That Vision thing part 3: Credible commitment

The last thing the president needs to secure is credible commitment in support of his social compact.

There are several commitment problems in the strategy and vision of the benevolent one’s regime. For one, there is no way of knowing whether its budgets will be worth the paper they are printed on given the kind of expenditure contractions they are forced to exercise whenever revenues fall short. Secondly, the deadlines of several strategic infrastructure projects keep being delayed as contractors miss important milestones. Thirdly, the lack of party discipline in enforcing its program of government has impeded progress on a number of fronts.

From reform to de-formed budget?

Currently, the administration may have a social compact with several programs in the pipeline–an expansion of basic education, health coverage, and social insurance programs–but no sure way to fund them. The reform budget could very well turn out to be a de-formed budget. The pipeline could very well turn out to be a pipe dream.

That is unless the president finds a way to rally his forces behind his vision. That vision includes an expansion of the role of the state, but at the moment the fiscal component of that vision is the weakest link. Among the rich countries of the OECD, the general size of the state is about 30-40% of GDP. Even some emerging economies like Brazil are able to achieve that ratio.

For developing economies the size of government is limited to 10-20% due to a small formal sector and narrow tax base. At the start of the global financial crisis in 2008 when the fiscal position was nearly in balance, public revenues and expenditures had leveled off at about 17% and 16% of GDP respectively.

Budget analysts believe it has to be restored to 18% which is what it previously had been prior to 2003, to resource social programs adequately. In 2009, the tax take declined to 14.6% of GDP, while a stimulus program made expenditures go up to 18.4% increasing the budget gap to 3.9%. In 2010, that gap was down to 3.25%.

With an 10 trillion peso economy in 2011, a one percent rise in the tax take would rougly equal 100 billion pesos. It would cost the government around 300 billion pesos to plug the fiscal gap, while it would need another 100 billion to pay for its social compact. Nearly half a trillion pesos is roughly 4% of GDP. Budget experts believe going after tax cheats would raise around half a percent of GDP in revenues. The remaining 3.5% (350 billion) has to be sourced elsewhere. Assuming we are content to keep an annual deficit of 1-2% of GDP, then that would mean finding a way to raise between 150-250 billion pesos from the tax and revenue system.

Without a carefully considered roadmap for raising revenue, a credible commitment towards meeting the vision would be wanting. The notion that we can aspire for greatness without the required sacrifice is nonsensical. Tradeoffs have to be presented to the Filipino people, not the hopeful “stretch targets” provided by our economic managers.

Incomplete contracts

Secondly, many equate improved governance with smooth running public transport and infrastructure. The poor state of our airports, seaports and railways is another reason why a credible commitment on the part of government seems to be wanting. Having resorted to the “magic of the market” to construct most of our major projects, the state failed to resource the screening of the private contractors properly.

As a result, an inadequately designed and costed project like the North Railway line was approved leading to subsequent cost adjustments to the tune of half a trillion pesos without any substantial improvement in its quality or completion rate. This railway is crucial to connecting the two major airline hubs in the country. The original delivery date was 2010, then it got pushed back to 2013 and now it seems it will be 2015.

Similar problems have hampered the upgrade of airports, highways and transit systems around the metropolis. The administration has partially adressed this situation by appointing competent cabinet secretaries over key portfolios. This will help ensure that future public private partnerships are screened properly. It does not necessarily address the problems of past faulty contracts.

A government takeover of failed projects and subsequent re-bidding seems to be the answer to a number of them, but will this kind of contractual failure continue to hamper projects in the future? Properly resourcing the agencies that examine their commercial viability with competent staff is a must for that to be avoided.

Institution-building

Finally, party discipline while it seems to be upheld in the impeachment of the ombudsman, seems to fall apart when it comes to important pieces of legislation. Certain senators that ran under the president’s banner do not support his entire platform of government.

This anomaly needs to be addressed. The expansion of conditional cash transfers and the reproductive health bill are two vivid examples. There needs to be a kind of credible commitment towards important pieces of legislation. Such a smorgasborg of support in the upper chamber continues to hound our presidential form of government.

