PH gov’t spending more when the economy slows–BSP study
The Philippines’ shift toward countercyclical fiscal policy, in which government spending rises during economic downturns, could support long-term development and ease the burden on the central bank to stabilize the economy, research by the Bangko Sentral ng Pilipinas (BSP) showed.
In a discussion paper titled “Governance and Cyclicality of Philippine Fiscal Policy,” BSP researchers examined how the government’s fiscal policy had responded to economic cycles from the fourth quarter of 1999 to the fourth quarter of 2024.
Citing existing literature, the authors—John Michael Rennie Hallig, Nickson Cabote, Joselito Basilio and Pamela Patacsil—said advanced economies typically followed countercyclical fiscal policies. Many emerging markets, by contrast, had historically pursued procyclical policies, increasing spending during economic booms and cutting back during recessions.
Still, the researchers noted that several emerging economies had moved toward countercyclical policies, a shift that could help promote development.
In the Philippines, fiscal policy had remained procyclical until 2016, the researchers said. Government spending nevertheless rose steadily after 1999 and increased sharply during the COVID-19 crisis.
“When the economy slows, deficits widen and spending increases, consistent with countercyclical fiscal policy,” the authors noted.
The analysis, however, found that elements of procyclical behavior persisted in the Philippines. Citing existing research, the authors said procyclicality was associated with factors such as high external debt, corruption and weak democratic, legal and political institutions.
The findings come as fiscal constraints following a recent graft crackdown have curtailed government spending and weighed on economic growth, a situation compounded by an oil shock linked to the conflict in the Middle East. The combination has left the BSP facing a delicate balancing act: containing inflation without further weakening economic activity.
The paper also highlighted the implications for monetary policy, arguing the way the government responds to economic cycles can influence the central bank’s decisions.
