Calls for increased government spending is rising by the day to stimulate the stagnating, if not an already stagnant economy. The BSP governor has, in fact, called for more government spending in today's headlines. While this inarguably results to increase in the Gross Domestic Product (GDP), this has less multiplier effect it is hoped to achieve. What is worse is that it is not sustainable in the long-term and only crowds out the more significant components of GDP - consumption and investment. Here is why.
Except for the Government Owned and Controlled Corporations and its profit shares from the oil fields of Malampaya, the government is NOT an income generating entity. To finance its spending, it has to raise taxes or borrow money. Taxes are a direct cut from someone else's purchasing income and that someone else is you and me and the businesses that hire you and me. Government borrowing is also a tax that is deferred into the future. That is because the government will someday tax you and me to pay off its debt. In other words, we are being squeezed dry today and will be squeezed dry tomorrow for something they call government spending. The more the government spends, the more the government has to dig deep into the pockets of Mr. and Ms. Someone Else. Now you know, who is the biggest pickpocketeer in our country - it is our government. You have to be wary about this simple truth, because the deeper the government goes into your pockets it will, with utmost certainty, grab not just your coins but your loins as well. This is not funny stuff.
Increased goverment spending is the reason why the government's hatchet man has been going around creatively taxing or planning to tax anything that smells and spells MONEY - PEACE bonds, REIT income, social security contributions, tiangge and ukay-ukay operators, stock trading gains, among others. What? Oh yes, poor little Jhonny boy, there is nothing now that escapes the taxman's attention.
With lesser purchasing power, individuals spend less. With lower retained earnings, corporations also invest less. Even foreign investors are not enticed to invest in our country because of our taxation system that tries to syphone off the blood of the golden goose. This malady is what is called crowding out effect of government spending on personal consumption and business investments. This is the same effect that results from government borrowing that raises interest rates.
Ok, you may argue that government does increase GDP. Well, it does but surprisingly it does not as well. Here is why it does and at the same time does not. Our government pays salaries to people who could better be more productive working in the private sector. It also builds roads, bridges and other infrastructures that are low on quality but high on "grease". Don't be coy, you know what I mean. It spends on health care, education, agriculture and so on and so forth for as long as it has money to spend it away. But does this spending generate and stimulate other economic activities apart from this? And does this trickle down to those who have less? There is an answer to this from a radio station, "Kailangan pa bang i-memorize yan?"
Sadly, our economy lacks vertical integration. Take construction for example and this suffices the point. When the government spends on schools, roads, and bridges, it does not result into production of metal and metal alloys because we have none. We import them machines, metals, and construction consultants and the money leaks out in circulation of the domestic economy. When the government spends on cash transfers to the poor, it only creates dependency and does not lift people's will to get out of the poverty line and encourages them to remain there instead. Ok, I stop. From here, you should have gotten the drift.
And here is the final argument. I challenge you to go to yahoo.com and google (or equally go to google.com and yahoo) "Corruption in the Philippines" and you will see why I am against increased government spending as a cure to stimulate the economy. Increased government spending is a curse rather than a cure. Period.
P.S. So what will? I will discuss that on my next post.
