The role of fiscal constraints in recovery and monetary policy in Philippine

Economic recovery can be defined as a flow of improved business cycle signifying the end of a recession, a period which an economy regains as well as exceeds output levels and peak employment achieved before the downturn. This period is not usually easy to recognize unless it has lasted for some months. In Philippines economists have been reported to apply number of indicators to determine whether the economic recovery is in progress (VENZON 2017). These include gross domestic product, financial markets, inflation as well as unemployment.  The economy contracts and grows in continuously changing periods as it strives to find the point of equilibrium (STEINDL 2009). The common features of economic expansion and recover include gross domestic product growth, declining unemployment, and higher consumer confidence and stock market gains. The economic cycle consists of phases which are trough, contraction, peak as well as expansion. Economic recovery is experienced during the contractionary phase (LAYTON 2018). Monetary policy on the other side involves a process of announcing, drafting as well as implementing the plan associated with actions adopted by the currency board, the central bank or any other capable regulator body within a country that usually determines the impact and scope of the major drivers of the country’s economy. Activities that are crucial to monetary policy comprises of management of interest rates and money supply (LAYTON 2018).

Fiscal constraints refer to a demonstration of adequate funds for implementing the proposed improvements in the transportation systems as well as to maintain and operated the whole system, by comparing the revenues and costs. Any policy that is changed strongly affect every person in a country. In Philippines, the existing interaction between fiscal policy as well as monetary policy involves the fact that these two have a great effect on the major macroeconomic activities.  As a result, this develops interdependence in pursuing policy objectives (MISHKIN, 2007). Fiscal policy in Philippines largely influences risk premia, real interest rate, potential output, and aggregate demand. Monetary policy in Philippines on the other side greatly impacts inflations expectations, risk premia as well as interest rates (ADAMS & COLANDER 2010).  According to various economic studies conducted in Philippines, they are three main ways that monetary policy can greatly affect fiscal policy (VENZON 2017).  Fiscal policy has a huge impact on prices and economic growth through fiscal policy stabilization.  The second impact involves the operation associated with automatic fiscal stabilizers which can largely lead to a reduction in the short-term volatility (MISHKIN, 2007). The third impact lies on the fact that the cost associated with a debt of financing the government. In any given ideal situation, fiscal policy greatly contributes to the maintenance of the macroeconomic stability. The monetary policy is supposed to monitor the fiscal policy frequently.  In pursuits of the country’s objective, the central bank is involved into taking account the fiscal policy. Instruments and objectives must be assigned effectively (ADAMS & COLANDER 2010).

EO represents original equilibrium

E1 equilibrium one

AD0 original demand aggregate

AD1 demand aggregate demand one

Expansion Fiscal policy

Fiscal policy is something that is used by the Philippine government to influence both the contradiction as well as the expansion of gross domestic product as a way of measuring the economic growth in situations where the government is applying its power through increasing their expenditures as well as lowering taxes.  This is a situation where the government practices expansionary fiscal policy.  At times the expansionary efforts may only seem to have positive impacts through stimulating the economy (STEINDL, 2009).  In situations where the Philippine government spends more quickly than the tax revenues which are collected, it can cause accumulation of additional debt (VENZON 2017).  This is because it gives bonds that contain a lot of interest to finance the government’s spending and therefore leading to increased national debt. If case such a scenario occurs the government responds by the issue of bonds which may result in competition especially with the private sector that may also be issuing a bond at a similar time (ELWELL 2012).  This is an effect referred to as crowding out, and it can lead to the raising of rates indirectly due to the increased competition as a result of borrowed funds. Another indirect effect associated with fiscal policy involves an effort by the potential investors to increase the currency of Philippine as they try to get the higher yielding bonds that exist in the open market (VENZON 2017).  Fiscal policy measures are as well associated with a great delay in the period that it requires to be passed by the relevant government authority in Philippine (LAXTON et al 2009).  On the other side, monetary policy can be applied in slowing or igniting the economy of Philippine.  It does not have strong and lasting effects on the country’s economy because the consumer demand for services and goods might not be associated with the cost of capital involved in obtaining the demanded goods (ELWELL 2012).

Fiscal policy largely increases the aggregate demand level through reductions in taxes collected by the Philippine government or it’s spending (VENZON 2018).  In relation to economic recovery, fiscal policy achieve this through increasing the level of consumption by increasing the disposable income of the country (STEINDL, 2009). This can be achieved by cuts in personal payroll taxes or income taxes.  This also achieved through raising the investments level in Philippine. This can be achieved through increasing after-tax profits by cutting taxes in the business. Recession, inflation as well unemployment can also be reduced in the economy of Philippine  through raising the purchases of governments through increasing the spending of the government on final services and goods (OHANIAN, TAYLOR & WRIGHT, 2012).  This is achieved through raising the federal grants to the governments with the aim of increasing their expenditures on final services and goods.  However the use of contractionary fiscal policy does the opposite of this, it decreases the aggregate demand level by decreasing investments, government spending as well as decreasing investments. This is done through cutting increasing taxes as well as government spending (BOEHLING 2010).

The economic trend of Philippine

Demand stimulus comprises efforts by both the government of Philippine as well as its agencies to stimulate an economy financially. A demand stimulus is the use of fiscal or monetary policy variations to start growth during a recession. The government can come up with strategies such as increasing its spending, lowering the rates of interest and quantitative easing to accomplish this growth (MISHKIN, 2007). The Philippine governments may want to change the composition and pace of economic growth within the country using the tools that are readily available to them (VENZON 2018). The Philippine government may choose to use monetary and fiscal policy tools for stimulating economic growth. Correspondingly, the government may also wish to engage in stimulus outflow by coming up with projects or enacting policies that endorse investments in the private sector (MORGAN 2012).

