The long-term view

 

With experts calling tepid and jobless growth the “new normal” for North Atlantic countries for years to come, it is important for governments to assess how this impacts them in the long-run.

The administration seems to have put two and two together and realized that with weaker growth prospects come weaker revenues and in an environment where any sort of fiscal deterioration could lead to speculative attacks on an economy, it is aiming to shore up its fiscal position through tax reform before the effects of the crisis start washing on our shores.

There certainly is nothing like a crisis to focus the mind on issues that would have slipped under the radar otherwise.

Fixing the areas in our tax system where leaks occur is just as important as trying to avoid wasteful spending. Paying full-market prices for second hand helicopters may create more of a buzz in the media, but the impact of improperly crafted policies on fiscal incentives or sin taxes create much bigger losses for the government on an annual basis.

The uncollected portion of those taxes could easily fill-up the public sector deficit eliminating the need for forced fiscal contraction that prevents us from building the necessary social and economic infrastructure needed for attracting job-producing investments and for improving governance.

The long-term view would allow our leaders to make the tough decisions to undertake necessary reforms that would lift the long-run productivity of the Philippines instead of merely catering to populist sentiment and short-term political payoffs.

Take a look at the following chart which shows various long-term forecasts for average annual incomes per person in the Philippines.

The high-growth scenario comes from the analysis of Dominic Wilson of Goldman Sachs on the Next-11 group of countries with strong growth potential. You can see why all those toxic sub-prime mortgage backed securities could be endorsed by them to Standard and Poor’s for triple A rating.

The rosy positive outlook has our citizens earning $20,000 on average by the year 2050. We should take our cue from those crafty people at GS who bet against the very investment vehicles they packaged and sold to investors, by hedging our bets a little. Let us consider other possibilities.

The low-growth scenario is taken from the Institute of Future Studies online data available via Google’s public data explorer. It shows the country achieving a per capita GDP level of just above $4,000 by 2050. This is quite a low level of growth given that the NEDA projects a $5,000 per capita income by 2020 (assuming we grow by 7% for the next ten years).

The high-growth scenario assumes growth of 6.4% per year on average in the next forty years (net of inflation). The low-growth scenario assumes that it grows by 2.9%. Note that with the population rising, the growth of the overall economy needs to be 7.6% under high-growth and 3.9% under low growth for average incomes to rise as they are forecast here.

I have projected a middle case in between the high and low growth scenarios. This trajectory produces an average growth rate of 4.9% per year. Under this scenario, average incomes are set to rise to close to $10,000 by the end of the forecast period ($9,497 to be exact).

This level of income is important because as the World Values Survey suggests, $10,000 is right around the level at which the minimum material needs of a country are met. Above this level, the reported level of subjective well-being is less dependent on income growth than on other factors.

Based on this survey, the Philippines is punching above its weight in the happiness index (far above its material wealth would imply). Imagine what would happen if Filipinos attained an even higher level of income.

Considerations for the long-term view

The question now becomes, what sort of policy shifts in the next five years would spell the difference between each scenario. Even though its framework produces an overly optimistic case for the Philippines, it is worth looking at the Growth Environment Score of Goldman Sachs to see what kind of policy response is required.

Under the 13 components of the GES, the Philippines was considered at par or above average in four aspects in 2006, namely: inflation, trade openess, education and life expectancy. It was considered below average in three economic indicators: fiscal deficits, external debt and investment; three governance indicators: political stability, rule of law and corruption; and, three infrastructure indicators: computers, phones, and internet penetration.

Tax reform would allow the government to correct the below par performance in debt and deficits. Investments could be addressed through competition policy and an opening up of restricted sectors. Political stability, rule of law and lower corruption results from better fiscal capacity to provide social safety nets and a more professional bureaucracy. Finally, better telecommunications governance results from both better regulatory quality and bureaucratic effectiveness which come about by opening up the economy and compensating public officials better.

The bottom-line is that better fiscal capacity along with sound and rational policy result in better growth prospects for our country. Let us hope that our leaders are able to take heed of this maxim and resist the urge to pander to populist patrimonialism in the short-run. By 2050, there will be between 135 and 145 million Filipinos. It is for the sake of this silent electorate, that I hope our leaders fix their vision on the long-run.

