Hidden deficits and the determination of the fiscal balance of the Philippine government

Date

2012

Degree

Bachelor of Science in Economics

College

College of Economics and Management (CEM)

Adviser/Committee Chair

Gideon P. Carnaje

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Abstract

To give a proper diagnosis to the economic problems and to find sound fiscal policies, it is important to measure the government fiscal position in an appropriate way. The ―budget deficit‖ is believed to be the sole concept that best measures the fiscal situation of an economy. Despite obvious limitations of the budget deficit—as it is conventionally measured—it remains the leading indicator of the fiscal health of a government because of the dearth of systematic attempts to find out how large are the deficits that are not captured in the reported budget deficit numbers but affect the total liabilities of the government. This study attempts to find out how large are the deficits that are not captured in

the reported budget deficit numbers for the Philippines. Itcompares the actual debt- output ratio as reported in the World Development Indicators database, with the

hypothetical debt-output ratio that the government would have accumulated had there been no capital gains and losses to government‘s liabilities (because of inflation, depreciation of the currency, etc.), and had it not incurred any expense outside the purview of the budget. The difference between the two ratios shows the accumulated hidden deficits of the Philippine government. The Philippines had actual debt-output ratios substantially more than its implied debt-output ratios during the period 1990-2010, indicating that the country had accumulated hidden deficits. The Philippine government had been involved in financial bailouts, buyouts of Public-Private Partnerships (PPPs), and other such activities, and it did not include these expenses within its budget; moreover its capital gains and losses did not offset some of the extra-budgetary expenditures. These resulted in the Philippine government having large hidden deficits, with accumulated hidden deficits of 31.18 percent of GDP for the period 1990-2010. Macroeconomic shocks as well as currency crises could also trigger the growth of past hidden deficits linked to the provision of contingent claims and restructuring expenses. In this light, the present study suggests that the prudent management of debt dynamics in the Philippines should be expanded well beyond the traditional concerns with ratios of government expenditures, budget deficits, and tax revenues to GDP. Similarly, the sources of hidden deficits must be carefully monitored and managed.

Language

English

Location

UPLB College of Economics and Management (CEM)

Document Type

Thesis

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