OF SUBSTANCE AND SPIRIT

The BSP sustained its drive for its staff to produce more basic and applied research papers, and upgrade their level of engagement with other research-minded economists, think tanks and multilateral organizations. This, it did, through the recently-concluded 3rd BSP International Research Fair for all of two days, June 13 and 14 at the Philippine International Convention Center. This research fair is perfect for networking among researchers and economists for knowledge-based re-sources would be accessible to the participants. One can only imagine the resource-rich BSP, ADB, World Bank, IMF, Asia School of Business, UP, Ateneo, La Salle, PIDS and BAP collaborating together to produce trailblazing papers for the greater good of the Filipino people. We were invited to be a panelist for the third session with Agustin Samano of the World Bank who presented his paper co-written with Carlos Esquivel of Rutgers University. The IMF’s resident representative to the Philippines Ragnar Gudmundsson was our co-panelist. Their paper is most interesting, arguing that fiscal consolidation could be expansionary. Normally, fiscal consolidation is another word for fiscal contraction, either through raising of taxes or reduction of public spending. If fiscal policy is firm enough, tax measures have been found to be more recessionary than cutbacks in government expenditure. During the pandemic, many countries bit the bullet by borrowing their way out. Survival from the virus is primordial especially for those without the luxury of a fiscal space, the availability of public revenues to pursue public goals of inclusive growth, reduction of poverty and social justice as a result of good policy choices. For many emerging markets including the Philippines, the issue was clearly reduced to their access to capital markets. If they should survive in the absence of fiscal space, they needed to borrow and therefore access was crucial. After the dust had settled, and the pandemic is now behind us, Carlos and Agustin’s paper squarely ad-dresses the challenge for many countries in restoring their fiscal health while ensuring the sustainable growth. With limited access to capital markets, the ability of countries to source funding could be severely con-strained. Here is the rub: the markets know that these countries are already deep in debt and therefore they could always exact their pound of flesh. They have enormous exposure and they would not want to risk more. Carlos and Agustin argue that adopting fiscal rules, or debt caps, could limit the rapid debt accumulation because the markets are assured that sovereign risks are mitigated and in the long run, total output will grow. Prospects of better debt and investment dynamics are promising due to institutionalization of debt limits and reduced debt spreads. For some local flavor, we cited in our comments a related paper which came out in May 2022. Written by Margarita Debuque Gonzales and five other research fellows at the PIDS, it focused on public debt sustainability in the Philippines. Despite the rapid and huge accumulation of public debt due mainly to the pandemic, the PIDS paper would maintain that this level of exposure is less worrisome than those we experienced in the 1980s and 1990s. However, the PIDS paper also expected that the debt to GDP ratio would likely remain high in the medium term, that the amount of adjustment to restore the debt to GDP ratio to pre-pandemic level of 40 percent of GDP by 2031 would just be too steep. Tax measures could be draconian unless the time horizon of the adjustment is extended. Otherwise, too much fiscal tightening could trigger weaker growth and instead further raise the debt to GDP ratio. Carlos and Agustin’s paper precisely provides us with an idea that an optimal debt limit, or fiscal rule, can be expansionary in the long run if it could be institutionalized and then implemented with great resolve. Debt rules can lead to more positive market sentiment and reduce debt spreads. Lower spreads inspire private in-vestment and business activities. We were pleasantly surprised that Carlos and Agustin should link fiscal rules with good governance: “Fiscal rules emerge as an efficient mechanism through which citizens provide incentives to the government to behave according to their best interest.” Fiscal rules limit the possibility of debt dilution by future governments, and lower distortions to private investment. We welcome the point raised by the IMF’s Ragnar about the need for flexibility about such fiscal rules de-pending on the gravity of the situation. Fiscal rules should be hard enough to discourage fiscal irresponsibility but flexible enough to accommodate the demands during extraordinary conditions. It should be expected that at the time fiscal consolidation is initiated, shrinkage could be much bigger than expected, but over time, the recovery should be more rapid for both consumption and investment. We gave due credit to the recent rollout of the government’s Medium-Term Fiscal Framework in that it could anchor market expectations and inspire confidence in the government’s efforts to sustain growth and restore fiscal sustainability. But we cautioned against several debt sustainability risks. They must be obvious because they have been eating or about to eat into the national budget: the Mandanas-Garcia ruling of the Supreme Court; unpredictable natural calamities; the non-contributory, incumbent-indexed pension of the military and uniformed personnel; PhilHealth net losses; resurgence of the pandemic; and aggregate demand risks. The Maharlika Investment Fund deserves a paragraph here because contrary to the representation of some, it is nothing but a gamble of public money, away from pressing social needs, to speculative higher returns. The fundamental problem is not even its confused objectives or terms of reference. It is the fact that at this time, we have no surplus funds to invest. That totally changes the equation of fiscal responsibility in the Philippines. That could send a different signal to the markets, that with this real risk, sovereign debt spread for the Philippines might have to rise. And against the caution of Carlos and Agustin, we might be seeing fiscal consolidation to be more contractionary than expansionary.