Philippine Case Structures and Arrangements Fiscal policy Fiscal balance is

Philippine case structures and arrangements fiscal

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Philippine Case: Structures and Arrangements Fiscal policy. Fiscal balance is important in achieving economic stability, and there are two important issues that must be addressed: (1) the sustainability of the fiscal balance, and (2) the impact of government spending and debt on the economic growth (Paderanga, 2001). For the sustainability of the fiscal balance, the ability of the economy to accumulate savings in order to finance its public investment is very important. Unfortunately, the slow accumulation of savings by the public sector has been offsetting the high savings achieved by the private sector. This resulted in negative savings-investment gap for 17 consecutive years. Further, with the growing trade gap, there has been increasing pressure for the private sector to generate private savings and likewise for the government to generate a large primary surplus. The second issue relating to fiscal policy for sustainable growth is the impact of government spending and debt on economic growth. The debt burden keeps the government from providing services to the people and the necessary infrastructure to help improve the economy. The trend in the government’s budgetary policies is a rising allocation for general public services and a decreasing budget for economic services. This means that the government is in essence spending more for less important matters and spending less on areas that are more crucial in achieving sustainable growth. Fiscal stability after the financial crisis in mid- 1990s remains in jeopardy. To raise its sustainable growth rate, the Philippines needs to close its fiscal gap without necessarily sacrificing essential physical and social infrastructure, i.e., physical and human capital investment. Posting a well-behaved fiscal position after the Asian contagion set in, the government indulged in deficit-spending in an attempt to stimulate the economy out of a mild recession. Both the revenue (tax collection) and expenditure sides require tremendous restructuring efforts and commitment. Monetary policy. Despite evidence showing that only M1 is co-integrated with interest rates, output and the exchange rate (Gochoco-Bautista, 1993), the Central Bank of the Philippines (CBP) used M3 or total liquidity as its intermediate target, specifically because the ultimate target is the rate of inflation. 2 As an intermediate target, the CBP used the base money (BM) as operating target, and the BM is related to M3 via the money multiplier, i.e. M3 = money multiplier x BM
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Bangko Sentral Review July 2004 37 In the mid-1980’s, the CBP conducted monetary policy through monetary aggregate targeting. Under this approach, its policy actions were aimed at influencing the behavior of monetary aggregates. Behind this is the presumption that monetary aggregates are meaningful indicators of economic activity, implying that there are stable and predictable relationships between high-powered money (or the monetary aggregate that the central bank is able to control) and money supply, as well as between money
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