• Policy calibration to address overheating


    Fiscal policies will have to be recalibrated to address risks that could arise from the government’s development plans, the International Monetary Fund (IMF) said.

    “Scenario analysis highlights the risk of overheating, especially if higher infrastructure investment is not financed with additional revenue,” IMF said in a report that detailed “reform-and-spend” and “no reform-and-spend” scenarios.

    The Duterte administration plans to spend up to P9 trillion on its massive “Build Build Build” program, which will be financed by an equally ambitious tax reform program.

    A “reform-and-spend” result in line with the government’s plans assumes a gradual increase in revenues from tax and administrative reforms and infrastructure spending of 2 percent of gross domestic product (GDP) and 1.6 percent by 2022, a rise in social spending by 0.4 percent of GDP and structural reforms in capital and labor markets and the removal of quantitative restrictions in rice.

    Potential growth is subsequently expected to hit 7.5 percent by 2022 due to higher investments and gains in productivity and employment.

    “Inflation rises temporarily due to the demand impulse and tax reform but returns to the target as productive capacity increases and monetary policy tightens. Higher growth and social spending would lead to faster poverty reduction than in the baseline scenario. The impact could be larger with well-targeted social policies, including to rural areas,” the IMF noted.

    The “no reform-and-spend” scenario, on the other hand, assumes that the tax reform brings no additional revenue but infrastructure spending rises as financed with public debt. Structural reforms also do not prosper.

    “As a result, the fiscal position deteriorates and growth increases less than in the ‘reform-and-spend’ scenario due to high borrowing cost that constrains private investment,” it said,

    In this context, the national government deficit widens to 5.5 percent of GDP by 2022 from 2.4 percent in 2016 and the debt-to-GDP ratio increases to 41.3% from the present 37.7 percent.

    The multilateral institution added that in this scenario, potential growth rises less than 7 percent as higher borrowing costs constrain private investment.

    “The output gap turns positive, and the CAB (current account balance) falls, leading to peso depreciation and higher inflation, which in turn result in tighter monetary policy. Poverty would fall by less than in the previous scenario as growth is lower and fiscal space to expand social protection is more limited,” it said.

    To avoid this scenario, IMF said fiscal policy should be calibrated—together with other macroeconomic policies—to balance against the risk of overheating.

    It suggested that the increase in priority spending be financed through additional revenue mobilization, including by widening the tax base, so that the fiscal stance remains broadly neutral.

    The institution said avoiding procyclicality in fiscal policy would require a tighter fiscal stance if economic growth turns out to be stronger than expected in 2018 and beyond.

    “Staff also supports the 3 percent of GDP national government deficit ceiling, which would reinforce policy credibility and keep the general government net debt on a stable path,” it said.

    IMF pointed out that a 3 percent deficit cap implied a broadly neutral policy stance from 2018 onwards, which is an appropriate fiscal stance to reinforce policy credibility by keeping a broadly stable general government net debt-to-GDP ratio.


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