Philippine Fiscal Policy: Sustainability, Growth, and Savings

Philip Gerson and David Nellor

 

Since 1990, the Philippines' fiscal accounts have improved dramatically, with the consolidated public sector deficit declining by about 5 percent of GNP, and expected to reach approximate balance in 1996. Against this background, the paper assesses the remaining agenda for fiscal reform in the Philippines--especially tax reform--to fully satisfy sustainability conditions and meet the Government's macroeconomic objectives.

A key condition for fiscal sustainability is that public debt obligations can be met without discretionary policy changes (and without sharp cuts to investment expenditure). A review of recent indicators suggests that this is likely to be satisfied. However, a more rigorous econometric analysis suggests that it would be more comfortably met with additional measures, such as the Government's planned comprehensive tax and civil service reforms; this would ensure that needed infrastructure investment would not need to be sacrificed for sustainability.

The second part of the paper examines how fiscal policy can contribute to meeting the Government's broader macroeconomic objectives. It is argued that a significant increase in government investment expenditure will be required to meet targets for economic growth and that, to avoid pressure on the external current account, a marked increase in domestic savings is needed. To achieve this, it will be prudent to target for a substantial improvement in government savings over the medium term. As noninterest government current expenditure is relatively low and largely nondiscretionary, the paper concludes that this would need to be achieved mainly through higher revenue.


Philip Gerson is an economist in the Fiscal Affairs Department of the IMF. He previously worked for a major U.S. commercial bank. He holds degrees from Dartmouth, Cambridge, and The Johns Hopkins University.

David Nellor is the Fund's resident representative in Manila. He has also worked in institutional funds management in Australia, Bahrain, and Singapore. He has Master's and Ph.D. degrees from schools in the United States.

 

[IMF Home]       [Seminar Contents]