Fiscal policy

Lore & Background

Fiscal policy involves changes in the level and composition of taxation and government spending, which can affect aggregate demand, saving and investment, income distribution, and allocation of resources. It is distinguished from monetary policy, which deals with the money supply and interest rates and is often administered by a central bank. Fiscal policy is typically administered by a government department. Since the 1970s, monetary policy was seen as having some benefits over fiscal policy due to reduced political influence, but the recession of the 2000s decade showed monetary policy limitations, such as a liquidity trap where interest rate cuts are insufficient. The relative effectiveness of fiscal versus monetary policy remains a subject of debate among economists, with some arguing for a combination of both depending on economic conditions.

Reader's Guide

Fiscal policy's significance lies in its role as a primary tool for stabilizing an economy over the business cycle. It can be expansionary (increasing government spending or cutting taxes during recessions) or contractionary (increasing taxes or decreasing spending to slow inflation). A neutral stance occurs when the economy is neither in recession nor expansion. The article notes that a 2000 survey of American Economic Association members found 84 percent agreed fiscal policy has a significant stimulative impact on a less than fully employed economy, but 71 percent agreed activist fiscal policy should be avoided. By 2011, the latter consensus had dissolved and was roughly evenly disputed. Fiscal policy is funded through taxation, seigniorage, borrowing, dipping into fiscal reserves, sale of fixed assets, or selling equity. A fiscal deficit is often funded by issuing bonds, and a fiscal surplus may be saved for future use. The concept of a balanced budget amendment suggests strict constraints on government spending and borrowing, though the US federal government's borrowing cap is not a meaningful constraint as it can be raised.

Fiscal Policy Across Philippine Administrations

Fiscal policy in the Philippines has shifted dramatically with each change in leadership. Under Marcos, the government leaned heavily on indirect tax collection and directed spending toward economic services and infrastructure. The first Aquino administration inherited a substantial fiscal deficit but turned the tide through the 1986 Tax Reform Program and the introduction of the value added tax, successfully narrowing the fiscal gap. Ramos presided over budget surpluses, buoyed by the massive sale of government assets and a surge in foreign investment. Estrada's tenure saw the deficit balloon again, driven by declining tax effort and the obligation to repay Ramos-era debts to contractors and suppliers. Arroyo's administration enacted the Expanded Value Added Tax Law, yet the national debt-to-GDP ratio reached its peak, and the government underspent on public infrastructure and capital projects. This rollercoaster of surpluses and deficits illustrates how fiscal outcomes in the Philippines are deeply tied to the political and economic priorities of each administration.

The Architecture of Tax Revenue

The Philippine government's revenue engine is overwhelmingly tax-driven. The Bureau of Internal Revenue stands as the largest collector, followed by the Bureau of Customs, which imposes tariffs and duties on imported goods. Tax effort as a share of GDP has hovered around 13 percent for the 2001–2010 period. Income tax operates on a progressive principle, with the top rate gradually declining from 35 percent before 1997 to 32 percent from 2000 onward. In 2008, Republic Act No. 9504 shielded minimum wage earners from income tax entirely. The Expanded Value Added Tax, a 12 percent consumption and indirect tax, applies to a wide range of goods and services including petroleum, medical and legal services, electricity, and domestic air and sea travel, while exempting basic commodities like unprocessed agricultural products, educational services, books, and low-cost housing under specific thresholds. Returning residents and Overseas Filipino Workers are exempt from customs duties under Executive Order 206.

Non-Tax Revenue and Government Corporations

Although non-tax revenue accounts for less than 20 percent of total government income, it plays a meaningful role through fees, licenses, privatization proceeds, and state enterprise earnings. The Bureau of the Treasury serves as the government's financial manager, tasked with maximizing revenue and minimizing expenditure. Under Executive Order No. 449, it generates income by issuing, servicing, and redeeming government securities, and by managing the Securities Stabilization Fund through the purchase and sale of government bills and bonds. Privatization has unfolded in three distinct waves: 1986–1987, 1990, and a third phase that was ongoing at the time of the source material. The program is overseen by the inter-agency Privatization Council and the Privatization and Management Office under the Department of Finance. The Philippine Amusement and Gaming Corporation, established in 1977 to curb illegal casino operations, is mandated to regulate and license gambling, generate government revenue through its own casinos, and promote tourism.

Fiscal Imbalance, Spending, and the Local-National Divide

The Philippine fiscal landscape is marked by persistent deficits and rising debt, though some improvement emerged in the latter years of the first decade of the 21st century. In 2010, the national government spent 1.5 trillion pesos against 1.2 trillion pesos in combined tax and non-tax revenue, producing a deficit of 314.5 billion pesos. To finance this gap and service existing debt, the country draws on both domestic and external borrowing. Yet a notable contrast exists at the local level: the Department of Finance reported an average surplus of 29.6 billion pesos among local government units, a result attributed to an improved financial monitoring system implemented in recent years. This divergence between national deficit and local surplus highlights the complexity of fiscal management across different tiers of government in the Philippines, where centralized spending obligations and debt repayment pressures coexist with more disciplined local budgeting.

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