Fiscal policies vs. monetary policies

The P13 trillion Philippine government debt overload/overhang is and will be the dominant challenge for the economic initiatives of the incoming administration. The fiscal and monetary policies will be major components, and have to be coordinated and balanced to avoid fueling the raging inflation and tipping the economy into a recession. Outgoing Finance Secretary Dominguez did a fairly good job on the fiscal side by rationalizing and improving the revenue generation, but he could have done better on the expenditure side by reining in graft-ridden deals and pushing for PPP on infrastructures, rather than the overpriced budget funded projects. BSP Governor Diokno obviously did a good job as he will be the next secretary of Finance. In fact, he had complained that during the COVID-19 crisis years, BSP did most of the “heavy lifting” to fund and stabilize the economy.

Fiscal policies/management has to do with the financial resources of the government. Setting and collecting taxes, customs duties and other revenues, and then disbursing these funds for the operations and investments of the government. This also includes borrowing for the government when the revenues fall short for the programmed expenditures, prudently controlling the budget deficit. The objective of these monetary policies is financial stability. This means price stability or inflation control and maintaining the integrity of the financial system for the orderly development of the economy. It manages the money supply to prevent a “demand pull” inflation, and supervises the banks and other financial intermediaries to prevent abuses and ensure the people’s confidence in the financial system.

The ideal situation is for the fiscal and monetary policies/management to complement/support each other. However, there are times when they contradict and are at cross purposes, especially in authoritarian countries, when the political leaders are in danger of losing the support of the people. To appease the economically-distressed population, they make the government overspend with borrowed money, run up large budget deficits, and force their central banks to loosen money supply or literally print money which will raise inflation rates. The Marcos martial law years did this with disastrous consequences, Erdogan of Turkey, and the military rulers of Myanmar and Sri Lanka are doing this now, and their inflation rates have skyrocketed to 60% to 100% annually. Their currencies have also devalued at these same rates.

Officially, Philippine inflation is already over 5% as of end May 2022, but unofficially if we check the prices of gasoline/diesel, food prices and other commodities, the cost of living has gone up by more than 10% in the last 12 months. These will make the job of the incoming secretary of Finance and the BSP governor difficult. That these incoming officials are already in government positions and familiar with these situations are positive factors, but will not make the problems easier. Hopefully, they can coordinate and cooperate better and come up with solutions sooner rather than later.

BBM’s platform and program of unity has not really been explained or elaborated during the campaign, and we do not know if he already has a grasp of the situation. Maybe, our best hope would be for the economic team to be given enough leeway to do their thing without much political interference. I am inclined to believe that a number of the elected/incumbent national and local politicians are deficient in understanding macro-economics and the multidimensional implications to society and the people. As history has shown, populism has a limited lifespan. Good governance with a wing and a prayer is the way to go.

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