In a chamber where every vote counts, this kind of feeble partyline is a hindrance towards achieving the vision. Certain institutions have to be designed and built prior to the congressional elections of 2013 to improve on this. One such institution could be the drafting and signing of a common agenda. This has to be developed if we are to see any meaningful development in our political culture. Not penalizing political turncoats is one thing, but not imposing a cost for party membership is another.

Conclusion and Recommendations

At the start of this series, I said that the president needs a roadmap that focuses on the big picture of his administration. Before he gets bogged down too much by official duties, he needs to create space and time for him and his team to have a re-think about their current strategic priorities.

This could be an opportune moment for that. He needs to first of all discard the outdated mental models he used earlier to define the role of the state under his presidency. He also needs to scope out his role as the guy who focuses on “that vision thing” and to focus on steering while allowing competent managers to do the rowing for him. Finally he needs to find a way to engender credible commitment towards his broad agenda.

The manner by which he accomplishes these three things will determine to a large extent how successful his administation will be and how he is remembered. Although he may have had a slow start, there is still time for him to recover, regroup and regain momentum.

The following are a number of policy recommendations for the president to consider at this time:

Policy recommendation #1: create a strategy unit within the office of the president to draft a strategic roadmap based on a long-term view but with action items to cover the next five years.

This strategic roadmap would look at the long-term trends that impact the social, economic, cultural, environmental and physical development of the population and align inter-agency goals and strategies for meeting these challenges.

The rolling mid-term development planning system which is managed by the NEDA is not strategic enough. It needs a higher level plan which models projections for the country over the next twenty to fifty years to frame the policy direction needed to shift the country into a higher growth trajectory.

The NEDA which is a technical agency used for asssessing development projects has no coordinating role in terms of implementing the medium-term development plan. A more central agency located in the Palace needs to take on the role of coordination and monitoring.

Policy recommendation #2: convene a commission to review both the revenues and expenditures sides of the budget.

The purpose of this commission would be two-fold: (a) to lay down a multi-year expenditure program for the attainment of the social compact and/or the fulfillment of the Millenium Development Goals, and (b) to determine the kind of tax structure that would produce the kind of revenues needed for meeting (a) in an efficient, effective and equitable manner.

Unlike the current revenue projections of the government which are based on “stretch” targets for the different agenices, the commission should take a dispassionate view towards what the revenue picture would realistically be over the medium-term given the current tax structure in place.

It should then determine how to reform the present system to account for any structural gaps that exist in our fiscal position. An eminent person well-versed in both the theoretical and practical side of instituting tax and spend reform should be appointed to head this commission. Its report should form the basis for proposed legislation.

The beauty of having a review of both the tax and spend sides of the budget is that it should allow the administration to propose to the Filipino people a price tag for a better equipped government in 2013. The nation has to be faced with a tradeoff. There ought to be no more free lunches (what I mean is no promise of a promised land without tough choices). If we want government to provide for better services, then we must be prepared to bear the cost.

The commission would allow the Palace to deal with the politics of tax and spend reform. Having an independent body provide advice would de-politicize the process. It would form the basis for a program of government which could be put to the people in 2013. Victory for the administration party would translate into a mandate for such reforms.

Policy recommendation #3: improve discipline within his coalition by imposing rewards and sanctions to its members who fail to toe the party line.

Within the ruling party, there should be a time and place for differences of opinion to be threshed out. A joint legislative-executive party caucus comprised of elected members of both congress and the executive branch needs to be convened to affirm their position on many legislative proposals.

A “contract” must be drafted and signed that would commit members towards the enactment of crucial bills and building of support for it among different constituencies throughout the country. Those that rode on the coat-tails of the president all the way into congress and local government posts need to know that there is a price for doing so. That price is to adhere to party rules and decisions.

The bottom-line

Underpinning these recommendations is a basic philosophy regarding the correct role of the state. The old Washington consensus supported a declining role for it and concurrently a lower level of taxation to “starve the leviathan”. The new balanced consensus recognizes that the state needs to be robust enough to engage with the market.

The role of strategy within government is to pose critical questions to policymakers involving tradeoffs. We can continue on the road we are on with a feeble state unable to raise revenues and pay for its programs adequately, or we can change course and have a state which has the capacity to make credible commitments towards commonly held objectives.

