Government Debt

 When a government spends more

than it collects in taxes, it borrows
from the private sector to finance
the budget deficit. The
accumulation of past borrowing is
the government debt
 The size of government debt

 Compare it to the size of other

countries debt
 Compare it as a percent of GDP
(Debt GDP ratio)
Problems in measuring government
debt

 Inflation-debt should be corrected for inflation and

measured in real terms
 Capital Assets-utilize capital budgeting a procedure that
accounts for assets as well as liabilities
 Uncounted Liabilities-SSS, GSIS, the future pension
benefits represet a future government liability almost like
debt
 The Business Cycle-recessions cause incomes to fall and
people pay less in taxes, less company profits means less
corporate income taxes.
The Traditional view of Government
Debt

 A tax cut financed by government borrowing would

increase consumer spending.
 In the short run higher consumption raises demand for goods
and services and raises prices increasing inflation.
 In the long run higher consumption decreases savings and
lowers the capital stock and eventually lowers output.
 The current generation would enjoy the benefits of higher
consumption and higher employment but future generations
would bear the burden of the debt and the subsequent
lowering of the capital stock.
The Ricardian View of government
Debt

 According to an alternative view called the “Ricardian

Equivalence”, consumers are forward looking and
therefore base their spending not only on their
current income but alos on their expected future
income.
 The idea is that government debt is equal to future
taxes.
Arguments for a Traditional view of
Government Debt

 Myopia - “shortsightedness”, not

fully comprehending the
implications of budget deficits
 Borrowing Constraints - current
income is more important than
lifetime income for consumers with
borrowing constraints
 Three Reasons why optimal fiscal
policy may call for a budget deficit or
surplus

 Stabilization
Tax Smoothing
 Intergenerational Redistribution
 International Dimensions of
Government Debt

 Increase the Risk of Capital Flight

 foreign investors fear default on the debt
and start to curtail their lending
 Reduce a nations Political Power
Philippine Debt Crisis
External Debt -The portion of a
country's debt that was borrowed
from foreign lenders including commercial
banks, governments or international
financial institutions.
These loans, including interest, must usually
be paid in the currency in which the loan
was made.
 Internal debt is the part of the
total debt in a country that is
owed to lenders within the
country. A country occasionally
needs to borrow from
institutional and individual
investors for budgetary purposes.
 National Debt-
Total outstanding borrowings of a
central government comprising of
internal (owing to national creditors)
and external (owing to foreign
creditors) debt incurred in financing i
ts expenditure.
• A debt crisis deals with countries and their ability to
repay borrowed funds.
• The most basic definition is that a debt crisis is
when a national government cannot pay the debt
it owes and seeks, as a result, some form of
assistance.
Major Risks of a Debt Crisis
1. High external debts are believed to have harmful
effects to the economy.
2. The reputation of a country is also at stake when
external debt is looked at and may discourage
investments to enter into the country.
3. The present foreign investors in the country would be
expected to pull capital out of the country.
4. It would lead to a decline in the Peso, making the debt
burden (which is largely denominated in dollars) more
onerous.
16
External Debt in Philippines decreased to 58.506
Billion USD in 2013 from 60.337 Billion USD in 2012.
External Debt in Philippines averaged 42.42706 Billion
USD from 1981 until 2013, reaching an all time high of
60.442 USD Million in 2011 and a record low of 20.893
Billion USD in 1981. External Debt in Philippines is
reported by the Bangko Sentral Ng Pilipinas.
The Gross Domestic Product (GDP) in Philippines was
worth 272.02 billion US dollars in 2013. GDP in the
Philippines averaged 60.12 USD Billion from 1960
until 2013, reaching an all time high of 272.02 USD
Billion in 2013 and a record low of 4.40 USD Billion
in 1962. GDP in Philippines is reported by the World
Bank.
The Gross Domestic Product (GDP) in Philippines
expanded 5.30 percent in the third quarter of 2014 over
the same quarter of the previous year. GDP Annual
Growth Rate in Philippines averaged 5.02 Percent from
2001 until 2014, reaching an all time high of 8.90 Percent
in the second quarter of 2010 and a record low of 0.50
Percent in the third quarter of 2009. GDP Annual Growth
Rate in Philippines is reported by the Philippine National
Statistical Coordination Board.
Philippines recorded a Government Debt to GDP of
49.20 percent of the country's Gross Domestic
Product in 2013. Government Debt To GDP in
Philippines averaged 58.35 Percent from 1990 until
2013, reaching an all time high of 74.90 Percent in
1993 and a record low of 49.20 Percent in 2013.
Government Debt To GDP in Philippines is reported by
the Bureau of the Treasury, Philippines.
Generally, Government debt as a percent of GDP is
used by investors to measure a country ability to make
future payments on its debt, thus affecting the country
borrowing costs and government bond yields.
The Philippines recorded a Government Budget
deficit equal to 1.40 percent of the country's Gross
Domestic Product in 2013. Government Budget in
Philippines averaged -2.17 Percent of GDP from 1988
until 2013, reaching an all time high of 1 Percent of
GDP in 1994 and a record low of -5.30 Percent of GDP
in 2002. Government Budget in Philippines is
reported by the Department of Finance of the
Philippine Republic.
Government Budget is an itemized accounting of the
payments received by government (taxes and other
fees) and the payments made by government
(purchases and transfer payments). A budget deficit
occurs when an government spends more money
than it takes in. The opposite of a budget deficit is a
budget surplus.
HOW DOES THE PHILIPPINE GOVERNMENT PAY ITS
EXTERNAL DEBT?

