2. My presentation today is influenced
by my recent research work on
• Pension and retirement systems, which allowed me
to analyze recent trends in the labor force and the
private sector and how they were impacted by the
covid crisis
• Determinants of cross-country growth amidst the
covid crisis and simulations of debt sustainability
• But it is also influenced by rapidly developing
recent events in the domestic and global economy.
3. • Both output and potential output fell during the crisis, but
has recovered somewhat, but not yet to pre-pandemic
levels. Especially on per capita basis.
4. Economy is just now beginning to recover
from the crisis
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2018 2019 2020 2021 2022
Gross Domestic Product
5. Per capita real GDP is still below
pre-pandemic levels
140,000
145,000
150,000
155,000
160,000
165,000
170,000
175,000
180,000
185,000
2016 2017 2018 2019 2020 2021
Per Capita Gross Domestic Product
9. Study 1: Initial analysis of the
pension system
• Sample panel data from Q12018 to Q42020 with a
limited number of variables from SSS across 28,846
registered firms and across quarters covering the
increase in the contribution rate in 2019 and the
start of the lockdown in 2020.
• Provides a good view of the effects on firms of a
large liquidity shock and a smaller shock
(contribution rate increase). Many firms and
employees stopped contributions due to the
former.
10. General results of panel regressions
using SSS data (based on coefficients)
11. Recent study on SSS
• Both output and potential output are determined
by labor income or (potential) hours worked. Part
of the problem can be seen in my recent analysis of
SSS during the pandemic. Regressions and statistics
suggest that many establishments and workers
stopped complying. This reflected the large liquidity
shock brought about by the covid crisis.
12. Recent study on SSS
• Small firms (by employee count) stopped complying more
intensively than did large firms, but regression analysis
suggests that controlling for other effects, compliance by
large firms’ employees tended to go down more than
smaller firms’. The evidence suggests that many small firms
registered with SSS closed during the pandemic or stopped
complying (or both), but large firms may have also laid off
employees in larger overall numbers.
13. Recent study on SSS
• The statistics also suggests that lower wage workers
stopped complying more than higher wage workers
(regardless of firm size). So likely that lower wage
and less skilled workers may have also been laid off
more than higher skilled workers. Some of them
may be structurally unemployed.
14. Structural Unemployment
• In light of the crisis, structural unemployment
seems to have gone up. This has happened due to
structural changes in the economy, reflecting the
fall of industries hardest hit by the covid and the
rise of other industries that benefitted from it and
frictions in allocating labor and capital across these.
17. Need to study structural changes
carefully
• Although LFPR fell at the height of the lockdowns, it
has rebounded; may suggest that people who once
opted out of the labor force have tended to come
back
• Could also reflect increase in young people opting
to find work rather than go to school (hopefully
not)
18. TFP also likely declined due to the
pandemic and more recent factors
• The pandemic impaired the global efficiency of combining factors of production.
• Could also be the case that low productivity firms have not exited due to support
from the government. But a redeeming feature in RP is that firms seem to
have retained the more productive workers.
• Ongoing and future supply chain disruptions increasingly lead to a less efficient
reallocation of resources. This is expected to continue as the world becomes
more fragmented geo-politically. Adjustments to the new remote working
remote working systems are also costly.
• On the positive side, progress with automation and digitalization could
digitalization could improve efficiency.
19. Other issues
• Structural changes can also emanate from reluctance to go
face to face (purchase goods and services or to work),
online sales, payments and delivery modes have changed,
digitalization, work from home, etc.
• Meanwhile, public schools have taken very long to reopen.
This has threatened to reduce productivity, wages and
competitiveness in the long run
20. Credit constraints tightened
• On the firm side, smaller firms that would have
obtained credit pre-pandemic have been
constrained since the pandemic.
• They are now more likely to remain constrained
given the current economic environment.
23. Determining if a fiscal boost is
possible
• If output/income is still low at this time
relative to prior to the pandemic this
situation may persist, can something be
done to stimulate the economy?
• Can a fiscal stimulus can be done? If it is done, it
must be done within the context of what is
currently feasible and will not reinforce existing
fragilities.
24. Determining if a fiscal boost is
possible
• I estimate the pre-covid output gap using the HP Filter, and the
covid-lowered output gap and, having measured the lowered gap,
look for a stimulus that can allow us to generate additional
income in the next few years to close it.
• We exploit the multiplier concept in Macroeconomics. A peso of
government spending will generate an additional (multiple) x
pesos of income.
• I estimate the multiplier using a Structural Vector Autoregression
Model (SVAR). Having estimated it, I then divide the covid gap by
the estimated multiplier to obtain the one-time fiscal expenditure
“required” to close it.
25. Using the multiplier, estimate value of
government expenditures that can be
incurred to close covid19 potential GDP gap
• If the “covid”-affected output gap is n pesos and actual
output is x pesos, one could conceivably aim to
eliminate this gap immediately by spending the gap
divided by the multiplier.
