Most Filipinos have been taught to think about government finances the same way they think about their own household budget. Before a family can spend, it must first earn income, borrow money or use its savings. When discussions turn to the national budget, the same logic is often follows. If the government wants to build roads, schools or hospitals, many assume it must first collect taxes or borrow through treasury bonds.
Economist Dr. Jesus Felipe believes that comparison is fundamentally flawed.
Speaking during the launch of the book The Philippine Economy Toward 2050 at De La Salle University on August 26, 2026, Felipe challenged one of the most widely accepted beliefs in public finance.
“Our government, as most governments in the world, believes that its finances are just like those of a firm or a family,” Felipe said.
That assumption, he argued, leads many people to misunderstand how a government that issues its own currency actually operates.
A government is not a household
Families and businesses have one thing in common: they cannot create money.
Before paying salaries, buying groceries or investing in new equipment, they must first obtain funds through income, borrowing or savings. If they run out of cash, they eventually become insolvent.
Felipe argues that the Philippine government occupies a fundamentally different position.
Because it is part of the sovereign monetary system that issues the peso, it does not face exactly the same financial constraints as households or companies.
One of the simplest ways he illustrated this was by asking the audience a straightforward question.
“Pesos? Scarce? Absolutely not.”
His point was not that governments can spend recklessly. Rather, he argued that the supply of pesos is not fixed in the same way that a family’s income is.
Where does government spending come from?
Felipe then explained what happens when the government makes a payment.
Suppose the government hires a contractor to build a bridge or pays the salary of a public school teacher. Most people assume the money must first come from taxes collected earlier.
Felipe offered a different explanation.
“The BSP makes payments on behalf of the government,” he said.
He described the process as the creation of new bank deposits within the financial system.
“Money is created ex nihilo,” he explained, using the Latin phrase meaning “out of nothing.”
In his view, government spending injects financial assets into the private sector by crediting bank accounts through the banking system.
This explanation differs significantly from the way government finance is commonly described in everyday conversations.
Then what is the purpose of taxes? Perhaps the most controversial part of Felipe’s presentation concerned taxation.
If government spending is not operationally constrained in the same way as household spending, why does government collect taxes?
Felipe’s answer surprised many in the audience.
“Government does not need your money to spend,” he said.
This statement does not mean taxes are unnecessary.
Instead, Felipe argued that taxes perform other important economic functions. They help create demand for the peso because taxes must be paid in the national currency. Taxes also help manage inflation by removing purchasing power from the private sector and can be used to influence the distribution of income.
In other words, he believes taxes are important, but not for the reason many people assume.
Why issue treasury bonds?
The next obvious question follows naturally.
If the government can spend without first obtaining pesos from taxpayers, why does it continue issuing treasury bills and treasury bonds?
Felipe argued that government securities play an important role in the financial system.
“Government bonds are basically savings accounts at the central bank,” he explained.
Banks, pension funds, insurance companies and investors purchase treasury securities because they provide a relatively safe, interest-bearing asset.
From Felipe’s perspective, government borrowing is not simply about obtaining money before spending. It is also part of how liquidity and interest rates are managed within the financial system.
Does this mean governments can spend without limits?
At this point, many readers may ask an obvious question.
If governments can create money, why not simply print enough pesos to eliminate poverty?
Felipe’s answer is that the real limits are not financial but economic.
Money alone cannot create additional factories, skilled workers, food, electricity or raw materials.
If government spending expands faster than the economy’s ability to produce goods and services, inflation can result. The true constraint therefore lies in the country’s productive capacity rather than in the number of pesos that can be created.
This is why Felipe repeatedly shifted the discussion away from the question, “Where will the money come from?” and toward a different question: What is the government spending the money on?
If spending improves infrastructure, education, healthcare or industrial capacity, he believes it can strengthen the economy’s ability to produce more in the future.
An idea that challenges conventional thinking
Felipe’s presentation does not represent the only way economists view public finance. His remarks reflect a framework that continues to be debated within the economics profession.
Even so, his presentation challenges several deeply held assumptions about government spending, taxation and public debt.
Rather than viewing the Philippine government as another household that must first earn before it can spend, Felipe argues that a sovereign government issuing its own currency operates under a different set of institutional rules. The more important question, he suggests, is not whether the government can find enough pesos, but whether public spending is directed toward activities that expand the country’s productive capacity and improve long-term economic performance.
