Aid, adjustment and public sector fiscal behaviour in the Philippines

A common aim of structural adjustment programmes is to expand the tax base of countries undergoing such reforms. Moreover, it is often the case that adjustment programmes are introduced soon after or in conjunction with attempts to stabilize the economies of these countries, which includes attempts to reduce public sector fiscal deficits. It is also the case, of course, that most programmes have been introduced under World Bank and IMF policy‐based lending regimes. While aid is obviously tied to domestic policy reforms, comparatively few constraints are imposed on how this money is spent. Bearing this in mind, the paper attempts to answer the following question: does the aid to which structural reforms are tied promote public sector fiscal behaviour which is inconsistent with the aims of these reforms? Does it, for example, reduce taxation effort or lead to larger fiscal deficits than would otherwise be the case? The paper looks specifically at the experience of the Philippines and builds on recent advances in econometric modelling of public sector fiscal behaviour in the presence of foreign aid inflows. It looks at the relationships between aid (both bilateral and multilateral), government expenditure, taxation revenue and domestic borrowing using 1960–92 time‐series data.