Budget 2012: How it all stacks up

Among the nations in the developed world that follow in the Westminster parliamentary tradition, the most eagerly anticipated policy speech by the government is not the state of the nation address but the budget speech.

The budget tackles not only the spending side, you see, but the tax side as well. On budget night, citizens find out if they are to get some form of tax relief. They also look for any additional spending on things they directly benefit from, like schools, hospitals or infrastructure.

The rich nations that make up the OECD (Organization of Economic Cooperation and Development) have varying levels of taxation. The Scandinavians typically tax more and provide a high degree of social insurance and welfare. The Anglo-American nations of the UK, US and Ireland tend to have lower taxes but provide a smaller safety net for their people.

Australia, the nation I am most familiar with seems to have the best of both worlds, with a tax take much lower compared to the Nordic countries but providing a level of social insurance and welfare comparable to them. That is because its tax and spend policies are some of the most progressive in the world.

Australia spends about 16 per cent of GDP on cash benefits (pensions, unemployment insurance, healthcare and community services) compared to an OECD average of just over 19 per cent. It is able to keep this expenditure down by means-testing benefits enabling it to target spending on those that most need it. Its tax take is about 27 per cent of GDP compared to an OECD average of close to 35 per cent. It is the sixth lowest-taxing country in that group.

Rich country, poor country

It is perhaps in this light that we need to focus on the Philippine tax and spend situation. Most poor countries are able to generate only as much as 20% of GDP from their tax systems. Yet the demand for public service is much higher than in advanced economies. The Philippines is no exception.

In 2012, the government projects it will generate about 1.5 trillion pesos worth of revenue out of a domestic economy that is expected to reach 11 trillion or about 13.6% of GDP. In the current year 2011, the government projects to earn 1.4 trillion out of an economy of 9.9 trillion or 14.2% of GDP. In 2010, the ratio was 13.3% (based on DBM papers).

In 2012, due to its low tax take and with a budget of 1.8 trillion, the government will incur a deficit of 286 Billion (up from the original 260 B) or 2.6% of GDP. That is compared to its projected deficit in 2011 of 300 Billion worth 3% of GDP and 314.5 Billion for 2010 or 3.5% of GDP.

Social services which include education, health, housing and land distribution are programmed to consume 556.2 billion pesos or 30% in 2012. That compares with 529 Billion in the current year equal to 31% of the budget in 2011 and 399.3 billion in 2010 worth 26.2% of that year’s total spend.

Among the social services, education takes the largest share. Next year it will amount to 309 billion or about 2.8% of GDP. This is up slightly from 2011 which was 272 Billion or 2.7% of GDP and from 2010 which was 225 billion or 2.5% of GDP. By contrast, Singapore and Thailand spend anywhere from 3.5-4% of GDP on education. Malaysia spends from 5-6%. If we were to match Thailand’s education to GDP ratio, we would need to spend an additional 70 billion on education.

As for health, next year’s budget includes 59 billion or 0.5% of GDP, up from 48 billion in the current year (0.48%) and 36 billion last year (0.39%). In contrast, Singapore spends about 0.9-1.5% of GDP, while Malaysia spends 1.8%, and Thailand 1.2-3%. If we were to match Singapore’s ratio, we would need to spend about 40 billion more on health.

Finally in housing, the 2012 budget contains 14.5 billion worth of spending or 0.13% of GDP compared to the current year’s 21 billion (0.2%) and 12 billion (0.13%) from 2010. Singapore by contrast spends about 1.8-2.5% on housing. Malaysia spends 0.3-0.6%, and Thailand spends 0.5-1%. If we were to simply match Malaysia, we would need to double our current spend by another 14 billion.

Living within our means

Judging from the magnitudes and ratios alone, we can plainly see that the country will continue to lag behind its neighbors in the region when it comes to providing basic social services for its citizens. As a result, it has much higher levels of poverty and inequality and lower levels of human development among the ASEAN-5.