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

    There are misguided humans sucking-off globalist agendas that the Philippines is NOT a welfare state.

    I say, they better read the Philippine constitution again and stop brainwashing the people with their self-serving “economic” agendas.

  • Herbert Abesamis

    We don’t have a problem with taxation. That is the most stupid system ever invented. History will prove that. Whether we pay taxes or not, the government would never run out of cash to keep things in motion because it is the source of all the cash we use.

    As far as current reality is concerned, we have failed our constitutional responsibilities as far as vis-a-vis:

    “Section 9. The State shall promote a just and dynamic social order that will ensure the prosperity and independence of the nation and free the people from poverty through policies that provide adequate social services, promote full employment, a rising standard of living, and an improved quality of life for all.

    Section 10. The State shall promote social justice in all phases of national development.”

    Tax or no tax, we have failed those things. And all that’s causing that is the artificial systems we have adopted.

  • Bert

    This is called badgering. Tempting the president to raise new taxes by enticement of some succulent ‘bait’ to make the president renege on his promise to the Filipino people thereby making the president ‘eat his words’ and losing his credibility and then the opposition rising in droves snickering in glee shouting ‘I told you so your president is a wimp can’t keep his words hehehehehe”.

    ‘Di ba, UP n?

    • Indexing sin taxes and removing redundant fiscal incentives are measures consistent with no new taxes pledge since they do not raise taxes or tax rates. They simply do away with leakages.

      Is it a case of goading or simply being ahead of the curve when it comes to certain policy responses? I think the latter is more likely. We don’t have that much influence over their thinking.

      • GabbyD

        i read somewhere that purisima is thinking about/planning tax initiatives for legislation. no?

      • J_ag

        Huh?????

        No new taxes???

        Indexing sin taxes and rationalizing tax incentives will almost surely result in transferring income from labor to the government.

        Who pays more and does it not come from final demand?

        Example — FIT in Germany is used to subsidize the production side of solar power.

        Here we want it simply as subsidy with no long term benefits.

        GDP measurement is aggregate totals of three sectors. Capital, labor and the government. When government wants a bigger share, bottom line labor pays the bills…

        Indexing sin taxes to inflation results in higher taxes.. Who pays more ? The Martians????

        By the end of this year nominal GDP will be close to Php 11-12 trillion.

        Next year the budget will be Php1.8 trillion… Less than 10 % of next years GDP

        • I am not saying there won’t be an increase in taxes collected, there would. And someone will have to pay for it. That’s the whole point.

          My point was in reaction to Bert’s point that PNoy will be accused of reneging on his promise. He won’t because there would be no new tax imposed, just an indexing of the tax that is already there. And similarly removing fiscal incentives does not impose new taxes, it just removes the exemption from certain ones.

          And on your point regarding laborers, some of the increase in revenues generated could go to increasing the income tax threshold which would lower the amount of taxes paid by those on minimum or lower wages. This will both boost the incomes of the working class and improve the government’s fiscal position. The question is, why wouldn’t you do it?

      • Bert

        But, Doy, you have to remember that MLQ3 and you were goody-goody during those good ole days of blogging, so was ManuelB and some others here in ProPinoy. My gut feel tells me he’s reading your blog, and if MLQ3 is reading your blog could it be far fetch Lacierda and Purisima are too, even Noynoy, who knows. So, Doy, please be careful with what you’re wishing, you might just get what you’re wishing for.

      • manuelbuencamino

        LEDAC agrees on priority measures http://www.abs-cbnnews.com/nation/08/16/11/ledac-agrees-priority-measures

        “Sin taxes, revenues

        Debates are expected, especially with the more controversial ones, the government leaders said.

        Aquino said the restructuring of the sin taxes alone faces road blocks, especially with the recent ruling of the World Trade Organization (WTO) that declared illegal the higher taxes on imported alcohol products.

        He said there is a need to simplify the process of collecting the taxes, with the end in view that revenues would be earmarked for public health care.

        He said around P60 billion in revenues are expected in return for the restructuring of the sin taxes.”