• But the resulting spending figure is too large relative to
the capacity of the country.
• Given the multiplier, look for combinations of fiscal
spending and multiplier that will yield feasible and
financeable output-gap closing primary balance and
debt outcomes
26. Estimate the Value of the Fiscal Multiplier
• Use Structural Vector Autoregression method of
Blanchard and Perotti (2002)
• The SVAR output allows one to estimate multipliers.
The impact multiplier is estimated from structural
impulse responses recovered from the model. I
estimate the value of the impact multiplier to be
approximately 0.49.
• The immediate increase in real output from a one peso
increase in government spending is about half a peso.
(Compare to other estimates)
29. Use the multiplier to determine
what is feasible
• Using the multiplier, estimate the value of additional
government expenditures that must be incurred to close
the covid19 potential GDP gap (P 528 B).
• Look for combinations of fiscal spending and multiplier
that will stimulate growth yet yield feasible primary
balance and debt outcomes.
• Primary balance (PB) = excludes interest payments
from expenditure. It is an indicator of fiscal effort, since
interest payments are predetermined by the size of
previous deficits (IMF).
30. Use the multiplier to determine
what is feasible
• To close the covid gap of P 528 B given the
multiplier of 0.49, one “must” spend P 1.093 T one
time
31. Criterion: Analyze impact of proposed
stimulus on debt sustainability
• Adopt a fiscal criterion to guide actions for the
future. Determine the debt-stabilizing primary
balance (DSPB) level that is consistent with
feasibly adding productive expenditures to help
the country recover yet keep the country’s debt
from growing too much.
• This is a solvency criterion. Determine the PB
required to stop debt from growing.
32. Significance of DSPB
• DSPB can take a range of values depending on
economic conditions. If it is < 0, government can afford
to run primary deficits < DSPB and still stabilize growth
of debt. It has more fiscal space and can afford to
engineer some sort of stimulus.
• If it is > 0, government has to run primary surpluses to
stop debt from growing and government is more
fiscally constrained.
• The greater is the DSPB for a given set of economic
circumstances, the more fiscally constrained is
government.
35. DSPB a few months ago at the
height of the pandemic
• Several months ago, the economic environment and figures for
real growth, real interest rates, etc., suggested that the
government needed to run primary surpluses of around close to
one percent of GDP to stabilize the growth of its debt.
• This may have required a major tax reform and expenditure cuts
• The government had been running primary deficits since Pres.
Duterte assumed office. But that stopped during the covid crisis
• Simulations suggest that the easiest way to stop debt from rising
is for the country’s GDP to just grow. The more rapid the growth,
the more the increase in debt can be contained.
36. Determine the feasible stimulus
• A one-time stimulus (P 1.093 T) may not be feasible; too
large.
• Will not stabilize growth of debt.
• It is also not feasible to raise additional resources for it
• So, try spreading it over several years. Maybe sources can
be found to finance more modest amounts that will help
stabilize our debt.
• Note that the 6 year “required” annual stimulus to close the
gap is already around 0.98 percent of 2021 GDP. Can
resources be found to finance this?
37. Check
• Is an annual stimulus of around 0.98 to 1 percent of
GDP too large for the country?
• According to the debt-stabilizing primary balance model
criterion, a 1 pct p.a. stimulus will “require” that the
country run primary balances of around – 1.0 percent.
The country can afford to run a negative PB and still
stabilize debt growth (at the moment).
• Notwithstanding this, can the country feasibly generate
this amount in additional fiscal resources each year from
new taxes, admin reform and other untapped sources?
38. Check
• It may not be feasible to raise this amount since it
already approaches the combined revenues raised
from TRAIN and Sin Taxes in 2021. So stimulus also
depends on willingness to impose new taxes and
capacity to tap untapped sources.
• A more conservative approach would be to
consider around HALF of the “required” fiscal
stimulus, 0.5 percent of GDP or about a P 100
million per annum. This should be easier to achieve
through a mix of fiscal reforms.
39. Determine the feasible stimulus
• Use DSPB model to determine what annual
expenditure is consistent with yielding DSPB close
to zero or slightly negative
• Given that DSPB is still negative when the stimulus
is 0.5 percent of GDP, it could be a feasible size of
expenditure (close to P 100 B per year). Aim for this
or slightly less.
40. Feasible stimulus
• A modest stimulus of about half a percent of GDP per annum may
be feasible – assuming current conditions persist, the country can
run a small primary deficit and still stabilize debt growth ceteris
paribus (DSPB with this stimulus is still slightly negative, -1.54 %)
41. Feasible stimulus
• The actual primary balance averaged less than -5 percent of GDP in
2021 and was -3.4 percent of GDP when last measured by BSP in March.
• Given these, the 6 year stimulus expenditure path looks feasible since
the DSPB associated with this (-1.54 %) is not to far from the actual PB.
• So stimulus can be about half a percentage point of GDP at most.