If you take out the possibility of tax reform, “living within our means” confines the budget department to look for savings and improve the structure or mix of spending to improve the quality of the spend rather than the quantity. Past studies have shown that our education spending is already quite progressive, while that of our health sector tends to be regressive with its focus on the tertiary hospitals in urban centers rather than on primary healthcare in the community.

Certainly, there are opportunities to improve the progressivity of our spending program in health. One problem is that our health system follows the model in the US, Europe and Japan which relies of specific contributions. Those who earn more tend to receive higher reimbursements. While in Australia, health expenditures are financed from income taxes, but then are spent in a more egalitarian way by means-testing recipients so that those who earn more tend to pay more out of pockets than those who earn less.

Can afford more

The orthodoxy of constraining the budget because we have to live within our means can of course be challenged by simply asking the question, can society afford to pay more?

From his State of the Nation Address, the president hinted that we probably could afford to pay more when he cited to his own disbelief the close to two million self-employed entrepreneurs and professionals who declare incomes beneath the minimum wage. The BIR has said subsequently that it believes that the current 10 billion raised from these individuals should actually be about 100 billion.

Aside from professionals and self-employed individuals, the corporate sector might also afford to pay more. That is according to a five year old study by Dr. Renato Reside. His work showed that a very low correlation between investments approved by the BOI and PEZA with actual capital formation in all regions except Regions 4 and 7. He concluded that since investments did not materialize companies were simply using their fiscal incentive privileges to engage in tax avoidance. The recipients of such incentives read like a who’s who of Philippine business elite according to Dr Ben Diokno.

Because companies under this scheme are also allowed to sell as much as 50% of the goods they produce to the domestic market, Dr Reside also believes that much revenue is lost. According to him, back in 2004, we were losing as much as 59 billion pesos from revenues on imported capital goods, 135 billion on imported raw materials, 10.5 billion on the use of domestic capital goods, and 44 billion on income tax holidays provided to these so called exporters. If even half of these were recoverd, it would be an additional 125 billion in revenues.

Another form of tax incentive is provided to sin products because of the non-indexation of taxes imposed on them. It is an incentive because every year the prices of these products go up, but the taxes imposed on them don’t. Government revenues are eroded over time. By gradually increasing the taxes along with the rise of prices in general, the additional revenues from sin products estimated to be as much as 70 billion annually could help beef up our infrastructure which in 2012 will be 270 billion a mere 2.5% of expected GDP.

Indeed, from the combined tax breaks given to entrepreneurs, professionals and corporations, our society could afford to bridge the gap in social as well as economic infrastructure. We could become a more inclusive society. With a combination of better policies and stricter enforcement in revenue and incentive granting agencies, by renovating our economic bureaucracy, we could produce a more progressive tax and spend system.

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.

  • Herbert Abesamis

    The orthodoxy of constraining the budget because we have to live within our means can of course be challenged by simply asking the question, can society afford to pay more?

    It isn’t society which is really paying. It is NATURE. And yes, Nature could afford to pay more. It is infinite. Only humans with their limited perspectives limit the same, hardly thinking that this planet has already seen several civilizations come and go in all of its hundreds of thousands or even millions of solar year existence.

    Scarcity-based models are based on finite resources and technologies which we should be throwing into the garbage-bin because their nature poses more problems and are hostile to human growth.

    • Tyrone

      Societies generally operate via a scarcity-based model primarily because natural resources are scarce to begin with. While resources do undergo cycles, capable of replenishing itself, it is not to say that the period of time it takes for energy to be recycled into the desired element/compound/mixture is fast enough for human consumption nor are we capable of manufactured the desired element/compound/mixture through artificial means yet. Take helium for instance, a quick research done of helium cycles reveal that helium is produced through a nuclear radiation that stars are capable of, and I do believe that you cannot find any sort of refutation nor proof that we are capable of producing energies rivaling the intensity of stars. If so then congrats, you are probably Superman.