Those that seek to succeed him in 2016 must see it in their interest to support the success of this presidency. They must find themselves all in the same boat and be willing to work cooperatively to get the job done. All the president’s men must see it in their interest to keep the administration’s support afloat until he steps down in 2016.

The task of the president now is to determine how to navigate in this terrain. Beyond the 24 hour news cycle, the palace has to focus on the long-term frame. The president himself needs to devote a good proportion of his time and energy in developing this grand vision and oversee the development of a roadmap that brings us closer to it within the next five years.

<<<<return to part 2: That Vision thing: Curing dysfunctionalism

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • Cocoy

    Doy, I think what you are looking for is the Medium Term Philippine Development Plan 2010 to 2016, which the president, NEDA and some cabinet members formulated. The PDF hasn’t been published yet. Perhaps, instead of creating a new agency, NEDA should be given more authority.

    • To change NEDA’s scope might require legislation. Having a unit within the office of the president would only require an EO. There are pros and cons to both. In my view too much emphasis has been placed on strategic communication without enough attention paid to thoughtful and innovative policies and ideas.

      The MTPDP is as I said not strategic enough. There are many parts that call for a strategic blueprint to be developed. In that regard it’s a plan to develop a plan.

      We need forward thinkers to envision where we want the country to be in 30 to 40 years from now and prepare a roadmap for getting there based on strategies that can be employed over the next 5-10 years.

      • Cocoy

        Good point, Doy.

      • GabbyD

        i dont think u need to change the law to have neda make something more strategic (here, i a ssume strategic means longer than medium term).

        the enabling law is pretty general.

        they could/should be doing this, no?

        my guess is that the issue is that the political system (taken as a whole) makes it difficult to have a vision longer than a presidential term.

        moreover, speaking of institutions, the NEDA really was created 2 be like a larger/expanded version of the council of economic advisers (with additional responsibilities like oversight on big infra projects).

        anything about economic policy that the president is concerned with should emanate from the NEDA.

  • manuelbuencamino

    So, in general, yo want to see new taxes and bigger government ?

    Now a couple of comments on specifics:

    1. Northrail – a review is being conducted but it’s running into a bit of difficulty because there are documents missing. The chinese are not being very cooperative about furnishing copies of the missing docs either. Ask around if this is true.

    2. “A government takeover of failed projects and subsequent re-bidding seems to be the answer to a number of them,”

    I don’t understand what you mean by a government takeover. But if you mean takeover as in take over then I’m not sure if that can be done without any legal complications. Same thing with rebidding while there is still an existing contract with another party. We might end up with a whole slew of NAIA III type lawsuits.

    3. “Policy recommendation #3: improve discipline within his coalition by imposing rewards and sanctions to its members who fail to toe the party line.”

    You want the president to use pork as his carrot and stick? Let’s face it, until we learn to elect principled legislators the most expedient means for enforcing discipline is pork.

    And on that issue you will encounter one of the tensions within the president’s circle of advisers. Some tell the president “you have to play the game.” Others tell him, “you were elected to bring about a new kind of politics.”

    Now as my candidate to head the Malacanan strategic unit, what course would you advice the president to take, as far as enforcing discipline is concerned?

    • MB, aside from pork, you can strip them of committee chairmanships. If they fail to sign on to party platform, they should only be allowed to run as guest candidates which should mean less support in terms of sample ballots, etc.

      Yes, takeovers as in the LRT/MRT whose re-bidding is questionable and in the case of NAIA-3 have to be avoided. But the takeover had to happen because the contracts were either tainted or defective.

      Northrail contract was a hand-me down problem. The previous DOTC and BCDA technical people left when Arroyo appointed military men who knew nothing about commercial viability assessment.

      • GabbyD

        the president doesnt control chairman ship allocations.

        • He does indirectly as head of the Liberal Party.

        • GabbyD

          only if the house/senate leadership is of the same party.

        • the house leadership is, and while the senate leader is of a different party, that doesn’t mean the party caucus cannot play a role. A member’s nomination can be withdrawn.

          It’s all about building new institutions/traditions that would result in stronger parties.