Requires at most P 100 B resources each year – roughly half the amount
generated by TRAIN, sin taxes annually according to recent press release
of DoF.
• Look for a combination of admin and tax reforms that can yield this
annually.
42. Suggested strategy
• Fiscal space may still be available because of the low real interest rates
and low levels of external debt. We may be able to borrow more for
productive expenditures, but monitor potential increases in interest rates
as the country borrows more with steepening yield curves.
• Risks have been elevated due to covid and supply chain disruptions and
also higher inflation, which a fiscal boost can also boost.
• It may be best to adopt conservative economic strategy – spend for
enhancing productivity and future growth; avoid fiscally risky
programs and gambles. Save for a rainy day, rebuild fiscal space lost
during the pandemic. May be more aggressive as more information
becomes available about the economic environment.
43. Suggestions for hitting new
growth targets
• Given the current environment, these measures can
come in the way of:
• A targeted stimulus, targeted to activities that increase
productivity the most and help crisis-affected sectors
• Measures to enhance our resiliency to future crises
• Calibrated combination of all
• Limit the stimulus to at most 0.5 percent of GDP in light
of recent growth and greater values and uncertainty
regarding values determining the debt-stabilizing
primary balance. Also limit stimulus to what can
feasibly be financed by changes in tax laws and admin
reforms.
44. Suggestions for hitting new
growth targets
• The challenge for government is to spend scarce resources
intelligently while also rebuilding fiscal space by raising
additional resources at least cost and by ensuring debt is
controlled.
• Based on the debt arithmetic presented earlier, the most
efficient way to contain the growth of debt is for a country to
pursue policies that will allow it to continue to restart and
sustain economic growth so as to enlarge and broaden the tax
base. Economic growth ensures greater demand for
sovereign bonds, which will also lower interest rates and
support existing credit ratings. It also attracts foreign and
domestic investment, which will support aggregate demand.
45. Combination of policies needed
• Medium- to long-run – to raise potential output
• Need to catch up and upskill or reskill, since jobs in the near
future are only going to be much more technology-driven;
mechanization is the least utilized of the RCEF funding channels
• Stimulate R and D, especially in manufacturing
• Short-run – to support vulnerable sectors, firms and workers
given current headwinds
• While pursuing mix of revenue-raising, cost saving reforms
46. Suggestions in the Short-Run
• Make up for lost output through fiscal stimulus targeted to
specific expenditures
• Determine a spending path that will help us recover lost
output in a reasonable amount of time, yet be affordable
and stimulate a level of growth that will help relax the
government budget constraint in the long-run
• Look for values of annual expenditures that will ONLY
increase the debt-stabilizing balance modestly. Also
consider more targeted spending targeted to health sector
and other growth and productivity-enhancing activities
since they can stimulate growth more aggressively too.
47. Medium- to long-run downside
risks for potential output
• Large cohort of students may have suffered from
inability to bring classes back to normal, lack of
equipment to go online or lack of access to reliable
internet. This will lower their future productivity
and wage earnings
• Need to help them catch up
48. Productivity-enhancing
expenditures
• To aid schools reopen
• To improve access to the internet
• For retraining workers; improving adaptability to post-
pandemic economic structure
• Identify people who chose to drop out of school during the
pandemic and chose to enter the workforce; retrain them
• Eliminating gaps in supply chains of essential goods
• To enhance hospitals and healthcare; further improve
COVID resilience nationwide
• To aid SMEs adapt to new economic structure
• Look to improve the spending of RCEF to boost productivity
49. Productivity-enhancing
expenditures
• Encourage interest in math and science among youth
• Productivity-enhancing infra investment (include for
agri sector)
• Boosting honest to goodness R and D in the country to
aid manufacturing (making new products and making
actual products better/faster)
• Helping firms find alternative suppliers, look for new
lower cost, same or similar quality input suppliers
50. Fiscal and other reforms
• Look for wins in tax administration, tax reform
• Look to raise a quarter to half a percent of GDP each year
• The current proposal for excise taxes and digital taxes looks good
• Also consider remaining tax reforms of previous administration
• PPP is an option, but need to reduce red tape and
investment risk premiums, political risk
• Look for ways to strengthen SSS after crisis; improve level of
funding and compliance
51. Fiscal
• Revisit bills that seek to reform military and uniformed
personnel (MUP) pensions (expenditure-reducing reform).
Raising finances doesn’t always have to be about raising
taxes. It can also be saving. Current annual expenditures to
fund MUP pensions are more than half a percent of GDP.
• Revisit pending bills in Congress that tax digital transactions
• Strengthen the BIR’s capacity to tax digital transactions
• Consider property tax reforms
52. Public health
• Budget for future mass vaccinations and boosters, look to
produce vaccines within country
• Improve spending efficiency and strengthen/increase health
expenditures. Reduce vulnerability of country vs future infection
surges so as to improve resiliency of real sector and support future
growth.
