long-term prospects seem portentous. 

 

Figure 5 

 

For chartists, haunting the PSEi 30 is a bleak 5-year head and shoulders pattern and a one-year rounding top, reinforcing this somber outlook. 

 

Aside from cash and FX holdings becoming discernible competitors of bonds and equities, current conditions represent a headwind to the economy and the financial markets. 

 

In closing, it is unclear if the BSP is aware of the impact of the unprecedented scale of financial leveraging in the face of the "most aggressive tightening cycle in years." 

 

The sum of public debt and universal bank loans is at an All-Time High!   

 

Higher rates extrapolate to higher borrowing, refinancing, and repayment costs.   And it also translates to amplified liquidity requirements to keep this incredible scale of leverage afloat. 

 

The Bulls will need Lady Luck on their side badly.