          • GabbyD

            this ability depends on circumstances; even when such are favorable, the head of congress (lower or upper) may still not be able to unilaterally change these positions.

            i think everyone agrees that building stronger parties is crucial.

      • manuelbuencamino

        Doy,

        1. In a two party system, your idea on committee chairmanships is fine. However, in a multi-party system where coalitions have to be cobbled together so that a minority party captures the speakership, the power to parcel out committee chairmanships does not belong to anyone.

        Pork remains the only means for enforcing discipline because that is in the president’s hands.

        2. “But the takeover had to happen because the contracts were either tainted or defective”

        And this is why there are lawyers and courts and arbitration panels because what is tainted or defective to one party is perfectly fine for the other.

        Still, my question is do you want more taxes and bigger government?

        • I would still press my points with respect to 1 and 2 regardless of our democracy being a multi-party system and regardless of the legal complications. Just a difference of opinion I suppose.

          See my answer below with respect to the general proposition.

          • manuelbuencamino

            Agreed. It is a difference of opinion on those two points.

    • With regards to your general point about new taxes. The solution would not only involve new taxes, but flattening existing income tax rates while widening the tax base by abolishing tax exemptions. On the whole though, taxes must be increased. It could with a combination of these levers.

      On bigger government, again, it might involve reducing spending on certain programs, but increasing others in line with the social compact. On the whole though the size of government will increase. So yes, that’s true I am in favor of expanding the role of government through social programs.

      We could possibly increase public housing through a 1-2% top-up real property tax, reduce the education gap through a 3% increase in VAT, help introduce universal health care by reverting to a percentage based sin taxes, prepare for natural disasters by increasing mining royalties.

      This is what I mean by posing trade-offs to the Filipino people. And what I propose is not to attempt these straight-away but refer it to a commission and present these options at the 2013 elections.

      • manuelbuencamino

        By the way, have you read the report that the president called for a review of tax exemptions?

        I support expanding social programs and if that means bigger government then so be it.

        I support universal health care by whatever means necessary but hopefully through the least painful way.

        I also support increasing royalties for extractive industry. I think we should keep minerals in the ground until such time as we can use them for ourselves. Right now we are exporting irreplacable resources which we import as finished goods. So an industrialization program must be set in place and implemented before we start digging holes in the ground. My one sentence description of mining is selling off family jewels.

        I have some reservations about real property tax increases at this time because a lot of Filipinos, thanks to employment abroad, are just now beginning to own real property. A tax increase would hit them the most.

        As to VAT, its okay if everybody had the same means. I know it’s a users’ tax so if you don’t want to pay, you don’t play. Still there are certain things you cannot avoid buying. What I’d like to see is a VAT that is sensitive to incomes, the needs and capacities of income groups.

        In sum, the trade-offs you propose depend on what is politically acceptable hence your proposal to submit them as part of an election platform in 2013. Indeed politics is the bottom line specially on issues where government digs deeper into the taxpayer’s pocket.

        Thus we have come full circle. People will be less resistant to more taxes if they see that the government is not corrupt.

        • Yes, it does become a chicken and egg thing. We solve that by raising govt capacity to collect taxes and beefing up the bureaucracy. We cannot do that if our govt only raises 14% of GDP as revenues with out present tax mix. It’s just inadequate.

          Please see my response to UP nn grad below about the purpose of anti-corruption being primarily about justice not improving tax collection in the short run.

      • UP nn grad

        Saying that “property tax will hurt the OFW’s.. don’t do it.. we want them to enjoy their new-found prosperity” is easy to address — progressive taxation. 0% -tax if an asset is worth more less than P10million. So the OFW who now has a P6million house-and-lot in Davao — no tax, and the BIR-commissioner who owns a P150-million 5-bedroom glass-and-concrete mansion in Greenhillls pays a tax.

        • UP nn grad

          And truly, the OFW’s should share the burden (pay taxes) to carry fair-share to build more public elementary- and high-schools in the provinces. The OFWs I know will pay income taxes when they are required to.

          The OFW’s are not happy about the thought of paying taxes because they believe the RATS/RATE pogi-points Lamborghini-arrests blah-blah-blah are okay, but there are not enough convictions and there still are thousands of “persons of interest” who should be arrested, brought to court and convicted with hard-evidence.

