Philippine fiscal behavior in recent history

Abstract

The Philippine national government had large and unsustainable budget deficits in the 1980s. But after a brief period of near-balanced budget in the mid-1990s, large deficits have reemerged in recent years. What explains the poor fiscal performance of the Philippines in recent years? Was it the result of unfortunate events, macroeconomic shocks, or misdirected fiscal policy?

The large public-sector deficits in the early 1980s and those in recent years have similarities and differences. Both episodes of deficits occurred during periods of soaring oil prices, high interest rates, and volatile foreign exchange rates. Both episodes were also associated with low tax effort. The gains from the 1986 tax reform program during the middle years were lost in recent years because of discretionary changes. Over time, spending priorities changed. Marcos focused on infrastructure spending, while Aquino and Estrada focused on social services. Investment in physical infrastructure has a positive effect on fiscal balance. It makes private investment more productive, reduces transactions costs, increases the profitability of private-sector businesses, and thus expands economic output.

JEL classification: H11, H5