        Happy now, Doy?

        • Hahaha, now he has an even bigger reason to “renege” on his promise…our international obligations under GATT. “Our hands are tied, it was not up to us to do this.”

          Well, as P. Evans wrote, one stratagem employed by reformist governments is to use international treaties to insulate the bureaucracy from rent seekers in this manner. This is an example of how that can be employed.

          • manuelbuencamino

            Doy,

            “Hahaha, now he has an even bigger reason to “renege” on his promise… our international obligations under GATT. “Our hands are tied, it was not up to us to do this.”

            HE? It is not HE, it is THEY.

            The restructuring of sin taxes is one of 13 priority measures agreed upon by the LEDAC (Legislative Executive Development Advisory Council.)

            NOW? Our hands have been tied by the WTO, the successor of GATT, since January 1995, a month after Senate ratification.

            Let’s play Jeopardy!

            Alex Trebek: “In 1994, when the Philippine Senate was debating whether to ratify the Uruguay Round agreement establishing the WTO, this former senator served as the Ramos administration’s point person leading the charge to ratify the treaty.” (http://www.chrispforr.net/)

            Answer: Was it Senator Gloria Arroyo?

            AT: The correct answer is Senator Gloria Arroyo! (Applause)

            Anyway, I’m surprised by your reaction. I thought you would be cheering the news because you have been badgering the government to restructure sin taxes. Instead you turned snide and cynical. Why oh why?

            I doubt you were unaware of the problems we will have with WTO when you were advocating the restructuring of SIN taxes.

          • Oh, don’t get me wrong, it is a positive development. Welcome news. I was just thinking aloud about how so many reforms have to be driven by external events or commitments rather than from an internal agenda.

          • manuelbuencamino

            Doy,

            That’s true. Thinking about and initiating change is rare for people who are comfortable or who can manage to survive with the things are. It takes an outside force to move them out of their comfort zone.

        • J_ag

          Imposing selective taxation on imports has been declared illegal.. However increasing taxes which are the same for all is what the sin taxes are all about.

        • By the way, if Raul Pangalanan is right, the current Sin Taxes Bill being considered will not actually index the tax to inflation but repeg it to today’s prices. This might not be such a good development after all, unless the Palace pushes for indexation. http://opinion.inquirer.net/10219/guilt-free-%E2%80%98sin-tax%E2%80%99-on-tobacco

  • J_ag

    “For the study of the economic growth of nations, it is imperative that we become more familiar with findings in those related social disciplines that can help us understand population growth patterns, the nature and force in technological change, the factors that determine the characteristics and trends in political institutions and generally patterns of behavior of human beings- partly as a biological species, partly as social animals. Effective work in this field necessarily calls for a shift from market economics to political and social economy.” Simon Kuznets, the man credited with the creation of the comprehensive national income accounts know as GNP.

    He is also known in some circles as the father of development economics. He made Keynes possible…

    • “it is imperative that we become more familiar with findings in those related social disciplines that can help us understand population growth patterns”

      The social discipline, or lack thereof, is called copulation with no regard for result, where result is a baby unwanted or a nation overburdened with hungry mouths.

      I’d like to see someone break down property tax valuations and assessments and collections. I think there is a huge hole in revenue.

      • uP nN gRD

        Assessments and Collections!!!!! Heresy!!!

        Listen to the words of advice, JoeAm…. a few people inside Malacanang may not take kindly to non-natives pushing for taxes on glass-and-concrete mansions, condominiums, Lexus and Expeditions, helicopters cuz…. you know.

        be careful, Joe…. unless, of course, you are a per-fessor at some college or universidad in University belt.

        • I hear you Mr. UP. A tax assessor in Northern Mindanao made the mistake of declaring my neighbor’s huge fish farm “commercial” rather than “personal” The neighbor was the attorney for a high mucky mucky. The assessor got transferred to Sulu or some place where he will never again be a problem. The stinkin’ fish farm is still there, polluting up the neighborhood with daily runoff.

    • I’m actually a big fan of Kuznets’ work. The recent inflation in the value of the housing and of commodities markets is an example of Kuznets cycles at work.