As of March 2012, the World Bank reported that 53% of DAP were released to National Government Agencies, and 37% to Government Controlled and Owned Corporations as well as 10% to local government units.
“With only 10 weeks remaining of the year, the P72-billion acceleration program will barely have an impact on the country’s growth target.
“With 10 weeks to go before the end of the year, and the slow-moving bureaucracy, I expect that, at best, only one-tenth of the proposed outlay will be spent this year, the rest will be spent next year,” said Benjamin Diokno, University of the Philippines economist.
Diokno said that 10 percent of P72 billion, or P7.2 billion, won’t make much difference in a P10-trillion economy.”
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.
Assessing PNoy’s freshman year: the good, the bad and the ugly
In numerology, the number 1 bears singular importance. The first, the start, the origin of anything bears significance and meaning in the sense that it opens up possibilities, it sets the scene, and it leads the way. The level of anticipation and anxiety is always highest at the start.
The mistakes and lessons, the first impressions and achievements all have lingering effects. So it is with the first year of PNoy’s administration: the learning curve, the birthing pains and the wall of public expectation he has had to scale was close to insurmountable.
Comparisons and contrasts
In assessing his first year, the problem of finding an appropriate yardstick has been highlighted before. For those that attempt it by way of contrast, PNoy has done a remarkable job in his first year simply by not being Mrs Arroyo. Some similarities can be drawn with his mother in that she too had to sort out a lot of problems left behind by Mr Marcos and high expectations on the part of the people.
Others like me have drawn some parallels between PNoy and Estrada in the way the president went about managing factions within his cabinet. Some have questioned the president’s work ethic. ‘Do nothing’ was a constant line of attack presented by his detractors.
The question here is, had PNoy not succeeded Mrs Arroyo, how would his first year have been measured? Corollary to this is, had PNoy not been an Aquino, how would we perceive or rate him? The nation treats PNoy almost like an older brother or ‘kuya’. His being the son of ‘Tita’ or Auntie Cory makes an objective assessment difficult because of kindred ties and the ‘halo’ effect.
Factoring out the ‘noise’
Then there is the problem of events outside the evaluatee’s control, or the noise factor. The worsening global economy emanating from the Eurozone, Japan and MENA as well as from the US, have been used to explain the weakening foreign investor confidence in the Philippines.
As Ben Diokno rightly points out, our relative performance to some of our ASEAN neighbors allows us to factor out the ‘noise’ in that our peers in the region all have experienced the same global slowdown, but as the first quarter data shows, they were able to increase their levels of foreign direct investments, while we saw ours shrink.
We need to bear this in mind whenever we hear officials justifying the slowdown in our economy by citing global affairs or cyclical factors like the elections of 2010. We might be maintaining growth in an absolute sense, but in a relative sense, we might fall behind our neighbors in the region. We therefore need to determine whether this poor performance relative to them is due to some of the things the administration is doing or failing to do.
Having said that, I would first like to focus on the positive things I believe the administration has done. This would include both its tangible and intangible achievements. I will start with the tangibles.
The introduction of universal kindergarten in public schools which studies show provide long-term learning benefits, the reduction of hunger most recently attributable to the conditional cash transfers program which is really designed to address intergenerational poverty and not fix the unemployment problem in the near term, and the reform of government corporations and debt management which have led to meaningful savings for the government are all worth a positive rating.
With regard to intangibles, the confidence engendered by the government which has led to private domestic firms releasing pent-up demand for capital goods and the greater trust or faith in government leaders are two things that this administration can be congratulated for. If the government can continue to make inroads in these areas it will have done a tremendous service to the Filipino people.
On the needs improvement column, I would have to cite firstly the government’s handling of its legislative agenda. Both the scope and the pace at which it has been pursuing this have serious flaws. The absence of the FOI and RH bill among its priority measures for instance was a major failing. The fact that it took nine months for it to hammer out its agenda led to meager legislative trophies in the first year.
