What is Fiscal Policy?

Fiscal policy is the means by which a government adjusts its spending levels and tax

rates to monitor and influence a nation's economic conditions, including demand for goods

and services, employment, inflation, and economic growth.. It is the sister strategy to

monetary policy through which a central bank influences a nation's money supply. These two

policies are used in various combinations to direct a country's economic goals. The usual goals

of both fiscal and monetary policy are to achieve or maintain full employment, to achieve or

maintain a high rate of economic growth, and to stabilize prices and wages. The

establishment of these ends as proper goals of governmental economic policy and the

development of tools with which to achieve them are products of the 20th century.

The Roots of Fiscal Policy

Fiscal policy is largely based on the ideas of British economist John Maynard Keynes

(1883-1946), who argued that governments could stabilize the business cycle and regulate

economic output by adjusting spending and tax policies. His theories were developed in

response to the Great Depression, which defied classical economics' assumptions that

economic swings were self-correcting. Keynes' ideas were highly influential and led to the

New Deal in the U.S., which involved massive spending on public works projects and social

welfare programs.

Here's a look at how fiscal policy works, how it must be monitored, and how its

implementation may affect different people in an economy:

 Fiscal policy is said to be tight or contractionary when revenue is higher than spending

(i.e., the government budget is in surplus) and loose or expansionary when spending is higher

than revenue (i.e., the budget is in deficit). Often, the focus is not on the level of the deficit,

but on the change in the deficit. Thus, a reduction of the deficit from $200 billion to $100

billion is said to be contractionary fiscal policy, even though the budget is still in deficit.

Expansionary Policies

To illustrate how the government can use fiscal policy to affect the economy, consider

an economy that's experiencing a recession. The government might lower tax rates to

increase aggregate demand and fuel economic growth. This is known as expansionary fiscal

policy.

The logic behind this approach is that when people pay lower taxes, they have more

money to spend or invest, which fuels higher demand. That demand leads firms to hire more,

decreasing unemployment, and to compete more fiercely for labor. In turn, this serves to

raise wages and provide consumers with more income to spend and invest. It's a virtuous

cycle.

Rather than lowering taxes, the government may seek economic expansion through

increases in spending. By building more highways, for example, it could increase employment,

pushing up demand and growth.

Expansionary fiscal policy is usually characterized by deficit spending, when

government expenditures exceed receipts from taxes and other sources. In practice, deficit

spending tends to result from a combination of tax cuts and higher spending.
Pros

Expansionary fiscal policy works fast if done correctly. For example, government

spending should be directed toward hiring workers, which immediately creates jobs and

lowers unemployment. Tax cuts can put money into the hands of consumers if the

government can send out rebate checks right away. The fastest method is to expand

unemployment compensation. The unemployed are most likely to spend every dollar they

get, while those in higher income brackets are more likely to use tax cuts to save or invest—

which doesn't boost the economy.

Most important, expansionary fiscal policy restores consumer and business

confidence. They believe the government will take the necessary steps to end the recession,

which is critical for them to start spending again. Without confidence in that leadership,

everyone would stuff their money under a mattress.

Cons

The main drawback is that tax cuts decrease government revenue, which can create

a budget deficit that's added to the debt. Although reversing tax cuts is often an unpopular

political move, it must be done when the economy recovers to pay down the debt. Otherwise,

it grows to unsustainable levels. The U.S. federal government has no limitation because it

prints money; it can pay for the deficit by issuing new Treasury bills, notes, and bonds. As a

result, the national debt is close to $23 trillion—which is more than the country produces in

a year. When the debt-to-GDP ratio is more than 100%, investors get worried, buy fewer

bonds, and send interest rates higher. All of which can slow economic growth.
 Politicians often use expansionary fiscal policy for reasons other than its real purpose.

For example, they might cut taxes to become more popular with voters before an election.

That's dangerous because it creates asset bubbles, and when the bubble bursts, you get a

downturn. It's called the boom and bust cycle.

