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Final fiscal sustainability up_mla_gil_b

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Final fiscal sustainability up_mla_gil_b

  1. 1. Fiscal Sustainability 9 September 2011 Undersecretary GIL S. BELTRAN DEPARTMENT OF FINANCE 1 Lecture Presentation to the University of the Philippines Manila
  2. 2. I. Theoretical Considerations II. Sustainability Analysis for the Philippines III. Fiscal Program, 2011-2016 IV. Measures in Supporting Programs Outline of Presentation 2
  3. 3. I. Theoretical Considerations 3
  4. 4. <ul><li>“ Sustainable ” : </li></ul><ul><ul><li>an adjective meaning something can be kept up, </li></ul></ul><ul><ul><li>prolonged, borne (Webster) </li></ul></ul><ul><li>use of resources so that such is not depleted or </li></ul><ul><li>damaged in the process </li></ul>Concepts of Fiscal Sustainability 4
  5. 5. <ul><li>are government resources enough or will be enough </li></ul><ul><li>to pay for current and future obligations? </li></ul><ul><li>is the current set of policies (fiscal and monetary)such </li></ul><ul><li>that it will lead to a situation of default in the future if </li></ul><ul><li>maintained indefinitely? </li></ul>Concepts of Fiscal Sustainability (cont.) 5
  6. 6. What is Fiscal Sustainability? <ul><li>government’s ability to pay for current and future </li></ul><ul><li>obligations </li></ul><ul><li>analysis of the linkage between budget and debt </li></ul><ul><li>positions and impact on the macroeconomy </li></ul><ul><li>appropriateness of fiscal policy given current </li></ul><ul><li>budget objectives and outstanding debt position </li></ul>6
  7. 7. Government budget constraint <ul><li>the fundamental building block of fiscal sustainability </li></ul><ul><li>analysis </li></ul>Net issuance of deb t = interest payments – primary balance – seigniorage where : net issuance of debt = gross receipts from new debt issue minus any amortization for the period 7
  8. 8. Primary Balance Primary balance describes the condition where expenditures (excluding interest payment and debt redemption) are covered by revenues excluding bond revenues (deficits). In this condition, general expenditures for the year and the tax or revenue collections for the same year are balanced. 8
  9. 9. Seigniorage In its original sense, Seigniorage refers to the difference between what it costs to produce currency and what that currency’s value is, or its net revenue. If a government is able to produce new money at a lower cost than what the money is valued at, the net revenue is positive and the government has made a profit. If the cost of producing money is greater than the money's worth, the government takes a loss. 9
  10. 10. Debt Dynamics (Flow budget constraint) <ul><li>Changes over time of government debt as illustrated </li></ul><ul><li>in the following equation: </li></ul>B t – B t-1 = I t – X t – (M t – M t-1 )   where: B is quantity of debt I is interest payments X is primary balance M is the stock of monetary base 10
  11. 11. Lifetime budget constraint where : b t-1 = debt stock of the initial period x = real value of primary surplus in future year x = seigniorage revenue in future year B t-1 = (I + r ) – (j+1) (X t+i + O t+i ) 11
  12. 12. Policy Choices <ul><li>The lifetime budget constraint can be met by </li></ul><ul><li>either generating primary surpluses or accumulating </li></ul><ul><li>seigniorage revenues. </li></ul><ul><li>The choice matters as to how the surpluses are </li></ul><ul><li>generated and when the surpluses are generated. </li></ul>12
  13. 13. Financing the Deficit <ul><li>Governments normally do not choose to default. </li></ul><ul><li>However, their choice of how to finance a deficit </li></ul><ul><li>can have different policy implications. </li></ul><ul><li>Generating primary surpluses either through higher </li></ul><ul><li>revenues or restrained spending lessens impact of </li></ul><ul><li>fiscal policy on inflation or price changes. </li></ul><ul><li>Generating seigniorage revenue means printing </li></ul><ul><li>money, and with a weak central bank, this can </li></ul><ul><li>ultimately lead to high inflation. </li></ul>13
