Philippine Markets Newsletter

PH Monday Macro: Ditch GDP figures and look at taxes

December 18, 2023

Last week, we delved into the latest GDP print and underscored the limitations of using GDP as an accurate gauge of economic health and growth.

We emphasized that GDP only measures transactional levels, akin to relying on revenue rather than income to measure a company’s growth.

Today, we will discuss how taxes can serve as a more nuanced barometer for assessing long-term economic growth and, to some extent, the current economic status.

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Following our discussion last week, contemporary economic theory suggests that long-term economic growth relies on factors of production, namely land, labor, capital, and entrepreneurship.

However, in our modern economic paradigm, economic development is driven by increases in labor output, accumulation of capital stock, and technological advancement, rather than relying on land, which is limited in its resources.

These aspects of long-term economic expansion are not encapsulated in the formula for Gross Domestic Product (“GDP”).

GDP quantifies private consumption, business investments, government expenditures, and net exports, but it does not specifically gauge factors contributing to long-term economic growth.

The metric that does is…taxes.

Let’s delve into the mechanisms employed by the Philippines in tax collection and fund allocation for its federal budget to showcase how taxes serve as metrics for assessing long-term economic growth.

National funds in the Philippines mainly come from taxes and non-tax revenues. Tax revenue, including personal income tax, corporate tax, VAT, social security obligations, and others, constitutes 91% of the total national income, with non-tax revenue contributing just 9%.

To understand how tax revenue is utilized, it depends largely on the priorities of the current presidential administration. Each president has their own agenda and objectives, influencing the allocation of the national budget according to their goals.

Conventionally, the national government allocates resources to five primary sectors, each encompassing various departments. For instance, within the social services sector, departments like education, health services, and employment are included. Similarly, economic services comprise departments such as roads and transportation, trade and industry, and natural resources.

For 2023, President Marcos proposed a national budget aimed at achieving economic transformation. The proposal centered on social, economic, and general public services, which will receive 38.2%, 29.2%, and 15.3% of the total budget, respectively.

These sectors have targeted sub-sectors, including education, culture & manpower development, social security, welfare, & employment, health, communications, roads, & transport, agriculture & agrarian reform, water resource development, public order and safety, and general administration.

Furthermore, despite differing administrative goals, recent presidential terms, particularly those of Duterte and Aquino, have consistently targeted departments under these three sectors.

The data presented in the table above highlights a consistent trend where, on average, the Education and Public Works departments have consistently received the highest allocation of funds in each annual budget proposed by various presidential administrations.

Notably, two of these departments, Education and Public Works, are direct and indirect factors driving long-run economic growth.

Investing in the education industry contributes by expanding the labor force and fostering innovation. In the same sense, allocating capital to the Public Works department enhances the nation’s infrastructure, a crucial component supporting economic advancement.

Moreover, since taxes serve as investments in factors driving long-term economic progression, they can function as a barometer for gauging government expenditure and growth prospects, unlike GDP which merely measures transactional value.

The critical question arises: can these transactions alone finance infrastructure projects, sustain government operations, or facilitate investments in education? The unequivocal answer is no.

These transactions solely signify the capital exchanged for the country’s goods and services. Essentially, it resembles a company’s revenue, and, akin to a company’s revenue, it cannot cover operating expenses, obligations, or investment activities.

Therefore, relying on transactions alone, as measured by GDP, falls short in capturing the comprehensive financial landscape necessary for sustaining a nation’s growth and development.

In summary, taxes are pivotal for long-term economic growth, contributing to a productive labor force, technological advancement, and infrastructure development.

Additionally, analyzing the allocation of government resources through taxation provides valuable insights for investors, offering opportunities to assess and potentially leverage government initiatives for strategic investments.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Newsletter
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