      To be honest, your way of thinking is utterly irresponsible and immature. While you project a semblance of intellect by saying that the planet has already seen several civilizations come and go, in recorded history, insofar as any one of us human beings do know, there has never been a society which has achieved a state of technology that we currently have. As such, it is improper, and thoroughly unscientific to conclude right away, only giving as your holy grail testament the period of time humans have lived, when in truth, the time human beings have spent living in this universe has but been a very insignificant time, and many more implications like an epoch’s zeitgeist and consumerism, that Earth’s natural resources are infinite. Expressly reckless statement.

  • Property taxes, which should fund schools and local infrastructure, are puny in relation to the value of land to generate profits and wealth. They are a joke. Mainly because the rich “in crowd” doesn’t want to pay them.

    Customs duties are also a joke, in the other direction. Assessments totally unrelated to value are charged simply because people are vulnerable and have to pay (like the P548 I was charged for US tax documents sent to me last week). Remove the tax charter from this agency and the Philippines might once again become a trading nation.

    • UP nn grad

      There is larceny/penny-ante corruption (the six hundred-peso mulcting you encountered) and there is BIG-TIME tax-avoidance . But the big-time TAX-Avoidance is legitimate, namely the mechanism are legal per Pilipinas tax codes, “….Mainly because the rich “in crowd” doesn’t want to pay them” and the rich have shaped the tax-code so progressive property-taxes (and other tax-vehicles) are excluded from PIlipinas tax code.

      And the latest slimeball statement is “…. don’t put property taxes so the OFW’s who have now bought houses for their family (or for themselves for retirement) can enjoy the rewards of their hard work.” Slimeball because it is “easy” to code the property tax to be very low (or even zero) for houses at P10Million-or-less value and then to be more effective so the GuLO and sons and Kris Aquino plus Ochoa and Lacierda get to pony up more in property taxes.

    • Actually Joe, our tariffs are already quite low (0-5% I believe). Perhaps not as low as you would like, but as a percentage of our overall revenues, they have been in decline since the 1990s.

      As for the real property tax collections, yes that potentially can be looked at. Other proposed measures include raising the VAT and the excise on petroleum once prices have settled.

      I think, realistically though the measures I have mentioned in the piece are the ones that form a compromise between these measures and simply maintaining the current tax and incentives system.

  • manuelbuencamino

    Doy,

    Different strokes for different folks. Comparing how we spend/allocate our revenues to how other countries spend/allocate their revenue does not help me assess our 2011 budget.

    What I’m interested in is:

    How does this year’s budget stack up against the country’s specific needs?

    Does it address our immediate needs?

    Is it moving forward as far as long term goals are concerned?

    Sa madaling salita, do you find President Aquino’s 2011 budget realistic? If so, why? If not, why not?

    • If you take a purely dispassionate view of the budget, you will conclude that it is basically more of the same. I don’t mean that in a pejorative sense. We are simply maintaining the levels of spending percentage-wise that we have in the past. The result is that we will keep slipping in our human development index. Now there may be nice features to this year’s budget, but by and large, the magnitude of the need swamps the amount of provision.

      I mentioned the progressivity of our spending on education. That means we are already spending on the right things. What’s lacking is the quantity not the quality. Now I benchmarked against our neighbors, but if you really did a Program Based Budgeting assessment (as opposed to Zero Based Budgeting), you might find we need to spend MORE as a proportion of GDP than our neighbors because we are playing a CATCH UP GAME.

      Its like if your growth is down by 1% this year, next year you have to exceed your competitor by 1% in order to catch up. In other words, I was being rather conservative in my approach by merely benchmarking us to our next nearest rival in terms of spending.

      • UP nn Grad

        Well expressed…. “…the magnitude of the need swamps the amount of the provision…. we will keep slipping in our human development index.”.

      • manuelbuencamino

        Doy,

        “What’s lacking is the quantity not the quality.”

        Quantity, isn’t that what all governments find never to be enough? All governments need and strive for higher GDP because the needs of their people are always greater than what governments can provide.

        But what I was trying to get from you was how would you redistribute the P1.8T budget, taking into consideration that you will have to make cuts in one department’s allocation to increase another’s.