• Avoid future surges and economically costly mobility restrictions
• Also protect country vs animal based diseases
53. Look for ways to improve
government effectiveness
• Look to strengthen governance quality
• The World Bank has an index of Government
Effectiveness. The government effectiveness index is an
index elaborated by the World Bank Group which
measures the quality of public services, civil service,
policy formulation, policy implementation and
credibility of a government's commitment to raise
these qualities or keeping them high.
• This will impair/is imparing our competitiveness and
reduce our growth
54. RP has sunk to the lowest index value
among the large ASEAN economies
55. Reduce investment risk premium
in the economy
• WACC is still high in many important sectors like
energy, due to political risk
• Improve governance; will help all investments
• Agree with proposal to pursue more PPP, but these
are long term projects
56. Financial development contributes to
the growth rate of the economy
• Develop the sector further; recently found that growth of pension
assets stimulates real economic growth across countries
• Consider pending bills to strengthen pension savings, increase
pool of long-run savings to finance longer-term projects (Capital
Markets Development Act)
• Harness the potential of Fintech firms in the provision of credit
and other financial services. Fintech can serve SME sector and
also alleviate existing credit constraints
• Fintechs will also strengthen payment and remittance systems
and also settlement systems
57. Agriculture
• Continue reviewing the implementation of RTL, study
downstream parts of the rice market, including the
utilization of the RCEF (can the PCC study the sector more
closely?)
• Review policies for land reform, land use and conversion.
Studies show that fragmentation of land discourages
mechanization and undermines productivity.
• Continue to look for ways to climate proof the agri sector
• Studies cite the need for NFA to implement its buffer stock
function
61. Recent Economic Developments
The Real Economy
• Still quite fragile
• Vulnerable to surges; state of public health
• Firms, households need to adapt to new realities
(e.g., hybrid activities, new payment systems,
digital technologies, etc.)
62. Philippine performance during
height of covid
• Real GDP declined by 9.57 percent in 2020
• Unemployment of factors of production likely caused potential output to also
fall by a large amount
• Government was compelled to issue additional debt because of the need to
finance assistance packages and stimulus spending
• Deficit widened, so did debt to GDP ratio (now at around 60 percent of GDP)
63. The Real Economy
• It’s 2022, but it still looks like the economy is still just
growing on base effects
• We are still not at pre-pandemic levels in terms of real per
capita incomes
• Need to find employment for those who are still remain
unemployed; firms still fragile, delayed closures are still
occurring
69. Elsewhere
• Central banks around the world are tightening at
the same time; large reversals of QE
• It looks like elevated inflation will stick for a while
• Forecast global growth has slowed down; will affect
global labor demand; may drive foreign firms to
outsource and hire RP labor to control costs
• Uncertainty is high
70. Also….
• Higher interest rates globally
• Weakening global demand (hopefully soft landing)
• Vulnerable sectors – SMEs, poorer households and
displaced students, lower-skilled workers,
• Mandanas ruling will also limit the extent to which
national government can provide a stimulus
71. Supply shocks
• Supply chain disruptions are affecting allocation of
capital and labor, also raising prices. Due to covid,
war.
• Loss of original access to inputs affects firm affect
costs and productivity
• Loss of markets for firm output
72. Potential output fell in a large way
but likely has also partially recovered
• Likely, our actual real GDP is also below lowered
potential GDP. Also, our output gap may also be
larger than the pre-pandemic output gap.
• Opening up the economy further has certainly
driven growth higher
• There could be complementary measures to further
facilitate growth in the short-run
73. Potential Output
• The amount of output that the economy can
produce when using its resources at normal rates
(Romer and Romer).
• Determinants of Potential Output:
• Labor
• Capital
• Technology
74. A look at L and K
• There may be structural changes taking place affecting
the labor force, some temporary and reversible,
adaptable, some may be more permanent
• Higher skilled workers seem to be adapting quickly,
they never lost their jobs, some have even found new
ones, hired by foreign employers but WFH here with
high salaries.
• The lower-skilled workers may be having a hard time
looking for work
75. Factors that reduce potential
output (Labor)
• During lockdowns and beyond, people became unemployed
and/or opted out of the labor force; potential output is
reduced if people do not return to the labor force.
• Students suffer from school closures because their
educational attainments are reduced. Labor inputs would be
reduced in the long run, which would reduce potential output
until the affected cohort retires.
• Business closures and early retirements also affect labor
supply. To the extent that businesses remain closed and
capital (and labor) have a difficult time being reallocated,
potential output will remain at a lower value.
76. Other factors affecting potential
output
• Changes in economic structure recently may also affect
potential output
• The extent to which Filipino workers and businesses face
frictions in switching jobs, sectors, industries, upskilling,
reskilling,
• Mismatches between demand for and supply of labor in
certain regions
• Flexibility of labor and capital is important, it can
sustain the level of potential employment and hence
potential output. Inflexibility can reduce potential
output
77. Other effects of the crisis
• Moreover, not only did potential output fall, our population
also increased, so potential output per person also fell
• Fortunately, actual output has recovered recently, so there’s
less to make up for.
