Fiscal SustainabilityFiscal Sustainability

9 September 2011

Undersecretary GIL S. BELTRANDEPARTMENT OF FINANCE

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Lecture Presentation to theUniversity of the Philippines Manila

I. Theoretical ConsiderationsI. Theoretical Considerations

II. Sustainability Analysis for the PhilippinesII. Sustainability Analysis for the Philippines

III. Fiscal Program, 2011-2016III. Fiscal Program, 2011-2016

IV. Measures in Supporting ProgramsIV. Measures in Supporting Programs

Outline of PresentationOutline of Presentation

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I. Theoretical ConsiderationsI. Theoretical Considerations

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“ Sustainable” :

an adjective meaning something can be kept up, prolonged, borne (Webster)

use of resources so that such is not depleted or damaged in the process

Concepts of Fiscal SustainabilityConcepts of Fiscal Sustainability

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are government resources enough or will be enough to pay for current and future obligations?

is the current set of policies (fiscal and monetary)such that it will lead to a situation of default in the future if maintained indefinitely?

Concepts of Fiscal Sustainability Concepts of Fiscal Sustainability (cont.)(cont.)

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What is Fiscal Sustainability?What is Fiscal Sustainability?

government’s ability to pay for current and future obligations

analysis of the linkage between budget and debt positions and impact on the macroeconomy

appropriateness of fiscal policy given current budget objectives and outstanding debt position

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Government budget constraintGovernment budget constraint

the fundamental building block of fiscal sustainability analysis

Net issuance of debt = interest payments – primary balance – seigniorage

where: net issuance of debt = gross receipts from new debt issue minus any amortization for the period

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Primary BalancePrimary Balance

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.

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SeigniorageSeigniorage

In its original sense, SeigniorageSeigniorage 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.

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Debt Dynamics (Flow budget constraint)Debt Dynamics (Flow budget constraint)

Changes over time of government debt as illustrated in the following equation:

BBtt – B – Bt-1t-1 = I = It t – X– Xtt – (M – (Mtt – M – Mt-1t-1))

where: BB is quantity of debt

II is interest payments

XX is primary balance

MM is the stock of monetary base

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Lifetime budget constraintLifetime budget constraint

wherewhere: : bbt-1t-1 = debt stock of the initial period

xx = real value of primary surplus in future year

xx = seigniorage revenue in future year

BBt-1t-1 = (I + r = (I + r) – (j+1) ) – (j+1) (X(Xt+it+i + O + Ot+it+i))

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Policy ChoicesPolicy Choices

The lifetime budget constraint can be met by either generating primary surpluses or accumulating seigniorage revenues.

The choice matters as to how the surpluses are generated and when the surpluses are generated.

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Financing the DeficitFinancing the Deficit

Governments normally do not choose to default. However, their choice of how to finance a deficit can have different policy implications.

Generating primary surpluses either through higher revenues or restrained spending lessens impact of fiscal policy on inflation or price changes.

Generating seigniorage revenue means printing money, and with a weak central bank, this can ultimately lead to high inflation.

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Financing the DeficitFinancing the Deficit

Governments normally do not choose to default. However their choice of how to finance a deficit can have different policy implications.

Generating primary surpluses either through higher revenues or restrained spending lessens impact of fiscal policy on inflation or price changes.

Generating seigniorage revenue means printing money, and with a weak central bank, this can ultimately lead to high inflation.

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II. Sustainability Analysis for the PhilippinesII. Sustainability Analysis for the Philippines

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Basic Fiscal Sustainability AnalysisBasic Fiscal Sustainability Analysis20062006

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FIXED ASSUMPTIONSFIXED ASSUMPTIONS % of GDP% of GDP

Initial debt Initial debt 79.079.0

Steady state inflationSteady state inflation 4.54.5

Monetary base Monetary base 14.014.0

Real Growth Rate (%)Real Growth Rate (%) Implied Seigniorage (% of GDP)Implied Seigniorage (% of GDP)

33 1.01.0

44 1.11.1

55 1.21.2

Implied Sustainable Primary Surplus/(Deficit)Implied Sustainable Primary Surplus/(Deficit) with no Seignioragewith no Seigniorage

(% of GDP)(% of GDP)

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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

III. Fiscal Program, 2011-2016III. Fiscal Program, 2011-2016

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Medium-Term Fiscal ProgramMedium-Term Fiscal Program(% of GDP)(% of GDP)

EXPENDITURESEXPENDITURES

DEFICITDEFICIT

REVENUEREVENUE

Tax EffortTax Effort

Actual

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PRIMARY SURPLUS-0.2 0.2

0.50.8

0.6 0.5 0.3

IV. Measures to Support ProgramsIV. Measures to Support Programs

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NG Outstanding DebtNG Outstanding Debt

P Billion % of GDP

…will decrease to 37% of GDP in 2006

Sovereign Credit Ratings:Sovereign Credit Ratings:

MOODY’S: MOODY’S: Upgraded to Ba2 (June 15, 2011)

FITCH: FITCH: Upgraded to BB+ (June 23, 2011)

S&P: S&P: Upgraded to BB (November 12, 2010)

Sovereign Credit Ratings:Sovereign Credit Ratings:

MOODY’S: MOODY’S: Upgraded to Ba2 (June 15, 2011)

FITCH: FITCH: Upgraded to BB+ (June 23, 2011)

S&P: S&P: Upgraded to BB (November 12, 2010)

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Actual Actual

BIRBIR

Under the Aquino administration (July, 2010 to September 1, 2011):

BOBOCC

DODOFF

Tax Administration MeasuresTax Administration Measures

Intensify good governance advocacy thru:

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Tax Administration Measures Tax Administration Measures (cont.)(cont.)

Expanded third party information

More productive tax audits

Anti-smuggling campaign

Improved taxpayer service

Enhanced training for tax collectors

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Enhance collection efficiences

Administrative reformsAdministrative reforms

Intensify collection of dividends and payables from GOCCs

Adjust fees and charges to reflect costs of providing services

Continue privatization program

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Deficit-Neutral (PAYGO) Bill Seeks to establish deficit-neutral rules toward responsible financial

management, and a burden sharing framework between the executive and legislative branches of government.

Fiscal Incentives Rationalization (FIR) Intended to remove redundant incentives to reduce the fiscal costs

and ensure that incentives will be given only to those who need them.

GOCC Reform Seeks to promote financial viability and fiscal discipline in GOCCs

and strengthens the role of the State in its governance and management .

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Policy ReformsPolicy Reforms

Sin Tax Reform

Raise effective tax rate close to international standards

Harmonize rate into one specific rate per sin product

Index specific rate to inflation

Remove protection of old brand

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Policy Reforms Policy Reforms (cont.)(cont.)

Thank you…Thank you…