Riding the wave

To continue this series on Boom and Bust - let's turn now to fiscal policy. In Leitner's paper fiscal policy is measured by government spending (though personally I find deficit spending to be a better measure). Still I agree that fiscal policy fails to counter the business cycle (which would happen if deficit spending shoots up during periods of unemployment, and eases up during periods of higher employment). The reason is simple: given the burden of the public debt (now standing at 3.4 trillion pesos, or 70% of GDP in 2004), fiscal policy is a balancing act between the country's development needs and what the government can afford. In short, government knows there is a shortfall in spending there, there, and there, but funds are scarce and the ability to borrow is now severely curtailed by a big stock of debt. So - when revenues are flowing in (boom), spend; when revenues are drying up (bust) - do the fiscally responsible thing, and rein in spending.

Government could have a lot more flexibility in attending to development needs and countering the business cycle, if only it could keep revenues flowing in. Unfortunately this is not the case. Tax effort - the ratio of revenues to GDP, has been on virtually an eight year decline since 1996. Last 2004 it was only 14.5% of GDP, from 18.9% in 1996. Because of its dismal performance in collecting taxes, the government is forced to just ride the wave.