Welfarism, Public Debt and Development Hindrance

Bienvenido “Nonoy” Oplas Jr. Minimal Government Thinkers, Inc.

Presentation at the Development Studies Class De La Salle University (DLSU), Manila

04 December 2014

Occasional lectures in the Philippines

Outline

I. Welfarism

II. Rising Size of Governments

III.Rising Public Debt

IV.Minimal Government

V. Conclusions

I. Welfarism

• The political and social belief that individual and parental

responsibility should be subsumed or substituted by more

government responsibility in improving people’s welfare.

• From education to healthcare, from unemployment

allowance to food stamps, from housing to train fare, from

seeds to agri credit, an endless program of subsidies, all

finance via high taxes/fees/fines/penalties and endless

borrowings

• Giving more powers to governments and their officials,

elected and appointed. Spending power and taxation power.

(a) Passive route: through time,

costs will stabilize while benefits will

expand

(b) Progressive route: initially, costs will be high, decline later, while benefits continue to expand

BENEFITS (“inclusive growth”, industrialization)

COSTS (taxes, fees, debts)

Figure 1. Expanding Government, the promise or hypothesis of expanding welfare/benefits

1993 2013

France 54.6 57.2

Denmark 60.7 56.9

Finland 62.8 56.1

Italy 59.1 54.5

Belgium 56.5 54.5

Sweden 71.0 53.0

Austria 57.0 51.2

Hungary 50.0

Portugal 45.4 48.7

Ukraine 48.4

Greece 43.6 47.2

Netherlands 46.7

Spain 46.7 44.9

1993 2013

Germany 48.0 44.5

Norway 51.7 44.2

United Kingdom 42.3 43.8

Belarus 0.7 42.9

Czech Republic 42.3

Poland 41.9

Ireland 43.8 40.4

Slovak Republic 38.7

Turkey 38.1

Russia 37.9

Bulgaria 37.4

Romania 34.3

Switzerland 36.2 32.9

II. Big and Rising Size of Governments General Govt Total Expenditure, Percent of GDP, 1993 & 2013

Source: IMF, World Economic Outlook (WEO) 2014 Database

1993 2013

Canada 56.9 44.5

Brazil 41.1

Venezuela 27.7 38.0

Argentina 36.8

United States 36.6

Colombia 20.0 29.2

Mexico 18.0 27.1

Chile 21.5 23.8

Australia 33.5 37.4

New Zealand 42.5 35.4

1993 2013

Japan 32.4 40.0

Brunei D. 51.7 37.6

Laos 29.6

Malaysia 29.0 28.9

Myanmar 26.5

Thailand 24.3

Korea 20.9

Cambodia 20.3

Hong Kong 16.4 20.2

Indonesia 17.0 20.1

Taiwan 29.3 20.0

Philippines * 18.6

Singapore 16.8 16.6

China ** 13.0 29.1

Vietnam ** 28.5

General Govt. Total Expenditure, Percent of GDP,

1993 and 2013

Source: IMF, WEO 2014 Database

* PH’ local govts spending not included. ** China, Vietnam’s many state enterprises, local govts, not included.

1993 2013

Greece 100.5 175.1

Italy 115.0 132.5

Portugal 54.4 128.9

Ireland 93.6 116.1

Belgium 137.8 101.2

Spain 56.1 93.9

France 44.9 91.8

United Kingdom 44.0 90.6

Hungary n/a 79.3

Germany 45.8 78.4

Austria 60.9 74.5

Netherlands n/a 68.6

Poland n/a 57.1

1993 2013

Slovak Republic n/a 55.4

Finland 52.3 54.7

Switzerland 48.5 48.3

Czech Republic n/a 46.0

Denmark 80.1 44.5

Ukraine n/a 40.9

Sweden 69.9 40.5

Romania n/a 39.4

Belarus n/a 37.0

Turkey n/a 36.3

Norway 53.7 29.5

Bulgaria n/a 16.4

Russia n/a 13.9

III. Rising Public Debt General Govt Gross Debt, Percent of GDP, 1993 & 2013

Source: IMF, WEO 2014 Database

1993 2013

United States n/a 104.2

Canada 96.5 88.8

Brazil n/a 66.2

Venezuela n/a 52.1

Mexico n/a 46.4

Argentina 25.1 41.0

Colombia n/a 35.8

Chile 28.3 12.8

New Zealand 57.2 36.1

Australia 30.6 28.6

1993 2013

Japan 79.9 243.2

Singapore 68.7 103.5

Laos n/a 61.3

Malaysia 55.7 57.7

Vietnam n/a 51.6

Thailand n/a 45.9

Taiwan n/a 41.1

Myanmar n/a 39.8

China n/a 39.4

Philippines n/a 39.1

Korea 11.2 33.9

Vietnam 28.5

Cambodia n/a 28.4

Indonesia n/a 26.1

Hong Kong n/a 6.7

General Government Gross Debt, Percent of GDP,

1993 and 2013

Source: IMF, WEO 2014 Database

Compared to Europe and N.

