Duterte’s debt and taxes

“We see in the arithmetic where Rodrigo Duterte’s profound empathy lies. Rather than burden Filipinos with taxes, he has tactfully shifted the financing burden to liabilities which offer lower debt costs.

At the close of October as we began our last quarter of 2019, the following numbers were recorded by the Philippine Treasury. These are the financial liabilities thus far of the Duterte administration. Their importance comes to bear on the public where corporate income taxes paid by businesses might prospectively fall following the agenda of tax reforms pursued under the Duterte economy against the funding requisites of an ambitious infrastructure program.

As of 31 October 2019, the total treasury bills issued were P530,380 million. Of these, P89,000 million were 90-day treasury bills, P142,000 million were 180-day bills, while the balance were all less than a year. The highest interest rates for the 90-day bills were 3.39 percent while the highest for the 180-day bills were 5.82 percent. To appreciate those simply array them against the rates extended to farmers and fisherfolk were these were recently reduced from 6 percent to 5 percent given the need to support the agricultural sector amid shocks experienced from rice tariffication initiatives.

Bond volumes and rates on the other hand show higher numbers in terms of amounts and tenor, albeit with lower interest rates. Against one-year T-bills, the longer the term of an instrument, the lower the rate. Three-year bond rates have a high rate of 4.75 percent and a volume of P154,891 million. The five-year bonds have a highest rate of 5.50 percent and a total volume of P291,511 million., while the seven-year issues have a highest rate of 5.75 percent and a total P630,714 million.

Much like a corporation the state through the government machinery raises capital through taxes and debt. A corporation does this by raising equity capital or borrowing.

The equivalent of taxes raised from the public in a private corporation would be capital from the owners, while state debts are direct borrowings from international creditors, or other countries. The state can likewise borrow from its own public through the issuance of treasury bills (T-Bills) backed with state guarantees.

Since the T-Bills have the virtual guarantee of the government with regard to liquidity and repayment, among the various instruments in the market, the government T-Bill represents the lowest risk, and perhaps the lowest yielding investment. These are thus used as benchmarks where a diverse portfolio of investments is concerned.

Investors use a simple formula to measure the value of their stock where they set it against the T-Bill as their guidepost for a risk-free investment on one end of the formula, while on the other end, the formula measures expected returns against the T-Bill rate.

Two dimensions are immediately evident — the question of risk and the question of expected returns. Since expectations vary from one corporation to another given their projections, this formula, called the Capital Asset Pricing Model, needs to be applied on a per corporation basis and needs to align T-Bill tenors with the horizon in which a stock is expected to yield the returns it promises where these are reflected in its prospective returns on equity.

Suffice it to say that T-Bills reflect either the lowest risk, or even a risk-free investment.

The government likewise borrows beyond its issuance of T-Bills. It issues bonds. We’ve seen their volumes and their cost to us as reflected in their effective interest rates.

Now array the government’s total liabilities against the effective decrease in both personal and corporate tax rates envisioned under the Duterte tax reform measures. Remember to factor in the increase in the tax exemption brackets under Tax Reform for Acceleration and Inclusion that increased disposable incomes.

By analyzing the economy now under this administration against the previous where employment had practically stagnated and economic inclusion was non-existent and worsened by billion-peso scams and scandals, we see in the arithmetic where Rodrigo Duterte’s profound empathy lies. Rather than burden Filipinos with taxes, he has tactfully shifted the financing burden to liabilities which offer lower debt costs.