• However, fiscal constraints have tightened as the peso has
depreciated and interest rates have risen
• The government recently announced growth targets, but
with potential and actual headwinds, may need additional
source of growth
78. Other longer term impacts of
Covid crisis
• Negative long-term implications of Covid-19 could
still arise from adverse sectoral developments:
• Underinvestment due to greater uncertainty;
• delayed bankruptcies and business closures;
• frictions in the reallocation of labor and capital.
• Lasting damage to the labor market may arise from
hysteresis effects if people remain out of work for
longer, lose their skills or become discouraged from
looking for work. This will apply most to lower income
workers displaced by the covid crisis.
79. Other longer term impacts of
Covid crisis
• The pandemic may have also triggered profound
changes in the labor force that bear watching
• Preference for WFH. This can be driven by several
factors, including the continuing avoidance of face to
face classes. Parents may be shifting to service jobs
based at home because that is where the children are
and also out of residual pandemic fear.
• Preference for WFH can also be driven by desire to save
on travel and food costs
80. Other motivations for this
presentation
• Apart from current economic conditions
• Some of my recent studies
• Study 1: Initial analysis of the pension system
• Study 2: Determinants of cross-country growth during
covid crisis: Ran cross-country regressions for this
81. Study 1: Initial analysis of the
pension system
• Sample data on a limited number of variables from
SSS across 28,846 registered firms and across
quarters covering the increase in the contribution
rate in 2019 and the start of the lockdown in 2020.
• Provides a good view of the effects on firms of a
large liquidity shock and a smaller shock
(contribution rate increase). Many firms and
employees stopped contributions due to the
former.
82. General results of panel regressions
using SSS data (based on coefficients)
83. Initial analysis of the pension
system
• Also, the average salary of workers contributing to SSS went
up post-pandemic. This means lower wage workers
probably tended to be more susceptible to layoffs and social
benefit cut offs than higher paid workers. This also suggests
that crisis-affected firms also tended to lay off relatively
lower-skilled workers more intensively than higher-skilled
workers in response to covid.
• I say probably since I was just looking at SSS compliance, not
actual layoffs.
• So, while the downside risk to potential output is reduced,
low skill, low wage workers were very vulnerable
84. Review of SSS data
• Suggests that during the pandemic, firms tended to
retain more highly paid and more highly skilled workers
and lay off the less productive ones
• Also small firms tended to be more adversely affected
than large firms (expected) – they tended to be more
prone to stop compliance
• So we need to see what happened to the lower skilled
workers. Need to ensure they stay in the labor force
and get jobs. We also need to address SME issues.
85. Observations from data during
the pandemic: SSS data
• Firms in the primary sectors were more vulnerable
(to the liquidity shock, to losing workers) than
service firms
86. Other observations from the data
during the pandemic
• Drop in labor force participation rate during
lockdowns; slight increase in the same rate recently
(need to check if due to more workers looking to
augment household income or dropouts who opt
into the labor force)
• High-skilled workers continued to be mobile as they
are able to find jobs with foreign employers (US
growth effect) that allow them to work in RP. But
they can be at risk if US goes into recession.
87. Recent analysis of the pension
system
• A further analysis across all types of SSS contributors
(including those not employed by firms) suggests that
compliance appears to not have significantly increased
since the pandemic began, so there still remain some
structural impediments to restoring the kind of
employment conditions we had pre-pandemic that
encouraged healthier contributions.
• Firms could still be very liquidity-constrained at the
moment and very fragile. Especially SMEs and
especially since banks seem to have only started re-
lending. So we still may observe delayed bankruptcies
now.
88. Study 2: Determinants of cross-country growth
during covid crisis: Ran cross-country
regressions to determine
• Factors that explain economic growth within the pandemic period (2020-2021)
• Case rates, Health expenditure to GDP ratio
• Factors that determine the duration of the recession
• Case rates, Oxford stringency index x high income dummy, Vaccination rates * Asia dummy
• Factors that explain economic growth in 2021 thus far
• Oxford stringency index, Stimulus to GDP ratio, Stimulus to GDP ratio squared, Vaccination
rate, Africa and Latin America dummies, vaccination rate * income level
• OLS on cross-country data used for the most part
89. Lessons Learned from Cross-
Country Regression Outcomes
• Nonlinearities observed. Size of fiscal stimulus matters for stimulating
growth throughout the pandemic, but beyond some threshold size, its
effect on short-run economic growth is negative
• Spending on health care matters
• Inability to reduce case rates prolongs recessions; ability to manage and
contain virus leads to least economic disruptions
• Indiscriminate and long lockdowns reduced growth across countries and
prolonged recessions in high income countries
• High vaccination rates can stimulate growth, especially in higher income
countries; higher vaccination rates shortened duration of recessions in
Asian countries. So need to sustain boosting effort.
