Download Social Welfare Programs and Social Safety Nets in the Philippines

Role and Relevance of Fiscal
Discipline in Fostering Growth
2nd International Tax Forum
27-28 October 2016
Rosario G. Manasan, Senior Research Fellow
18 May 2015
Philippine Institute for Development Studies
Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
Overview of presentation
Link between fiscal policy and growth
Fiscal policy, growth and sustainability
Fiscal rules
2
Link between fiscal policy and economic growth
 Countercyclical fiscal expansion to balance demand
shocks – important in stabilizing aggregate demand
and growth
 Public investment on infrastructure and R&D –
essential in supporting productivity of private sector
and improving access of the poor to basic services
 Public investment in human capital (e.g., education,
health, social protection) – key ingredient to longterm growth and poverty reduction
 Taxes – by incentivizing certain types of undesirable
behavior may have negative impact on growth
3
Fiscal policy, economic growth and fiscal
sustainability
 Demand for greater government spending on
infrastructure, R&D, education, health and social
protection  increased pressure on governments’
budgets increased fiscal deficits  increased
government debt  possibly, higher interest rates 
crowding out of private investment  negating some, if
not all, of positive effect of higher government
spending on economic growth in the near term
 Large (and persistent) fiscal deficits  higher
government debt  large debt service  crowding out
of productive government spending in the medium
term
4
Fiscal policy, economic growth and fiscal
sustainability
 Focus on fiscal consolidation may result in lower
government investment on infrastructure  perverse
effect on growth
 On the other hand, focus on growth-enhancing public
infrastructure investment  deterioration of fiscal
position
5
India
Indonesia
2
90
80
70
60
50
40
30
20
10
0
0
-2
-4
-6
-8
-10
Overall balance (left axis)
100
4
80
3
2
60
1
40
0
-1
20
-2
-3
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-12
5
Primary balance (left axis)
Overall balance (left axis)
Govt debt (right axis)
Primary balance (left axis)
Govt debt (right axis)
Malaysia
Philippines
80
70
60
50
40
30
20
10
0
-10
-20
6
80
70
4
60
2
50
0
40
30
-2
20
-4
10
Overall balance (left axis)
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-6
Primary balance (left axis)
Overall balance (left axis)
Govt debt (right axis)
Govt debt (right axis)
Vietnam
Thailand
Overall balance (left axis)
Primary balance (left axis)
Overall balance (left axis)
Govt debt (right axis)
2014
2013
2012
2011
2010
2009
0
2008
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
1996
-10
10
2007
10
2006
-8
20
2005
20
30
2004
-6
40
2003
30
-4
50
2002
40
-2
60
2001
50
0
70
2000
60
2
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
1999
70
4
1998
6
Govt debt (right axis)
Primary balance (left axis)
Primary balance (left axis)
6
Indonesia
India
15.00
10
10.00
8
5.00
6
4
0.00
2
-5.00
0
-10.00
-2
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
-4
Public Gross Fixed Capital Formation
overall deficit WEO
Malaysia
15.00
10.00
5.00
0.00
-5.00
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-10.00
Overall deficit
Philippines
5.00
4.00
3.00
2.00
1.00
0.00
-1.00
-2.00
-3.00
-4.00
-5.00
-6.00
20.00
Public investment
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Overall deficit
2004
2003
2002
2001
2000
1999
1998
1997
1996
-15.00
Public Gross Fixed Capital Formation
Public Gross Fixed Capital Formation
Overall deficit
Vietnam
Thailand
12
15.00
10
10.00
8
6
5.00
4
2
0.00
0
-2
-5.00
-4
-6
Overall deficit
Public Gross Fixed Capital Formation
Overall deficit
Public investment
7
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
-8
1997
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
-10.00
India
Indonesia
20
2
15
1
1
10
0
5
-1
0
Thailand
2014
2013
2012
2011
2014
2013
2012
2011
2010
2009
2008
Fiscal impulse (new)
8
2014
2013
2012
2011
2010
2008
2007
2005
2004
2009
Fiscal impulse (new)
Fiscal stance vis output
gap – measure of
cyclicality
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
2003
Output gap, nominal
Fiscal impulse (new)
10
8
6
4
2
0
-2
-4
-6
-8
1997
2002
2001
2014
2013
2012
2011
-3
2010
-2
-4
2009
-2
2008
-1
2007
0
2006
0
2005
2
2004
1
2003
2
4
2002
6
2001
3
1996
Fiscal impulse (new)
Philippines
8
Output gap, nominal
2010
Output gap, nominal
Malaysia
Output gap, nominal
2009
2008
2007
2005
2014
2013
2012
2011
2010
2009
Fiscal impulse (new)
2006
Output gap, nominal
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
-2
1998
-10
1997
-2
2006
-1
-5
Fiscal policy, economic growth and fiscal
sustainability
 To ensure consistency among fiscal policy, economic
growth and fiscal sustainability:
 Focus has shifted on the creation of fiscal space – “capacity of
government to provide budgetary resources for desired
purpose, subject to the constraint that fiscal position is
sustainable in the medium- and long-term
 Ways to obtain fiscal space
 Increase growth
 Raise more revenues
 Improve allocative and technical efficiency in government
spending
 Increase borrowing
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Fiscal sustainability
 Government’s capacity to borrow – limited by
magnitude of existing debt, size of contingent debt (i.e.,
government guarantees), and economic growth
 Fiscal sustainability analysis – practical starting point of any
conversation on “growth-oriented fiscal policy because
unsustainable public finances – if uncorrected – inevitably lead
to crises”
 ADB 2015 study on Public Debt Sustainability in Asia
indicates sustainability of public debt in more of Asia
but some cause for concern for India, Indonesia,
Mongolia, Georgia and Kyrgyz Republic
10
120
Public
debt as
% of
GDP in
Asia
100
80
60
40
20
1990
1995
Bangladesh
2000
Bhutan
2005
India
Nepal
2010
Pakistan
2015
Sri Lanka
120.00
100.00
80.00
60.00
40.00
20.00
0.00
1990
1995
2000
2005
2010
China
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
Vietnam
Linear (Malaysia)
2015
11
Fiscal sustainability and fiscal rules
 Increasing adoption of fiscal rules – imposes longlasting constraint on fiscal policy through numerical
limits on budgetary aggregates for the purpose of
ensuring debt sustainability
 Debt rules – explicit limit on public debt stock
 Budget balance rules – explicit limit on size of the deficit
so as to constrain increase in the debt ratio
 Expenditure rules – explicit limit on total/ primary/ current
spending by putting a ceiling on their growth or ratio to
GDP
 Revenue rules – set ceilings or floors on revenues or
determine use of windfall revenues (IMF)
12
Drawbacks of fiscal rules (IMF)
 May unduly constrain ability of government to conduct
pro-cyclical stance in bad times, i.e., pro-cyclical
 Too much focus on fiscal rules may encourage
governments to invest too little  lower growth
 Focus on aggregates rather than composition 
quality of fiscal policy may suffer
 May encourage creative accounting
 Need to frame fiscal rules that are flexible yet
credible - e.g., rules related to cyclically adjusted
budgets; difficulty related to measurement and
transparency
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Philippine Institute for
Development Studies
Surian sa mga Pag-aaral Pangkaunlaran
ng Pilipinas
Thank you
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