Policy
Instruments
Let’s Practice!
 The growth of BIR collections was dampened by the softening of economic growth and the
passage of RA 9504 which raised personal exemptions for individual taxpayers effective July
2008.
 Tax collection of the BIR and BOC dropped due to lack of economic activities resulting from
the pandemic and disasters, such as the Taal volcano eruption and ASF.
 Bangko Sentral ng Pilipinas decided to raise the interest rate on the overnight reverse
repurchase facility by 50 basis points to 3.75 percent.
 BIR’s tax collection increased after a strong implementation of its Run After Tax Evaders
(RATE) Program.
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What kind of policy is PBBM
referring to in his tweet?
Who takes charge of this type
of policy?
Definitions
 Fiscal Policy: the government’s use of taxes and spending to influence the level of economic
activity (taken from slide 24 of Income and Spending PPT) ; economy stabilization by shifting the AD curve
 The government’s policy on the generation of its resources through taxation and/or
borrowing, as well as the setting of the level and allocation of expenditures. Three
components: revenue policy, expenditure policy, and debt management policy (Office of the
Ombudsman)
 Revenue policy- to increase or raise revenue and for regulatory purposes; sources of revenue: tax
and non-tax revenues
 Expenditure policy- disbursement of funds; government ensures that the level of expenditures is
consistent with the approved surplus/deficit program for the year
 Debt management policy- policy to attain a manageable debt level
Definitions
 Automatic stabilizers: government spending and taxation rules that cause fiscal policy to be
automatically expansionary when the economy contracts and automatically contractionary when
the economy expands
 Discretionary fiscal policy: result of deliberate actions by policy makers rather than rules
 Cyclically adjusted budget balance: estimate of what the budget balance would be if the economy
were at potential output
 Debt-to-GDP ratio: government’s debt as a percentage of GDP
Fiscal Policy
Expansionary Fiscal Policy
Contractionary Fiscal Policy
↑ 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔, ↓ 𝑇𝑎𝑥𝑒𝑠
↓ 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔, ↑ 𝑇𝑎𝑥𝑒𝑠
Increases aggregate demand
Decreases aggregate demand
Can close recessionary gap
Can close inflationary gap
Higher budget deficits
Reduces deficits
Expansionary Fiscal Policy
P
LRAS
SRAS0
P0
AD0 AD1
AD= C+I+G+NX
Y1 Y*
Y
Contractionary Fiscal Policy
P
LRAS
SRAS0
P0
AD1
Y*
Y1
AD0
AD= C+I+G+NX
Y
Fiscal Policy Controversies
 Every dollar that the government spends is a dollar taken away from the private sector. So any
rise in government spending must be offset by an equal fall in private spending.”
 False. Government spending crowds out private spending only when the economy is operating at full
employment.
 Government borrowing always crowds out private investment spending
 False. Government borrowing crowds out private investment spending only when the economy is operating
at full employment.
 Government budget deficits lead to reduced private spending
 Insufficient. Consumers will still spend at least a portion of their extra cash.
Fiscal Policy Lags
 A government that tries too hard to stabilize the economy can end up making the economy less
stable
 Time lags between when the policy is decided upon and when it is implemented
Fiscal Policy and the Multiplier
 multiplier: ratio of change in real GDP caused by an autonomous change in aggregate spending
to the size of that autonomous change
 how taxes affect the multiplier (reduce the size of the multiplier)
 Automatic stabilizers: government spending and taxation rules that cause fiscal policy to be automatically
expansionary when the economy contracts and automatically contractionary when the economy expands
 Discretionary fiscal policy: fiscal policy that is a result of deliberate actions by policy makers rather than
rules (legislation)
Budget Balance
 Budget Balance: difference between the government’s revenue and its spending
 budget surplus- positive budget balance
 budget deficit- negative budget balance
𝑆
= 𝑇 − 𝐺 − 𝑇𝑅
 expansionary fiscal policy- lower budget surplus or higher budget deficit
 contractionary fiscal- make budget surplus bigger or a smaller budget deficit
 Economists often use budget balance to assess whether current fiscal policy is expansionary or
contractionary. Is this always correct?
Budget Balance
 Using budget balance as a measure of fiscal policy can be misleading for the following reasons:
 Two different changes in fiscal policy that have equal-sized effects on the budget balance may have quite
unequal effects on the economy. Changes in government purchases of goods and services have a larger
effect on real GDP than equal-sized changes in taxes and government transfers (remember: Y=S-T+TR)
 Often, changes in the budget balance are themselves the result, not the cause, of fluctuations in the
economy.
Debt
 Debt-to-GDP ratio: government’s debt as a percentage of the GDP
 What does the debt-to-GDP ratio imply?
 Measures a country’s ability to pay
 Should a high debt-to-GDP ratio worry us?
Philippines debt-to-GDP ratio
Definitions
 Monetary Policy: policies conducted by the Bangko Sentral ng Pilipinas through decisions
involving money supply and the cost of borrowing money to influence demand for goods and
services
 Bangko Sentral ng Pilipinas Monetary Policy
Monetary Policy
Expansionary Monetary Policy
Contractionary Monetary Policy
↓ 𝐾𝑒𝑦 𝑝𝑜𝑙𝑖𝑐𝑦 𝑟𝑎𝑡𝑒𝑠
↑ 𝐾𝑒𝑦 𝑝𝑜𝑙𝑖𝑐𝑦 𝑟𝑎𝑡𝑒𝑠
Expands money supply
Reduce money supply
More lending/borrowing
Less lending/borrowing
Less savings
More savings
More spending
Less spending
Expansionary Monetary Policy
P
LRAS
SRAS0
P0
AD0 AD1
AD= C+I+G+NX
Y1 Y*
Y
Contractionary Monetary Policy
P
LRAS
SRAS0
P0
AD1
Y*
Y1
AD0
AD= C+I+G+NX
Y
•
What kind of policy is PBBM
referring to in his tweet?
Monetary Policy
•
Who takes charge of this type
of policy? BSP