AS basic economics textbooks spell out, the government has six legitimate roles to play in the economy: 1) provide for a stable set of rules and institutions, 2) maintain competition, 3) correct for externalities, 4) provide for public goods and services, 5) correct undesired market outcomes, and 6) ensure economic stability and growth. Of particular interest in today’s column is the last role, which is typically gauged by the so-called “PiTiK” test.
The “PiTiK” test—capturing presyo (prices), trabaho (jobs), and kita (incomes), hence P-T-K—is an apt gauge for how well the economy is doing. These three, after all, are the indicators that directly impact on every Filipino’s life and welfare. Rapid increases in prices, high rates of unemployment, and falling incomes are triggers for social unrest and instability. The government aims to keep inflation and unemployment rates down, while maximizing income growth to support the growing population and uplift the standard of living.
To ensure economic stability and growth, two types of policy tools are at the disposal of the government: fiscal policy and monetary policy. Fiscal policy would refer to the use of taxation powers and public expenditure management to influence economic outcomes. The Department of Finance (which collects taxes and other government revenues) and the Department of Budget and Management (which sets levels of public spending) are primarily in charge of fiscal policy. The National Economic and Development Authority also determines the levels of spending by various government entities via its planning and public investment programming functions.
Raising taxes, on the one hand, tends to slow down economic activity, as it takes money from people who would otherwise spend it to buy goods and services and, hence, create demand to stimulate production. Hiking government spending (financed from taxes or loans), on the other hand, stimulates the economy if the proceeds are spent on economic activities that create the most benefits for the domestic economy through the widest network of linkages. Economic instability could result when public spending far outstrips revenues, and government debt becomes overly burdensome (from various other effects like surging imports leading to currency depreciation, which, in turn, could lead to rising prices). Indeed, fiscal policy is a delicate balancing act that is best entrusted to competent economists.
Regarding monetary policy, it refers to the management of the supply of money circulating in the economy, exclusively exercised by the Bangko Sentral ng Pilipinas (BSP). With its supervisory role over all banks and its sole authority to print and issue money, the BSP can use several tools to manage the money supply.
Money supply management is critical for maintaining price stability and influencing economic activity (job generation and income growth). Injecting more money into the economy, which goes with lower interest rates, induces more production activities and more jobs. However, having an excessive amount of money could push up prices (i.e., having too much money chasing too few goods). If the BSP controls inflation by tightening the supply of money, it could choke economic activity and dampen income growth. Indeed, there is also a delicate balancing act that must be done constantly, so it is equally important to put the right people in the BSP.
Having presided over the Philippine economy during a period of turbulence (i.e., the pandemic years), the current economic team, indeed, deserves heaps of praise for preventing what could well have been a catastrophic meltdown. These economic managers have fully understood fiscal and monetary policies and have known exactly which lever to push or pull under such difficult circumstances.
On top of ensuring economic stability and growth, the current economic team has also instinctively pushed for reforms that will create the most benefits for the most people. Prime examples of such reforms are the Ease of Doing Business and Efficient Government Service Delivery Act, the Philippine Identification System Act, the Tax Reform for Acceleration and Inclusion Act, the Real Estate Investment Trust Act, the Rice Tariffication Law, and, of course, the Build, Build, Build Program. Finance Secretary Carlos G. Dominguez III, the economic team leader, has publicly acknowledged that all of these reforms cannot be attributed exclusively to the efforts of the outgoing administration. These reforms are the logical continuation of decades of reforms arduously passed by previous administrations.
So, the choice of economic managers by the incoming administration will be crucial. It will have far-reaching implications on restoring confidence among businesses and consumers under the new normal, and also on ensuring policy reform continuity, which is necessary to sustain long-term development plans. It is hoped that the incoming administration, which the Filipino people have chosen emphatically, will, in turn, choose its next set of economic managers wisely.
Dr. Ser Percival K. Peña-Reyes is the Associate Director of the Ateneo Center for Economic Research and Development.