Fiscal Policy in the Philippines

In the Philippines, this is characterized by continuous and increasing levels of debt and

budget deficits, though there have been improvements in the last few years. The Philippine

government main source of revenue are taxes, with some non-tax revenue also being

collected. To finance fiscal deficit and debt, the Philippines relies on both domestic and

external sources.

Fiscal policy during the Marcos administration has primarily focused on indirect tax

collection and on government spending on economic services and infrastructure

development.

The first Aquino administration inherited a large fiscal deficit from the previous

administration, but managed to reduce fiscal imbalance and improve tax collection through

the introduction of the 1986 Tax Reform Program and the value added tax.

The Ramos administration experienced budget surpluses due to substantial gains

from the massive sale of government assets and strong foreign investment in its early years.

However, the implementation of the 1997 Comprehensive Tax Reform Program and the onset

of the Asian financial crisis resulted to a deteriorating fiscal position in the succeeding years

and administrations.
 The Estrada administration faced a large fiscal deficit due to the decrease in tax e0ort

and the repayment of the Ramos administration debt to contractors and suppliers.

During the Arroyo administration, the Expanded Value Added Tax Law was enacted,

national debt-to-GDP ratio peaked, and under spending on public infrastructure and other

capital expenditures was observed.

Fiscal Expenditure in Philippines increased to P415,085.00 Million in September from

P282,233.00 Million in August of 2019. Fiscal Expenditure in Philippines averaged P50,300.35

Million from 1959 until 2019, reaching an all time high of 415085 PHP Million in September

of 2019 and a record low of 107 PHP Million in April of 1959. (Source: Bureau of the Treasury,

Philippines)

Philippines Government Last Previous Highest Lowest Unit

Government Debt to 41.90 42.10 74.90 41.90 percent

GDP

Government Budget -3.20 -2.20 1.00 -5.30 percent of

GDP

Government Budget - -2488.00 86872.00 - PHP Million

Value 178557.00 178557.00
 Philippines Government Last Previous Highest Lowest Unit

Government Spending 272139.90 328018.80 328018.80 62728.31 PHP Million

Government Revenues 236528.00 279745.00 317236.00 81.00 PHP Million

Fiscal Expenditure 415085.00 282233.00 415085.00 107.00 PHP Million

Credit Rating 53.12

Military Expenditure 3753.00 3755.00 4223.00 513.00 USD Million

Philippines Fiscal Expenditure

Fiscal expenditure refers to the sum of government expenses, including spending on
goods and services, investment and transfer payments like social security and
unemployment benefits. Fiscal expenditure are part of government budget balance
calculation. This page provides - Philippines Fiscal Expenditure- actual values, historical
data, forecast, chart, statistics, economic calendar and news. Philippines Fiscal Expenditure
- actual data, historical chart and calendar of releases - was last updated on November of
2019.

