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References

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1

The author would like to thank Jaime Guajardo, Kenneth Kang, Elena Loukoianova and the participants of a presentation at the Bangko Sentral ng Pilipinas, and a joint seminar at the Asia Pacific and Fiscal Affairs Departments of the International Monetary Fund, for their insightful comments and suggestions.

2

The dataset used in this paper is consisted of annual observations covering the general government and obtained from various sources including the Department of Finance, the Bangko Sentral ng Pilipinas, the World Bank’s World Development Indicators database, and the IMF’s World Economic Outlook database.

3

This is in line with the extensive literature showing that developing countries tend to exhibit procyclicality in fiscal policy contrary to countercyclical or neutral fiscal policy in advanced economies (Gavin and Perotti, 1997; Talvi and Vegh, 2005; Alesina, Campante, and Tabellini, 2008; Iletzki and Vegh; 2008).

4

The HP filter separates the GDP series into trend and cyclical components, using a smoothing parameter of 6.25 on annual data.

5

These assumptions may appear to be strict, but a disaggregated approach is likely to yield less accurate estimates due to data limitations and structural changes. The Philippines’ tax system has changed significantly in recent years; and expenditure automatic stabilizers are negligible as in many other developing countries.

6

According to the model-based fiscal sustainability approach proposed by Bohn (1998), a positive coefficient on the debt variable is sufficient to establish that the fiscal policy stance takes into account the government’s intertemporal budget constraint and, therefore, long-run fiscal solvency concerns.

7

Although some countries adopt “golden rules” excluding investment spending, this tends to complicate the implementation of fiscal rules and weaken fiscal sustainability, as it creates an incentive for inefficient investments and opportunistic reclassification of current into capital expenditure, and leads to higher current spending associated with maintenance of a higher level of public capital stock (IMF, 2014).

8

A contingent liability is an obligation that does not arise unless a particular event occurs. Some contingent liabilities are explicitly recorded as legal claims and guarantee agreements, while others are implicit, such as the government’s implicit support to SOEs and public-private partnerships (PPPs). Some contingent liabilities are quantifiable (i.e., litigation claims), while others are not quantifiable until they turn into actual liabilities.

9

Budina, Kinda, Schaechter, and Weber (2012) provide a detailed account of escape clauses across all countries with a rule-based fiscal policy framework.

10

IMF (2013) provides a detailed assessment of examples of fiscal council mandates.

11

Eberthardt and Presbitero (2015) and IMF (2016) provide comprehensive surveys of empirical and theoretical research in this area.

12

Macroeconomic shocks are drawn from symmetric normal distributions, although the empirical evidence suggest that shocks can be skewed to the downside (Escolano and Gaspar, 2016). The impact of shocks on debt paths, however, depends on the initial level of debt. For example, an adverse shock to growth and/or interest rates will increase debt by more when the initial debt level is higher.

13

The results remain broadly in line with the fiscal response estimated by the FRF for a panel of 26 large emerging market economies including the Philippines.

14

According to a recent study, a country is likely to experience the realization of large contingent liabilities every twenty years and the average fiscal cost of contingent liabilities is around 10 percent of GDP. Accordingly, this exercise assumes a realization of contingent liabilities amounting to 7 percent of GDP over the medium term.

15

Fan charts show capture uncertainty surrounding the baseline projection from the 5th to 95th percentile of the distribution, with each shade of color representing a 5 percent level of likelihood.

16

This would also provide a reasonable cushion against natural disasters. The fiscal cost of natural disasters in the Philippines amounted to 0.6 percent of GDP on average and as much as 4.6 percent of GDP over the period 1960–2015.

17

This is consistent with empirical evidence showing that revenues are far more sensitive than expenditure to the economic cycle (Price, Dang, and Guillemette, 2014).

18

Budina, Kinda, Schaechter, and Weber (2012) provide a detailed account of escape clauses across all countries with a rule-based fiscal policy framework.

Anchor Me: The Benefits and Challenges of Fiscal Responsibility
Author: Mr. Serhan Cevik