Secondly, our response to China’s emerging role in the region as a superpower to counterbalance the US our traditional ally has been all over the place. First, we sided with China unnecessarily in not attending the Nobel Prize conferment ceremonies for one of its leading dissidents. Then, in handling the Spratlys issue, we engaged in sabre rattling by sending out a navy vessel into disputed territory, again unnecessarily. A more considered and strategic foreign policy is required.
Thirdly, in prosecuting cases against Mrs Arroyo and her allies, many will assail the efforts of PNoy as unsatisfactory or timid, as several church and citizen’s groups have done. Personally, I would not consider this too much of a problem, but I know that many have that expectation. So what I cite as a failure by this government is its inability to manage such high expectations. More importantly, I would like to see greater safeguards and economic measures put in place to ensure that the Ombudsman and Solicitor General’s office are well resourced to perform their functions.
Sharper focus required
Finally, I would like to cite areas that deserve sharper focus by this administration. These are things that the administration needs to prioritize if it is to make a lasting impact. The first has to do with its development strategies contained in the Philippine Development Plan 2011-2016. As I have stated in a three part series, entitled the National Development Program, there are serious gaps in the Plan that need to be addressed.
Secondly, in its first year, the government has shown serious shortcomings in its budget plans and execution. Having had a head start by way of Congress’s early approval of their budget, the government should have done better at releasing its funds for infrastructure projects. The practice of forced savings due to off-target collections also has to be addressed. This cannot continue as per the ratings agencies reports if the nation is to keep to its growth trajectory.
Thirdly, in generating much needed employment, this government has to start thinking ‘outside the box’ if it is to keep up with the growing workforce. PPP’s or public-private partnerships are an existing tool already wielded by preceding governments. For it to have a successful employment program, the administration will have to develop a robust industrial policy. To do that it needs to reshape the economic bureaucracy as I have pointed out here.
Looking back, moving forward
A periodic performance appraisal is always necessary for any government to benchmark itself against the undertaking it has given to the people, to celebrate successes and take stock of where it needs to improve or devote more attention to.
The first year of any government is always the hardest. Unexpected roadblocks and landmines often litter its path. The ability of any regime to survive its first year relatively unscathed or even stronger than before usually is a good indicator of the caliber of its leaders.
We will have to say that the government despite all the sound and fury has survived relatively intact. The remaining five years will contain many twists and turns. Hopefully, the correct lessons from its first year will help inform these remaining years. For this reason, it is important for citizens to remain as engaged as they have been during this first year as we here at Propinoy are determined to be.
What yardstick are we using to measure P-Noy’s performance?
The arbitrary, rule of thumb of the first year in office is about to come and go for this administration. The obligatory journalistic pieces assessing the president’s performance have consulted the usual suspects.
Political analysts, polling firms and pundits, the business community and the average man on the street express varying degrees of satisfaction, from impatience on the part of Conrad de Quiros for instance, to a more sanguine position on the part of Mon Casiple. Regardless of their positions, they are essentially in agreement that while one year is too brief a period to expect major change, some demonstrably concrete level of progress or achievement is lacking in the president’s first 365 days in office.
As expected the president’s men were engaged in a charm offensive to address these complaints with Undersecretary Manolo Quezon of the Communications Group appearing on ANC, Deputy Spokesperson Abigail Valte on Twitter, and Budget Secretary Butch Abad polemically addressing the issue of economic management. The to-ing and fro-ing has been at times entertaining as in the case of the Valte-Magsaysay twitterverse exchanges and insightful as in the case of Quezon’s revelations about the president’s love life.
The advocates of the president (both in and out of government) say that much has been accomplished. The emphasis on government frugality and public spending restraint has created domestic private investor confidence and a credit ratings dividend according to Cielito Habito. Plugging the leaks in infrastructure spending has generated fiscal space to expand social spending by the end of the year according to Abad. Public private partnerships are “on track” to be consummated this year according to Finance officials.
That in essence is the shortlist of accomplishments brandished by Malacanang. Judging by his poll numbers, the public seems to give P-Noy the nod of approval with 64% expressing satisfaction with his performance.