90. Recent events suggest a big domestic
stimulus is no longer feasible
• The Philippines had one of the smaller stimuli packages
during the covid crisis, but the time for a big stimulus
has passed
• Recent big movements in factors related to debt
sustainability (exchange rate, interest rates, the level of
the debt itself)
• Spike in global inflation driven by supply side sources
• Possible recession in other countries
91. Given all that is and went on…
• Next slides aim to provide guidance to new
administration
• What can it do to sustain growth?
• Is there still a role for government spending to
promote growth? If yes, how can it finance it?
92. What is a reasonable stimulus?
Suggest two criteria to estimate this.
(1) The stimulus could allow the country to make up for lost output/income
(2) The stimulus should be reasonable when analyzed within a debt-
sustainability framework
• The first criterion requires us to estimate the fiscal multiplier of government
expenditures and work backwards to determine the annual fiscal
expenditures that will allow us to make up for lost income
• The second criterion requires one to vet whether the annual expenditures
that will allow us to make up for lost income will not destabilize the growth
of debt.
• One last criterion is to determine whether these annual expenditures can
be financed through taxes or other means.
93. Suggested approach to determining appropriate
expenditure policy for sustainable recovery
and hitting growth targets
• Determine the basis for fiscal expenditures for recovery: where feasible,
make up part of the difference between real GDP in 2019 and current
potential GDP (= the covid19 potential GDP gap).
• Estimate the fiscal multiplier using the SVAR method of Blanchard and
Perotti (2002)
• Estimate how potential output was reduced by the covid19 pandemic crisis.
• Using the multiplier, estimate the value of additional government
expenditures that must be incurred to close the covid19 potential GDP gap.
• Look for combinations of fiscal spending and multiplier that will stimulate
growth yet yield feasible primary balance and debt outcomes.
94. Start with second criterion:
Analyze debt sustainability
• Adopt a fiscal criterion to guide actions for the
future. Determine the debt-stabilizing primary
balance (DSPB) level that is consistent with
feasibly adding productive expenditures to help
the country recover yet keep the country’s debt
from growing too much.
• This is a solvency criterion. Determine the primary
balance required to stop debt from growing.
95. Significance of DSPB
• DSPB can take a range of values depending on
economic conditions. If it is < 0, government can
afford to run deficits and still stabilize growth of
debt. It has more fiscal space and can afford to
engineer some sort of stimulus.
• If it is > 0, government has to run primary surpluses
to stop debt from growing and government is more
fiscally constrained.
98. DSPB a few months ago at the
height of the pandemic
• Several months ago, the economic environment and figures for
real growth, real interest rates, etc., suggested that the
government needed to run primary surpluses of around close to
one percent of GDP to stabilize the growth of its debt.
• This may have required a major tax reform and expenditure cuts
• The government had been running primary deficits since Pres.
Duterte assumed office. But that stopped during the covid crisis
• Simulations suggest that the easiest way to stop debt from rising
is for the country’s GDP to just grow. The more rapid the growth,
the more the increase in debt can be contained.
100. Estimate the “Covid-Lowered” Output
Gap and aim to make up for it
• After measuring the output gap and the fiscal multiplier, one
can then estimate the rough size of a stimulus that can
reasonably allow the country to approach an adjusted value
of potential output.
• Starting from the equation: Spending x fiscal multiplier
= output gap, solve for the spending variable. (Estimated)
Output gap / (estimated) fiscal multiplier = estimated
maximum fiscal spending “required” to achieve
stabilization
• So need an estimate of the multiplier
101. Estimate the Value of the Fiscal Multiplier
• Use Structural Vector Autoregression method of
Blanchard and Perotti (2002)
• The SVAR output allows one to estimate multipliers.
The impact multiplier is estimated from structural
impulse responses recovered from the model. The
impact multiplier is approximately 0.49.
• The immediate increase in real output from a one peso
increase in government spending is about half a peso.
(Compare to other estimates)
103. Using the multiplier, estimate value of
government expenditures that can be
incurred to close covid19 potential GDP gap
• If the “covid”-affected output gap is n pesos and actual
output is x pesos, one could conceivably aim to
eliminate this gap immediately by spending the gap
times 0.49.
• But the resulting spending figure is too large relative to
the capacity of the country.
• Given the multiplier, look for combinations of fiscal
spending and multiplier that will yield feasible and
financeable output-gap closing primary balance and
debt outcomes
105. • To close the covid gap of P 528 B given the
multiplier of 0.49, one can spend P 1.093 T one
time
106. Determine the feasible stimulus
• A one-time stimulus (P 1.093 T) may not be feasible; too
large.
• Will not stabilize growth of debt.
• It is also not feasible to raise additional resources for it
• So, try spreading it over several years. Maybe sources can
be found to finance more modest amounts that will help
stabilize our debt.