Debt Service- The cash that is required for a particular

time period to cover the repayment of interest and
principal on a debt. Debt service is often calculated on
a yearly basis.

Debt burden is the cost of servicing the public debt.

Most of this debt burden is a really transfer from one
generation to another.
Financing the 2015 expenditure plan: Macroeconomic
environment
Fiscal program
The Aquino administration commits to maintaining the
budget deficit at 2% of GDP, which is equivalent to P283.7
billion. This will allow the administration to continue
pursuing reforms to increase revenue collections without
burdening the people with additional debt.
Of the P2.606 trillion expenditure program:
Social services: 37.1% = P967.9 billion
Economic services: 26.9% = P700.2 billion
General public services: 16.2% = P423.1 billion
Defense: 4.4% = P115.5 billion
Debt burden: 15.3% = P399.4 billion
Borrowings
The projected deficit for 2015 is P283.7 billion. To cover
this gap between disbursements and revenues, the
administration will borrow P700.8 billion, reducing the
country’s debt stock while also helping develop
domestic capital markets.
The goal is to raise 86.3% of the borrowing program
(P605.1 billion) through the issuance of treasury bills
and bonds to local investors. The remaining 13.7%
(P95.7 billion) will be sourced externally through
concessional loans from development partners and the
issuance of dollar bonds in global capital markets.
Good News!
The Philippines continues to pare down its foreign
debt servicing to $1.538 billion as of this year or
37.32 percent less than the $2.454 billion in the
same period last year, the Bangko Sentral ng
Pilipinas (BSP) reported.
Estimated Calculation for Debt Burden for both
foreign and domestic debts of the Philippines:

Based on the 2015 Annual Budget

Debt Burden - P399.4 billion
Domestic Debt Increase per annum resulting from
budget deficit- P700.8 billion (That if the
government can stabilize the budget deficit of 2%
out of the total GDP.
Foreign Debt Service- $3.09 Billion ( P137.63 Billion)
(In billion of peso)
Budget 2015 (Debt Burden)- P399.4
Less: Domestic Debt- P700.8
(This is only the incremental debt per annum)
Foreign Debt- P137.63
Total Deficit (P439.03)

Where will the government get funds to cover the annual deficit
of P439.03 for the debt service? If this will continue after 10
years or the Philippines will most likely be one of the countries
experiencing a debt crisis!