  14. 14. Financing the Deficit <ul><li>Governments normally do not choose to default. </li></ul><ul><li>However their choice of how to finance a deficit can </li></ul><ul><li>have different policy implications. </li></ul><ul><li>Generating primary surpluses either through higher </li></ul><ul><li>revenues or restrained spending lessens impact of </li></ul><ul><li>fiscal policy on inflation or price changes. </li></ul><ul><li>Generating seigniorage revenue means printing </li></ul><ul><li>money, and with a weak central bank, this can </li></ul><ul><li>ultimately lead to high inflation. </li></ul>14
  15. 15. II. Sustainability Analysis for the Philippines 15
  16. 16. Basic Fiscal Sustainability Analysis 2006 16 FIXED ASSUMPTIONS % of GDP Initial debt 79.0 Steady state inflation 4.5 Monetary base 14.0 Real Growth Rate (%) Implied Seigniorage (% of GDP) 3 1.0 4 1.1 5 1.2
  17. 17. Implied Sustainable Primary Surplus/(Deficit) with no Seigniorage (% of GDP) 17 Variable assumptions Real interest rate (%) 0.4 1.4 2.4 3.3 4.3 5.3 6.2 Nominal interest rate (%) 5 6 7 8 9 10 11 Real growth rate (%) 3 -1.9 -1.2 -0.5 0.3 1.0 1.7 2.5 4 -2.6 -1.9 -1.2 -0.5 0.2 1.0 1.7 5 -4.1 -3.4 -2.7 -2.0 -1.3 -0.5 0.2
  18. 18. III. Fiscal Program, 2011-2016 18
  19. 19. Medium-Term Fiscal Program (% of GDP) EXPENDITURES DEFICIT REVENUE Tax Effort Actual 19 PRIMARY SURPLUS - 0.2 0.2 0.5 0.8 0.6 0.5 0.3
  20. 20. IV. Measures to Support Programs 20
  21. 21. NG Outstanding Debt P Billion % of GDP … will decrease to 37% of GDP in 2006 Sovereign Credit Ratings: MOODY’S: Upgraded to Ba2 (June 15, 2011) FITCH: Upgraded to BB+ (June 23, 2011) S&P: Upgraded to BB (November 12, 2010) 21 Actual Actual
  22. 22. BIR <ul><ul><ul><ul><li>Under the Aquino administration (July, 2010 to September 1, 2011): </li></ul></ul></ul></ul>BOC DOF Tax Administration Measures <ul><ul><ul><ul><li>Intensify good governance advocacy thru: </li></ul></ul></ul></ul>22
  23. 23. Tax Administration Measures (cont.) <ul><ul><ul><ul><ul><li>Expanded third party information </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>More productive tax audits </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Anti-smuggling campaign </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Improved taxpayer service </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Enhanced training for tax collectors </li></ul></ul></ul></ul></ul>23 <ul><ul><ul><ul><li>Enhance collection efficiences </li></ul></ul></ul></ul>
  24. 24. Administrative reforms <ul><li>Intensify collection of dividends and payables from GOCCs </li></ul><ul><li>Adjust fees and charges to reflect costs of providing services </li></ul><ul><li>Continue privatization program </li></ul>24
  25. 25. <ul><ul><li>Deficit-Neutral (PAYGO) Bill </li></ul></ul><ul><ul><ul><li>Seeks to establish deficit-neutral rules toward responsible financial management, and a burden sharing framework between the executive and legislative branches of government. </li></ul></ul></ul><ul><ul><li>Fiscal Incentives Rationalization (FIR) </li></ul></ul><ul><ul><li>Intended to remove redundant incentives to reduce the fiscal costs and ensure that incentives will be given only to those who need them. </li></ul></ul><ul><ul><li>GOCC Reform </li></ul></ul><ul><ul><ul><li>Seeks to promote financial viability and fiscal discipline in GOCCs and strengthens the role of the State in its governance and management . </li></ul></ul></ul>25 Policy Reforms
  26. 26. <ul><ul><li>Sin Tax Reform </li></ul></ul><ul><ul><ul><li>Raise effective tax rate close to international standards </li></ul></ul></ul><ul><ul><ul><li>Harmonize rate into one specific rate per sin product </li></ul></ul></ul><ul><ul><ul><li>Index specific rate to inflation </li></ul></ul></ul><ul><ul><ul><li>Remove protection of old brand </li></ul></ul></ul>26 Policy Reforms (cont.)
  27. 27. Thank you…

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