Just like other things in economics, stimulus programs are usually controversial. One of the British economist, John Maynard Keynes, is often linked to the theory of demand stimulus. This theory is sometimes referred to as counter-cyclical measures and was introduced in the early 20th century (RAY, LANE & VAROUDAKIS, 2007). In his approach, Maynard argued that during the times when unemployment rates are persistently high, the Philippine government for instance, should cut down spending in an attempt to stimulate further demand, reduce the rate of unemployment and elevate the levels of economic growth. If the Philippine government increases growth, reduced spending can pay for itself through the collection of higher tax revenues which result from the rapid growth rates (MONTI 2009). There are some arguments against Maynard’s theory. They include some theoretical discussions concerning the Ricardian equivalence as well as the notion of crowding out. In the early 1800s, the former named for David Ricardo’s work proposed that clients adopt the decisions of government spending choices in a manner that counterpoises the current stimulus methods (RAY, LANE & VAROUDAKIS, 2007). This means that most of the customers in Philippines would ensure that they spend less now if they were aware that they would have to pay higher taxes in the future to cover the deficits of the government (VENZON 2018). Even though the empirical evidence for Ricardo’s theory is not detailed, it is considered an essential argument in making policy decisions (MONTI 2009). The critique of crowding-out recommends that even though some forms of stimulus may be significant on a theoretical basis, they are faced with some practical challenges. For instance, stimulus spending in Philippines may not occur at the right time because of interruptions in classifying and allocating funds. The Philippine government may also be less effective in allocating funds to the most beneficial projects, leading to uneconomical ventures which may yield low returns (BOEHLING 2010).

Supply-side economics tries to give an explanation of both macroeconomic phenomena and through these explanations, it offers policy prescriptions that is associated with stable economic growth. Generally, this theory consists of three main pillars; regulatory policy, monetary policy as well as tax policy. However, the main concept behind this theory is that the production of services and goods is very crucial in the determination of economic growth. Looking at Philippines, the supply side restructuring is based on willingness to creating services and goods which set the pace at which economy experiences growth (OHANIAN, TAYLOR & WRIGHT, 2012).  The supply-siders is of the view that lower rates in Philippines induce employees to opt working over leisure while on the lower rate of capital gains, it argues that they induce the investors in deploying capital productively. In regards to the taxation policy supply-siders supports lower rates of marginal tax rates in Philippine given that the supply-siders argue that monetary policy is not a tool to be applied in creating economic value, but a variable that can be controlled (TIMBERLAKE 2009). This theory may lead to the establishment of a more stable monetary policy in Philippine. This principle is the major reason behind why supply-siders mostly advocate considering the gold standard. It agrees that using gold in the economy, and it would be greatly assisted in making the currency more stable while fewer disruptive results would emerge from the currency fluctuations (VENZON 2018).

References

VENZON, C (2017) ‘phillipine tax reform will add to Duterte infrastructure war chest’, Nikkei Asian Review World.

VENZON, C (2018) ‘Deterte has three words on infrastructure: ‘Build, Build, Build’Nikkei Asian Review World.

ADAMS, R. V., & COLANDER, D. C. (2010). The art of monetary policy. Armonk, NY u.a, Sharpe.

BOEHLING, R. L. (2010). A question of priorities: democratic reforms and economic recovery in postwar Germany: Frankfurt, Munich, and Stuttgart under U.S. occupation 1945-1949. Providence u.a, Berghahn Books.

BOFINGER, P., REISCHLE, J., & SCHC?HTER, A. (2011). Monetary policy: goals, institutions, strategies, and instruments. Armonk, NY u.a, Sharpe.

ELWELL, C. K. (2012). Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy. Cambridge, Mass, The MIT Press.

LAYTON, A. (2018). ECONOMICS FOR TODAY: with student resource access 12 months. MELBOURNE, CENGAGE LEARNING AUSTRLIA.

LAXTON, D., MUIR, D., KUMHOF, M., MURSULA, S., & FREEDMAN, C. (2009). Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits. Washington, International Monetary Fund. https://public.eblib.com/choice/publicfullrecord.aspx?p=1605975.

MISHKIN, F. S. (2007). Monetary policy strategy. Cambridge, Mass, MIT Press.

MONTI, M. (2009). Fiscal policy, economic adjustment, and financial markets: papers presented at a seminar sponsored by the International Monetary Fund and Centro di Economia monetaria e finanziaria, Universita? Bocconi, held in Milan on January 28-30, 1988. [United States], International Monetary Fund. https://www.hoopladigital.com/title/11390572.

MORGAN, P. J. R. (2012). Euro crisis: aggregate demand control is European single currency weakness : a critique of the current European economic governance system, with practical solutions. [England], Morganist Economics.

OHANIAN, L. E., TAYLOR, J. B., & WRIGHT, I. (2012). Government Policies and the Delayed Economic Recovery. Chicago, Hoover Institution Press. https://public.eblib.com/choice/publicfullrecord.aspx?p=1370704

RAY, C. W., LANE, T., & VAROUDAKIS, A. (2007). Fiscal policy and economic growth: lessons for Eastern Europe and Central Asia. Washington, DC, World Bank.

STEINDL, F. G. (2009). Understanding economic recovery in the 1930s: endogenous propagation in the Great Depression. Ann Arbor, Mich, Univ. of Michigan Press.

TIMBERLAKE, R. H. (2009). Monetary policy in the United States: an intellectual and institutional history. Chicago, Univ. of Chicago Press.