Decomposing Crowding Out Effect in the Philippines: Leveraging Fiscal Policy to Drive Inclusive Growth

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ID: 284115
2025
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Abstract
Fiscal stimulus programs have substantively kept the Philippine economy afloat during crises and in facilitating recovery. In pursuing steeper growth, there is a tendency to harness fiscal policy at the expense of crowding out private investment and consumption, which defeats the ultimate purpose of such policy. Using time series analysis, we assess the degree of crowding out effect in the Philippines and its implications for the effectiveness of fiscal policy as a macroeconomic stabilization and growth driver tool. Although scholarly literature has used aggregate government spending in probing the existence of a crowding out effect on aggregate investment and consumption spending, we decomposed government spending into its various components to establish which form of spending should be managed. Results show that the crowding effect on private consumption has nuances, whereas the crowding out effect on investment is validated. In terms of the type of expenditure, national government spending on interest payments and subsidies demonstrated a negative effect on specific classifications of consumption and investment. Findings provide fiscal policy directions to mitigate the crowding out effect and impediments to private consumption and investment, thereby facilitating robust and sustained economic growth.
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Authors John Paolo R. Rivera, Mary Grace R. Agner, Viory Yvonne T. Janeo, John Angelo F. Cristobal
Journal Malay Journal
Year 2025
DOI
10.59588/2243-786X.1053
URL
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