Is that it, then? Should we give the president a pass too?
Unfortunately, what is missing is a solid discussion over, well…what sort of yardstick is appropriate for measuring the president’s performance. For instance,
• Shall we judge him on what he said he will do?
Based on the president’s anti-Gloria campaign theme, De Quiros now questions why the former president and her ilk have not been brought before any court to answer for her alleged transgressions. Based on his anti-corruption platform, the Management Association of the Philippines now asks why there have been no measures like the Freedom of Information bill or any meaningful reductions in business redtape progressed.
Civil rights advocates wonder what has happened to Jonas Burgos and many other like him. Women’s groups are still waiting for the RH Bill to be passed. Farmers are wondering what happened to the resolution of Hacienda Luisita. The ordinary man on the street wonders where the jobs are and the relief from the rising cost of living. These were issues PNoy promised to resolve once in office.
• On the other hand, should we judge him based on his ability to prudently modify or alter what he said he would do?
The problem for the president of course is, whether you adhere to the strict contractual sense or not, he has failed to register meaningful progress on many fronts. So the question then becomes, how much time should we give him before we start downgrading his performance assessment? How long before we start saying that the president has either reneged or foolishly forged ahead down a dead end path?
Should we give him another six months? A full year? Two years? It’s like asking the question, how long is a piece of string?
After all, for the marginalized groups awaiting resolution to decade’s old injustices, their well-being has been put on hold for far too long. The well-healed chattering classes may feel aggrieved that bringing justice to Arroyo has been delayed, but their grief is nothing compared to what farmers and human rights abuse victims have suffered.
Similarly for those denied access to education, healthcare, sanitation and protection from the elements, the experiment to improve tax collection without a root and branch reform process would prove to be the most costly of all, if it fails. Is it therefore worth the gamble?
Perhaps, it is in addressing the needs of the least of our brethren that the president ought to be judged. In his “Back to the Future” moment, the president like his mother in the mid-1980s seemed to have prioritized the needs of rich creditors and bondholders over that of poor and marginalized stakeholders. Private investments have improved the skyline, but public investment failed to raise more out of the poverty line.
How long is a piece of string? Well we will have to wait and see…
With the conflicting policy goals of increasing the years of basic education to 12 from 10, creating universal health coverage, expanding social safety nets via the conditional cash transfers while at the same time reducing the deficit and bringing the budget within 1-2% of GDP, the Cabinet has finally come to the conclusion that intensifying tax collection efforts simply won’t be enough.
Here is the full transcript of the president’s speech at the Makati Business Club back in January 2010 during the heat of the campaign. It was in this speech that the then candidate Aquino declared, “We will refrain from imposing new taxes or increasing tax rates.” During the Q&A that followed, he clarified that this meant no new taxes were intended and were to be used as a last resort.
Even the MBC executive director at the time Alberto Lim hinted (if you read between the lines) that he did not believe this was even appropriate. Evidently that pledge has been interpreted by Cabinet to mean “no new taxes at least during the first eighteen months of his administration.” It appears that the Run After Tax Evader (RATE) and Run After the Smuggler (RATS) schemes cannot be expected to raise revenues by the required margins as the experts had predicted.
The sad thing is that the short window of opportunity for undertaking tough fiscal reforms may have passed by the time they introduce such measures in Congress. Next year, 2012 is an election year. With the proposals on the table being:
an increase in the excise tax on tobacco and alcohol,
an increase of the VAT rate to 15%,
the scrapping of redundant fiscal incentives to smugglers businesses operating in special economic zones,
a national real property tax assessment coursed through local government units and deducted from their Internal Revenue Allotments,
it does not seem likely that our representatives will have the appetite to enact them. Sen TG Guingona III who hosted the Open Budget Partnership forum on Tuesday seemed to admit that the measures though “sensible” were politically unpalatable. Never mind that in exchange for the “pain” of these measures, the public will “gain” through reduced corporate and income taxes. The dream of every tax economist is for a flatter simpler system to administer. This is seldom ever achieved in the lobby-ridden halls of Congress.