          • manuelbuencamino

            Income tax is different from realty tax, UPn

          • UP nn grad

            there you go again, obsfucating and sliding and shashaying about so people don’t think about property-taxes.

            I understand that those with Lexus and Expeditions and glass-and-concrete mansions would rather not, but property-tax — progressive — may annoy Mikey and Gloria Arroyo, Ochoa, Hilario Davide and other of GMA’s BFF’s. But Property-tax-progressive- ch but it is a good money-source so PresiNoynoy’s administration gets more applause to build more elementary schools in the provinces.

          • UP nn grad

            ManuelB: do you not want Noynoy Aquino to be able to build more elementary schools in Pilipinas provinces? And you won’t be able to convince me that Noynoy does not want to build more elementary schools in Pilipinas provinces… really, progressive property tax will help Presi-Noynoy.

          • manuelbuencamino

            Up,

            Yes I want PNoy to build more schools in the country.

  • UP nn grad

    In this sentence is a major point:
    Budget experts believe going after tax cheats would raise around half a percent of GDP in revenues. The remaining 3.5% (350 billion) has to be sourced elsewhere.

    Noynoy campaigned on “… clean living… honesty by He-Who-Should-Be-President-2010-2016”, no-Wang-Wang and going after tax cheats would raise 4%.

    I think, though, that in 2015 if not sooner, Noynoy would have raised VAT. The one I don’t know if he puts property taxation ( 0% on the first P5million, 1.5% on P5Mil to P20Mil, 3.5% in excess of P20Mil — progressive taxation).

    • According to govt’s own estimates, an added 400B pesos in additional spending over the course of four years is needed to fund the attainment of MDG targets. 100B pesos a year. That is roughly equal to recovering 5x Danding Cojuangco’s shares in SMC or 23x the Marcos Swiss deposits or 7,550x the Ligot family home, or 2,300x Mikey Arroyo’s US property EACH YEAR.

      We have to come to terms with the fact that Daang Matuwid is all about bringing people to justice and is a long-term fight. It won’t address poverty or the fiscal gap in the short-run. Fighting corruption will also require a lot of money. Not that it is not befitting for it to happen, but it won’t fulfill the needs of the Social Contract.

      Helping the poor through social safety nets while supporting enterprise through flatter income tax rates and and at the same time widening the base by plugging loopholes are both necessary for the economy to grow in an inclusive manner. The means for achieving that might be a little heavy handed, but that is the price we have to be willing to bear for a fairer more productive society to emerge.

      • manuelbuencamino

        Doy,

        Daang matuwid is both about bringing people to justice and ending the climate of impunity that allowed vermin to thrive and prosper. Most important of all is the culture change that Daang Matuwid hopes to bring about. This has deeper and more far reaching consequences on the nation’s soul than what we are talking about here.

        I maintain that “People will be less resistant to more taxes if they see that the government is not corrupt.” Definitely there will be less need to use a heavy hand when new taxes are required.

        So Daang Matuwid goes hand in hand with introducing revenue enhancing measures, whether it’s new taxes or enhanced collections. Daang matuwid is the foundation, it is what gives an administration the legitimacy it needs to govern the nation.

      • Yes I definitely agree 100% with what you are saying. Although I might add that people would be more willing to pay their fair share of taxes if they can see what it is meant for and where it is going. Hence the need to pose the question of additional taxes in the form of trade-offs.

        I hope we have belabored the point enough, so cheers!

      • UP nn grad

        “Indecisiveness of Noynoy Aquino administration”… “Malacanang and Office Ombudsman have become alike”.

        Read it here (on a report by PCIJ):

        Yet a second factor could well be the indecisiveness that Aquino and his officials have shown….

        PNoy, Merci alike

        ….it was most disappointing, it was not much of a surprise that the PCIJ audit showed the Office of the President under Aquino and the Office of the Ombudsman under just-resigned Merceditas N. Gutierrez as having become more alike in terms of their access to information practices in recent months.

        http://www.gmanews.tv/story/219332/special-reports/palace-among-darkest-corners-of-govt-for-docs