25 1977 2002
PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
Policy Notes April 2002
A Macroeconomic Evaluation of the Proposed PERA Act Josef T. Yap*
T
he House of Representatives has recently introduced the concept of a personal equity and retirement account (PERA) through house bills number 2827, 28, 192, 1665, 1757 and 2648. In response, a chorus of concerns has been raised on various aspects regarding the concept such as institutional requirements, financial viability, potential impact on government revenues, and effect on the capital market. To help provide answers to some of these concerns, this Policy Notes examines the macroeconomic implications of the various bills consolidated into a PERA Act, using the PIDS Annual Macroeconometric Model to simulate some of the scenarios. __________ The author is Senior Research Fellow at the Philippine Institute for Development Studies (PIDS). *
No. 2002-02
Basic assumptions and description of the model First, we assume that the PERA Act will reduce government tax revenues by P4 billion annually. However, because of the increase in savings mobilization, there will be a concomitant deepening of the capital market that will result in reduced interest costs. As such, the two variables that will be adjusted in this exercise are government tax revenues and the interest rate, represented in the model by the 91-day Treasury Bill rate. In making use of the PIDS model for our simulation exercise, we took into consideration the fact that as a macroeconometric model, it can take into account all factors affecting the macroeconomy at the same time, thereby attaining a semblance of general equilibrium. For instance, in the model, a reduction in the interest rate will stimulate the economy by lowering the cost of credit and increasing its supply. Expenditures, particularly consumption and investment, will increase. The increase in economic activity will increase the tax base, making it possible for the initial drop in revenue to be offset. Meanwhile, the increase in money supply will add to inflationary pressure which in turn has its own impact on economic activity. The initial reduction in taxes will also affect consumption by increasing disposable income. And while theoretically, the widening of the deficit will have an im-
PIDS Policy Notes are observations/analyses written by PIDS researchers on certain policy issues. The treatise is holistic in approach and aims to provide useful inputs for decisionmaking. The views expressed are those of the author and do not necessarily reflect those of PIDS or any of the study's sponsors.
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pact on interest rate, this channel is not taken into account in the simulation exercise.1 The simulation is performed over a six-year period in order to evaluate the short- and medium-term impact of PERA. The interest rate is adjusted as follows:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Baseline Tbill rate
Simulated Tbill rate
11.76130 12.33800 12.89940 15.00420 10.00000 9.90000
10.00000 10.00000 10.00000 12.00000 8.00000 7.00000
Simulation results Based on the abovementioned assumptions and simulation exercise, we may observe the impact on tax revenues in Table 1. Table 1. Impact on total government tax revenues (Pmillion) Baseline
Simulated
Percent change
219759.3 253793.7 293431.8 357304.6 413480.3 464301.0
217289.7 251290.5 293091.5 357102.8 413913.6 465295.8
-1.1 -1.0 -0.1 0 0.1 0.2
These results indicate that the PERA concept is approximately revenue-neutral. This means that the increase in the tax base brought about by an increase in economic activity is enough to offset the direct decline in tax revenue. In later years, tax revenues are seen to even increase slightly. __________ This is because the interest rate is exogenized.
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Policy Notes
Meanwhile, the increase in economic activity can be gleaned from the behavior of output (or gross domestic product) and total investment as summarized in Table 2. Table 2. Percentage change over baseline (In percent)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
In this six-year period, government tax revenues, as earlier mentioned, are reduced by P4 billion annually.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
April 2002
GDP
Total Investment
0.8 1.1 1.9 2.4 2.7 3.1
1.3 2.3 3.8 6.5 8.1 10.6
In the first year, GDP rises only by 0.8 percent and investment by 1.3 percent. But by the sixth year, investment has the potential to grow by 10.6 percent, contributing to an output increase of 3.1 percent. Of course, these results are contingent on the assumed interest rate response, which is a result of capital market deepening.
Conclusion While the simulation results point to positive gains, it should be emphasized that they are only indicative and the numerical values cannot be taken at face value. What the exercise merely indicates is that the PERA can benefit pension holders without sacrificing tax revenues. At the same time, the economy also has the potential of expanding as a result of capital market deepening. 4 For further information, please contact The Research Information Staff Philippine Institute for Development Studies NEDA sa Makati Building, 106 Amorsolo Street Legaspi Village, Makati City Telephone Nos: 8924059 and 8935705; Fax Nos: 8939589 and 8161091 E-mail: jyap@pidsnet.pids.gov.ph jliguton@pidsnet.pids.gov.ph The Policy Notes series is available online at http://www.pids.gov.ph