• Note that the 6 year “required” annual stimulus to close the
gap is already around 0.98 percent of 2021 GDP. Can
resources be found to finance this?
107. Check
• Is an annual stimulus of around 0.98 - 1 percent of
GDP too large for the country?
• According to the debt-stabilizing primary balance
criteria, a 1 pct p.a. stimulus It will “require” that the
country run primary balances of around – 1.0 percent.
The country can afford to run a negative PB and still
stabilize debt growth.
• But can the country feasibly generate this amount in
additional fiscal resources each year from new taxes,
admin reform and other untapped sources?
108. • It may not be feasible to raise this amount since it
already approaches the combined revenues raised
from TRAIN and Sin Taxes in 2021
• A more conservative approach would be to
consider around HALF of the “required” fiscal
stimulus, 0.5 percent of GDP or about a P 100
million per annum. This should be easier to achieve
through a mix of fiscal reforms.
109. Determine the feasible stimulus
• Use DSPB model to determine what annual
expenditure is consistent with yielding DSPB close
to zero or slightly negative
• Given that DSPB is still negative when the stimulus
is 0.5 percent of GDP, it could be a feasible size of
expenditure (close to P 100 B per year). Aim for this
or slightly less.
110. Feasible stimulus
• A modest stimulus of about half a percent of GDP per annum may
be feasible – assuming current conditions persist, the country can
run a small primary deficit and still stabilize debt growth ceteris
paribus (DSPB with this stimulus is still slightly negative, -1.54 %)
111. Feasible stimulus
• The primary balance averaged less than -5 percent of GDP in 2021 and
was -3.4 percent of GDP when last measured by BSP in March.
• Given these, the 5 or 6 year stimulus expenditure path looks feasible
since the DSPB associated with this (-1.54 %) is not to far from the
actual PB.
• So stimulus can be about half a percentage point of GDP at most.
Requires at most P 100 B resources each year – roughly half the amount
generated by TRAIN, sin taxes annually according to recent press release
of DoF.
• Look for a combination of admin and tax reforms that can yield this
annually.
112.
113. Options for new admin
• If the country is to go closer to lowered potential output, we have
several options
• Be satisfied with the current growth trajectory and live with what we
have
• Undertake the feasible stimulus spending with at an affordable level
with sustainable funding sources to facilitate growth in the next few
years
• Stimulus allows us to potentially achieve higher growth rates and
get closer to even just the lowered potential output
• But will still require additional fiscal resources
114. Characteristics of the debt-
stabilizing primary balance (DSPB)
• Debt stabilizing primary balance is sensitive to the real interest
rate; a few basis points upward movement in real interest rates
can have a significant impact in tightening the budget constraint
(can raise the debt stabilizing primary surplus significantly).
• It is also sensitive to the depreciation rate of the peso and off-
balance sheet expenditures of government. Fortunately, DSPB is
also sensitive to real GDP growth. Given current conditions, one
needs to aim for modest consistent growth to relax the budget
constraint
• So, one needs to spend, but be very deliberate about doing it
and be somewhat conservative now given the risks and
uncertainty over the variables that determine DSPB
115. Factors that will keep debt rising
(fiscal risk factors)
• Increases in domestic and foreign real interest rates
• Must see how additional borrowings affect yields on
Philippine instruments (increasing bond supplies can lead to
falls in bond prices)
• Sharp depreciation of the Peso
• More lockdowns in the future and other factors that
will slow down/stall Philippine growth – inability to
contain future outbreaks
116. Other risks
• Primary risks in the Philippines now are real (low GDP
growth, weather disturbances, disasters), fiscal (adverse
interest rate, exchange rate or off-balance sheet shocks) and
external (foreign interest rates, foreign recessions, external
supply shocks) in nature.
• Rising inflation is another threat that needs to be addressed
117. Suggested strategy
• Fiscal space may still be available because of the low real interest
rates and low levels of external debt. We may be able to borrow
more for productive expenditures, but monitor potential increases
in interest rates as the country borrows more with steepening yield
curves.
• Risks have been elevated due to covid and supply chain
disruptions and also higher inflation
• Best to adopt conservative economic strategy – spend for
enhancing productivity and future growth; avoid fiscally risky
programs and gambles
118. Suggestions for hitting new
growth targets
• Given the current environment, these measures can
come in the way of:
• A targeted stimulus, targeted to activities that increase
productivity the most and help crisis-affected sectors
• Measures to enhance our resiliency to future crises
• Calibrated combination of all
• Limit the stimulus to at most 0.5 percent of GDP in light
of recent growth and greater values and uncertainty
regarding values determining the debt-stabilizing
primary balance. Also limit stimulus to what can
feasibly be financed by changes in tax laws and admin
reforms.
119. Suggestions for hitting new
growth targets
• The challenge for government is to spend scarce resources
intelligently while also rebuilding fiscal space by raising
additional resources at least cost and by ensuring debt is
controlled.