Actual Previous Highest Lowest Dates Unit Frequency

415,085.00 282,233.00 415,085.00 107.00 1959 - PHP Monthly Current

2019 Million Prices,
NSA

Country Last Previous Range

Argentina 475224.20 Oct/19 448552 527118 : 3240 ARS Million

Australia 39353.00 Sep/19 39564 47824 : 790 AUD Million

Country Last Previous Range

Canada 26584.00 Aug/19 27055 40708 : 5565 CAD Million

China 25543.00 Sep/19 15106 30515 : 139 CNY HML

France 298.97 Sep/19 273 426 : 16.73 EUR Billion

Germany 366.81 Mar/19 396 510 : 222 EUR Billion

India 14886.19 Sep/19 11753 23114 : 137 INR Billion

Indonesia 2202200.00 Dec/18 2007352 2202200 : 10167 IDR Billion

Italy 33.72 Sep/19 29.76 109 : 1.78 EUR Billion

Mexico 538049.20 Sep/19 392823 830184 : 14303 MXN Million

Netherlands 70.10 Jun/19 44.5 70.1 : 23.5 EUR Billion

Russia 24637086.50 Sep/19 21675530 33880686 : 44800 RUB Million

Saudi Arabia 1030415.00 Dec/18 929999 1109903 : 6028 SAR Million

Singapore 4595.70 Sep/19 6264 16655 : 2544 SGD Million

South Africa 123271.00 Sep/19 161091 182477 : 46 ZAR Million

South Korea 364632.00 Sep/19 330168 407099 : 7012 KRW Billion

Switzerland 224309.00 Dec/19 221715 224309 : 47240 CHF Million

Turkey 79120499.00 Sep/19 91959276 144562290 : 11186669 TRY Thousand

United States 379988.00 Oct/19 291260 439833 : 3842 USD Million

Medium-Term Fiscal Program to Sustain the PH Economy’s Growth Momentum

From 2017 to 2022, the government will embark on an expansionary fiscal policy to

finance the country’s development priorities, boost economic growth, and ultimately achieve

the administration’s objectives of rapid poverty reduction.

The expansionary fiscal policy will be characterized by increased government

spending, particularly on public infrastructure and social services. This fiscal strategy will be

made possible by maintaining the deficit-to-GDP ratio at 3 percent while improving revenue

effort through tax policy and tax administration reforms.

The deficit will be financed primarily through borrowings, following an 80-20 mix in

favor of domestic sources. This mix minimizes foreign exchange risks.

Despite the increased deficit, the debt levels of the Philippine economy will remain to

be manageable and sustainable (see Figure 1). In fact, projections from government

authorities show that the debt-to-GDP ratio of the Philippines is on a downward trajectory.

In 2016, it was recorded at 42.2 percent and is expected to decline gradually to 36.7 percent

by 2022.
 Figure 1: Debt-to-GDP Ratio of the Philippine Economy (2015 – 2022)

In terms of revenue effort, the Comprehensive Tax Reform Package being sponsored

by the Department of Finance (DOF) is expected to bolster revenue collection to 15.3 percent

of GDP in 2017 up to 17.7 percent of GDP in 2022 (see Figure 2). Tax reform is expected to

net more than P200 billion in revenues annually.

Figure 2: Medium-Term Revenue Program

 The projected increase in government spending due to the expansionary fiscal

program is reflected in the National Budget. For fiscal year 2017, the obligation budget is set

at P3.35 trillion, an 11.6 percent increase from 2016. Meanwhile, revenues are slated to reach

P2.43 trillion, a 10.5 percent increase, while disbursements are set to reach P2.91 trillion, a

14.1 percent increase. In line with the deficit of 3 percent of GDP, fiscal balance is also

projected to be at P482 billion in 2017.

Moving forward, the Development Budget Coordinating Committee (DBCC) has

approved a budget ceiling of P3.84 trillion for the 2018 National Budget. This is P490 billion

or 14.6 percent higher than the P3.35 trillion budget for the current year. Projections also

show that revenues are targeted to reach P2.91 trillion while disbursement levels will

increase to P3.44 trillion. Maintaining the deficit level will also translate to a fiscal balance of

P532.5 billion.

While the FY 2017 Budget, dubbed as the “Budget for Real Change”, is under

implementation, the FY 2018 Budget is now being prepared by the Department of Budget

and Management and is set to be submitted to Congress before President Duterte delivers

his second State of the Nation Address on July 24, 2017

 The upward trend in government spending will be sustained in the medium-term, with

the obligation budget for 2022 being projected at P5.67 trillion. Likewise, the deficit ceiling

of 3 percent of GDP will be maintained so that the budget deficit is projected to be P777

billion in 2022. The projected medium-term fiscal program is summarized in Table 1.

Table 1: Projected Medium-Term Fiscal Program

 The medium-term fiscal program of the government supports President Rodrigo

Duterte’s 0-10 Point Socioeconomic Agenda, and is anchored on the Philippine Development

Plan of 2017 to 2022.

The Duterte Administration aims to achieve a GDP growth rate of 7 percent in the

medium-term, pushing the Philippine economy to high-middle income status by 2022. More

importantly, the government aims to bring down the poverty rate by 1.25 to 1.5 percentage

points annually, bringing down poverty incidence to 13 to 15 percent by 2022.