Part Two
It is assuring to note that the 2018 national budget is part of a packaged plan that stretches out contemporaneous with the term of the Duterte administration, which takes responsibility for the spending and results. It is not proposed in isolation but is meant to be understood as a continuing “live” spending guide with targeted outcomes, with set parameters matching on the one hand the expenditures and, on the other hand, the revenues and borrowings, in a manner that is believed to be a manageable fiscal program.
So the budget establishes the premise that, “The government adopts an expansionary fiscal policy in the medium term to allow more spending for priority expenditures, such as infrastructure and social services. This will help the economy grow by 7 percent to 8 percent and reduce the debt-to-GDP ratio to 38.1 percent in 2022, from 40.6 percent in 2017.”
This premise is significant for budget watchers. The government is going to very deliberately increase spending to prime, support and sustain the momentum of economic growth. This economic growth means releasing through government spending a wide range of mutually reinforcing forces of economic activities—stimulating start-up enterprises, encouraging business expansion, promoting robust business growth, opening up employment opportunities, increasing corporate profit and individual incomes, as well as generating wider bases and higher levels of taxes. As production rises, so does consumption, translating to improved economic prosperity overall.
The expansionary fiscal policy can be seen and understood through this simplified cause-and-effect sequencing scenario.
As we might realize, the government has to borrow to partly finance the programmed spending, as the projected revenues are not adequate to cover all expenditures. This is the fiscal deficit incurred when government spending exceeds the collected revenues. Incurring fiscal deficits is accepted practice so long as the debt is kept manageable, usually measured in its reasonableness by its proportion to GDP. For this, the fiscal deficit target is 3 percent of GDP.
But a broader measure of “debt manageability” is to look at total government debt as a percentage of GDP. While the borrowing is increasing, so is the GDP expanding faster. Consequently, the debt as a percentage of GDP even becomes smaller through the years, from 42.2 percent in 2016 to 38.8 percent by 2020.
By comparison, the debt-to-GDP ratios (2016) of some selected countries from the International Monetary Fund/Wikipedia, are:
Indonesia 24
Thailand 36.54
Malaysia 55.47
Singapore 111
Japan 237.9 (highest)
United States 106.71
In a coordinated monetary policy, the Bangko Sentral ng Pilipinas (BSP) governor has announced that he intends to inject more liquidity into the financial system, putting more money into the hands of consumers. This will be done by reducing the reserve requirements for banks, thus making more available funds for consumer and business lending. All these reinforce and drive economic growth and undergird the budget objectives.
Like all plans, the national budget makes some major assumptions, and planners have to be discriminating in the choice of the macro indicators that tell how the budget assumptions are playing out and impacting on the budget.
There is a collective thinking going into the formulation of the national budget, represented by the, Development Budget Coordination Committee (DBCC), which chooses the key assumptions that anchor the budget: the GDP; the inflation rate; interest rate; and foreign-exchange rate. The budget secretary chairs the DBCC, with the finance secretary, National Economic and Development Authority head and the Executive Secretary as members. Notably, the BSP is made officially as a resource institution, which is good. In some countries, we might find fiscal and monetary authorities not quite aligned in their policies and prescriptions for economic growth and stability.
And what if the macro indicators change, and they do change? How will the budget be impacted? The DBCC has figured it out for us.
When the GDP-growth rate grows by one percentage point, the government generates an additional P21.4 billion in revenues.
For every one percentage-point increase in inflation rate, revenues will increase by P20.7 billion.
For every one percentage-point increase in Treasury bill (interest) rate, there’s an increase of P1.0 billion from withholding taxes. It also increases the cost of the country’s debt by P2 billion.
A P1 depreciation against the United States dollar increases tax revenues by P9.5 billion; and also increases the cost of foreign-denominated debt by P2.1 billion.
A one percentage-point increase in merchandise imports can increase revenues by P4.2 billion.
These are the dynamics in the budget assumptions, the macro indicators that the Department of Budget and Management monitors as every budget cycle progresses, the cue from which budget adjustments are made in a continuing work-in-progress.