America, Asian economies are not heavily indebted, except Japan and Singapore.

Philippine Experience: Principal + Interest Payment of Public Debt, 2012-2014

Source: DBM, Budget of Expenditures and Sources of Financing (BESF) 2014, Table B.20. Interest alone: P312.8 B in 2012, P332.2 B in 2013, P352.6 B 2014, ave. of P332 B a year. Why are the people not angry at this huge transfer of money?

Interest Payment as Percent of Tax Revenues, 2010-2014

Sources: Interest payment, Tables 4 and 5 above; Tax Revenues 2010-2012, DOF, Fiscal Update Tax Revenues 2013-2014, DBM, BESF 2014, Table C.1.

For every P100 in various taxes that we pay – personal and corporate income tax, excise tax, VAT, documentary stamp tax, import tax, travel tax, vehicle registration tax, etc. – about P23 of it is used to pay the interest payment alone. Only P77 will be used for salaries, offices, subsidies, projects of various government agencies, local and national.

Outstanding Debt of National Government at End of Period, in P Trillion

Sources: (1) DBM, BESF 2014, Table D.3 (2) Bureau of Treasury

* Outstanding public debt of P5.865 trillion by the end of 2013. * PH population 100 million middle of 2014, from 92.3 milion in May 2010 national census. * Every Filipino, men and women, young and old, rich and poor, has a per capita debt of around P60,000. Mortgaging the future.

• Public debt is simply the accumulation of wastes in government. From P1 billion a year to P10 billion a year to P300 billion a year.

• If public spending in the past was generally productive, say in public education, health, roads and bridges, then people should be productive enough to pay back those debt, debt stock should plateau, if not decline.

• This s not happening. Past public spending for many agencies and programs were designed to be forever, no timetable spending, inefficient.

• Public debt stock keeps rising, around P350 to P400 billion a year on average.

Backward-bending curve, as costs increase, the benefits to average taxpayers decline, (might even approach zero to some people)

BENEFITS ( “inclusive growth”, industrialization..)

COSTS (taxes, debt)

Figure 2. Deviation from the Promise (the reality)

IV. Minimal Government The Promise, Figure 1 above

Figure 3: Privatization and Shrinking Government

point of full-privatization (2): Privatize many GOCCs and agencies

Room for tax cut as endless subsidies to ever-losing GOCCs are eliminated, debt servicing greatly reduced

(1): Privatize some GOCCs, use proceeds to pay back debt. A few “earning” enterprises be retained,and hope that costs will be kept to the minimum

+

0

-

Costs

BENEFITS

Figure 3: Privatization and Shrinking Government

point of full-privatization (2): Privatize many GOCCs and agencies

Room for tax cut as endless subsidies to ever-losing GOCCs

are eliminated, debt servicing greatly reduced

(1): Privatize some GOCCs, use proceeds to pay back debt. A

few “earning” enterprises be retained,and hope that costs will

be kept to the minimum

+

0

-

Costs

BENEFITS

V. Conclusions

1. Welfarism and populism is wrong. Individual and parental/guardian responsibility should not be subsumed by more government responsibility.

2. Welfarism results in corruption of the people’s values, creates more state dependency and sense of entitlement. The income and investments of hard working people are not entirely theirs, other people are “entitled” to get a big portion of it.

3. Governments around the world remain big, or keep expanding. Local, national and international/multilateral government agencies. This means their appetite for more taxes, fees, fines and penalties keep expanding.

4. Existing taxes, fees, fines are no longer sufficient to sustain huge spending by governments. Endless borrowing is the norm. 5. Almost all governments around the world are indebted, they vary only in the extent of indebtedness. The more welfarist and populist the government, the more indebted it is. 6. Being indebted is not bad per se. In cases of emergencies and natural calamities (ex. Big earthquake in 1990, Mt. Pinatubo eruption in 1991), borrow. 7. But when there are no clear emergencies, governments should have balance budget at least, fiscal surplus if possible and pay back some debt. This is not happening, in most governments worldwide.

8. Fiscal responsibility, governments should learn to live within

their means, do not engage in endless borrowings, do not

mortgage the future of the next generations.

9. But we must not renege those debt payment, pay them all. The

hugeness of the debt and its interest payment is a constant

reminder to the current and future administrations that endless

borrowing is wrong.

10. Reduce taxes especially personal and corporate income tax,

leading to zero income tax. Governments have many other taxes

and fees to collect, have many assets to privatize.

11. The promise and hypothesis of “expanding government leads

to expanded welfare” is hardly happening. In most cases, the

opposite happens, backward-bending case of diswelfare as

government size keeps expanding.