The time according to former Budget Sec Ben Diokno for instituting such tough measures would have been early in the term of a president (first six months), when his public support is at its highest and a few years from the next election to allow the sting of reforms to wear off and the public benefits to set in. Unfortunately this president chose to delay doing the hard yards until now.
This puts his spending programs at risk. Either way, something will have to give. The government will be forced to either scale back its social services spending or say good-bye to any possible credit upgrade. In all likelihood, it will end up somewhere in-between with half baked spending programs and a mediocre budget position. Society will not gain from an optimal level of social service, and the business sector will not benefit from lower costs of borrowing.
If only candidates were made to cost their campaign promises (as I had advocated during the campaign season), the President would have realized early in the day that a “no new taxes” pledge would be the undoing of his social compact. I recall during the campaign season being challenged on this issue in Manolo L Quezon’s blog site during the unveiling of the Liberal Party’s (LP’s) platform.
My claim was that party platforms usually came with budget impact statements. If you make a campaign pledge to introduce two more years of high school for instance, you need to estimate how much additional spending will be required and how you will finance it. I was told that being in the opposition prevented the LP from performing such an exercise. I challenged this view based on the fact that the LP had a former education secretary (Butch Abad) as an advisor, a recent NEDA secretary general (Ralph Recto) among his senatorial line-up, and the presidential candidate himself who claimed to be knowledgeable of the budget..
Just like Aquino I before him who promised to “honor all debts” whether they be tainted with corruption or not, the pledge of “no new taxes” by Aquino II might have bound the hands of this administration and caused unnecessary damage to its social reform agenda.
My concern was that such platforms turn into sweet nothings after the election, and that issuing such promises without costings was irresponsible. In the previous UK elections for instance, the Liberal Democrats under the now Deputy PM Nick Clegg which for a time was tipped to upset the major parties, prepared a fully costed first year’s budget in their manifesto hoping to project an image of a party ready to govern. Of course after having formed a coalition agreement with the Conservatives, they had to backtrack on some of these pledges, but the point is, in these mature democracies, if you want to be taken seriously during the campaign, you need to engage in serious pencil pushing and numbers crunching before formalizing your manifesto.
(Note: The reason why this is possible under the parliamentary system is that during the formal campaign when the government goes into caretaker mode, the bureaucracy is made accessible to the Opposition. So any costings for any planned effort can be run through the treasury department. But even so, under the presidential system in the US, a number of think tanks and advisors proliferate that would allow for such calculations to be made. The same applies in the Philippines.)
The other problem for me was that certain party nominees for the Senate had not signed on to the LP platform. If you for instance adopt responsible parenthood as one of the key planks in your program of government, then all those who run under your banner must sign on to it. How can you endorse someone opposed to it? It should be a condition of joining the team that each nominee must commit to support the proposed policies embodied in the document. The fact that they weren’t required to do so (TG Guingona and Ralph Recto oppose the RH bill or have serious reservations), shows how “airy fairy” these pledges become.
Aquino I and II: uncanny similarities
Just like Aquino I before him who promised to “honor all debts” whether they be tainted with corruption or not, the pledge of “no new taxes” by Aquino II might have bound the hands of this administration and caused unnecessary damage to its social reform agenda. A similar parallel can be drawn in the case of the CARP and the RH bill. Under Aquino I the legislation on agrarian reform was stalled until the more conservative forces in congress could water it down. The RH bill seems to be suffering a similar fate due to the weak support being received from the president in the face of stiff opposition from the conservative Catholic bishops conference.
So as we approach the final quarter of P-Noy’s first year in the Palace, we probably should load up the karaoke and sing along with Naked Eyes. This is probably the only solace we will find in the wilderness of broken promises.
The ProPinoy Project is a Global Community Center for all things Pinoy, to connect Filipinos at home and abroad by creating a space for ideas, trends and analyses about the Philippines and the global Pinoy community to inspire informed discussion and transformative action.