• Based on the debt arithmetic presented earlier, the most
efficient way to contain the growth of debt is for a country to
pursue policies that will allow it to continue to restart and
sustain economic growth so as to enlarge and broaden the tax
base. Economic growth ensures greater demand for
sovereign bonds, which will also lower interest rates and
support existing credit ratings. It also attracts foreign and
domestic investment, which will support aggregate demand.
120. Combination of policies needed
• Medium- to long-run – to raise potential output
• Need to catch up and upskill or reskill, since jobs in the near
future are only going to be much more technology-driven;
mechanization is the least utilized of the RCEF funding channels
• Stimulate R and D, especially in manufacturing
• Short-run – to support vulnerable sectors, firms and workers
given current headwinds
• While pursuing mix of revenue-raising, cost saving reforms
121. Suggestions in the Short-Run
• Make up for lost output through fiscal stimulus targeted to
specific expenditures
• Determine a spending path that will help us recover lost
output in a reasonable amount of time, yet be affordable
and stimulate a level of growth that will help relax the
government budget constraint in the long-run
• Look for values of annual expenditures that will ONLY
increase the debt-stabilizing balance modestly. Also
consider more targeted spending targeted to health sector
and other growth and productivity-enhancing activities
since they can stimulate growth more aggressively too.
122. Medium- to long-run downside
risks for potential output
• Large cohort of students may have suffered from
inability to bring classes back to normal, lack of
equipment to go online or lack of access to reliable
internet. This will lower their future productivity
and wage earnings
• Need to help them catch up
123. Productivity-enhancing
expenditures
• To aid schools reopen
• To improve access to the internet
• For retraining workers; improving adaptability to post-
pandemic economic structure
• Identify people who chose to drop out of school during the
pandemic and chose to enter the workforce; retrain them
• Eliminating gaps in supply chains of essential goods
• To enhance hospitals and healthcare; further improve
COVID resilience nationwide
• To aid SMEs adapt to new economic structure
• Look to improve the spending of RCEF to boost productivity
124. Productivity-enhancing
expenditures
• Encourage interest in math and science among youth
• Productivity-enhancing infra investment (include for
agri sector)
• Boosting honest to goodness R and D in the country to
aid manufacturing (making new products and making
actual products better/faster)
• Helping firms find alternative suppliers, look for new
lower cost, same or similar quality input suppliers
125. Fiscal and other reforms
• Look for wins in tax administration, tax reform
• Look to raise a quarter to half a percent of GDP each year
• The current proposal for excise taxes and digital taxes looks good
• Also consider remaining tax reforms of previous administration
• PPP is an option, but need to reduce red tape and
investment risk premiums, political risk
• Look for ways to strengthen SSS after crisis; improve level of
funding and compliance
126. Fiscal
• Revisit bills that seek to reform military and uniformed
personnel (MUP) pensions (expenditure-reducing
reform)
• Revisit pending bills in Congress that tax digital
transactions
• Strengthen the BIR’s capacity to tax digital transactions
• Consider property tax reforms
127. Public health
• Budget for future mass vaccinations, look to produce vaccines
within country
• Improve spending efficiency and strengthen/increase health
expenditures. Reduce vulnerability of country vs future infection
surges so as to improve resiliency of real sector and support future
growth.
• Avoid future surges and economically costly mobility restrictions
• Also protect country vs animal based diseases
128. Look for ways to improve
government effectiveness
• Look to strengthen governance quality
• The World Bank has an index of Government
Effectiveness. The government effectiveness index is an
index elaborated by the World Bank Group which
measures the quality of public services, civil service,
policy formulation, policy implementation and
credibility of a government's commitment to raise
these qualities or keeping them high.
• This will impair/is imparing our competitiveness and
reduce our growth
129. RP has sunk to the lowest index value
among the large ASEAN economies
130. Reduce investment risk premium
in the economy
• WACC is still high in many important sectors like
energy, due to political risk
• Improve governance; will help all investments
• Agree with proposal to pursue more PPP, but these
are long term projects
131. Financial development contributes to
the growth rate of the economy
• Develop the sector further; recently found that growth of pension
assets stimulates real economic growth across countries
• Consider pending bills to strengthen pension savings, increase
pool of long-run savings to finance longer-term projects (Capital
Markets Development Act)
• Harness the potential of Fintech firms in the provision of credit
and other financial services. Fintech can serve SME sector and
also alleviate existing credit constraints
• Fintechs will also strengthen payment and remittance systems
and also settlement systems
132. Agriculture
• Continue reviewing the implementation of RTL, study
downstream parts of the rice market, including the
utilization of the RCEF (can the PCC study the sector more
closely?)
• Review policies for land reform, land use and conversion.
Studies show that fragmentation of land discourages
mechanization and undermines productivity.
• Continue to look for ways to climate proof the agri sector
• Studies cite the need for NFA to implement its buffer stock
function