      • It’s not a question of redistributing the 1.8T. If Sec Abad has done his Zero Based Budgeting correctly, all that’s in the budget is absolutely essential at this point. Hence, my view that what’s lacking is the quantity not the quality.

        Perhaps, the administration knows that is so because they are already foreshadowing a name and shame campaign against delinquent taxpayers through the BIR and a rationalization of fiscal incentives which I hope is finally enacted by Congress with the administration’s support.

        That would deal with the wang wang mentality in the private/business community which may be sapping more from the government than all that was allegedly taken by the members of all previous regimes combined.

        • UP nn grad

          My understanding : the quantity — P1.8T — not enough. The P1.8T has to be increased . Four simple examples to increase the quantity would be (i) more income-tax collection from lawyers, doctors, other professionals, (ii) more VAT collection; (iii) new taxes, e.g. sin taxes; (iv) new taxes, e.g. property tax on Lexus, helicopters, other vehicles… on mansions, condos, farmland, other real property assed to have value in excess of P12Million.

          There is no sahhHH–TaYHR intended.

          • UP nn grad

            There is no call for an increase in tax-rates // what is required is BIR to do its job in order to increase by P50Billion-year on tax-collection from lawyers, doctors, dentists, nurses, engineers, GRO’s, bartenders, media personalities, pawnshop owners and other self-employed who have under-report their income. The requirement is for the BIR to do its job.

            Was it two months ago when Malacanang sounded out lifestyle checks and yearly SALN’s for the middle class?

  • Vishnu Palacio

    All I know from the past administration is that the budget, say for these year is disbursed three years ahead. And they call it “actual Budget”.

  • UP nn Grad

    Hindi baleng naghihikahos pa rin pagdating ng 2016, basta we live within our means. “Pero ‘tay, puwede namang ibang paraan, di ba?”. “Shusssn. Tahimik ka…. Para sa iba lang iyon, pero tayo hanggang dito na lang tayo.”

    “Tay, ang kitid naman ng pag-iisip mo. O mahina na lang talaga tuhod mo. Ano ba ang istorya. Nawalan ka na lang ng pag-asa sa buhay, pero bakit kami, damay?”

    • manuelbuencamino

      Tay: “konting pasensya lang anak…hindi natin kayang idaan sa wang-wang ito…alam mo naman na nilustay ng nanay mo ang pera natin……maayos ko lahat ang ito kaya huwag mo akong pilitin na gumaya dyan sa tiyuhin mong si Sam dahil tignan mo nagkabaon-baon siya sa utang wala din nangyari naghihikaos pa rin siya…”

      Anak: “Basta mahal ko si nanay kahit ano pa ang ginawa niya…”

      Tatay: (sa sarili) “Ang hirap talaga magkamerong anak na utak tilapia …”

      • UP nn grad

        “Nahihibang ba kayo, ‘Tay. Anong wangwang pinagsasalita ninyo, wangWang sa tricycle na gamit ninyo sa trabaho? At anong nilustay ni Nanay… Tay, gising… matagal ng wala si Nanay, si nanay OFW… naruruon sa Guam. matagal na, Tay!

        At ‘tay, gising na, tama na ang pagluluksa. Ako at si Kuya, paalis na rin pagdating ng tiket na padala ni Nanay para makasunod kami sa Guam.

        Tay, ‘gising!!! Tama na ang pagluluksa. Natalo ang kandidato mong si Erap. Gising na, tay, ang nanalo si Noynoy Aquino. Tingnan mo ang kabayanan natin, ‘tay, tingnan mo ang iskuwelahan namin. Kailangang maka-alis kami ng Kuya, ayaw naming lumaking mangmang!

        • manuelbuencamino

          Tay: Hijo para ka ng sirang plaka. Eto humigop ka muna ng sabaw para huminahon ka.

          Anak: Anong sabaw niyo, Tay?

          Tay: Fish head soup, anak. Utak ng tilapia. Masarap.

          • UP nn grad

            hah hah hah hah…. saHHHH-taYHR from ManuBuen.