fiscal reforms

Dredging the Waters

The Laguna Lake dredging project is a good analogy for what the Aquino administration seeks to achieve with its anti-corruption campaign.

Last month, during the celebrations of Independence Day, PNoy sought to put an emphatic fullstop to the ongoing debate over what to do with a 19 billion peso dredging project involving the Laguna Lake by a Belgian firm which had handled a similar project involving the Pasig River.

In its most elemental form, the project intended to dredge the silt from one part of the lake and dump it on another part. It was cancelled not because the deal was invalid, as the DOJ had determined it had been. Nor was it due to corruption, as the administration did not allege any form of it had taken place (otherwise the OECD Anti-Bribery Convention would have required the filing of cases against those who offered or paid any bribes).

It was cancelled simply because as PNoy had put it, he was “allergic” to such deals, which led the firm to file for damages amounting to 6 billion pesos with the International Centre for Settlement of Investment Disputes. In seeking to dredge the silt from its own spending, the government seems to have delayed, if not cancelled many of its own public works projects in the first half of the year. Applying the same criteria (suspicion of corruption) to PDAF or congressional pork barrel would actually mean cancelling the lot of it.

But this post is not about that issue. Today, it was reported that credit rating agency Moody’s had followed another agency Fitch Ratings in recommending a structural (read: roots-to-branch) reform of the fiscal system. After praising the government for its efforts at consolidation (read: restraining expenditures while improving collections) without resorting to new taxes, it said that

(I)t is unlikely that stricter tax compliance will generate a material change in revenue performance if tax evasion cases are not resolved expeditiously by the country’s inefficient legal system.

So it would seem the efforts towards apprehending tax cheats is similar to the scuttled project that involved dredging the waters of Laguna de Bay in that it takes volumes of silt from one end of the bureaucracy, i.e. the revenue agencies, and dumps them onto another end, i.e. the courts, where they presumably accumulate and clog up the system. Without substantial amounts of spending to upgrade our court system, Moody’s is saying that a significant, permanent improvement to collections is unlikely.

To underscore the scale of the mountain the country has to climb if it wishes to gain an investment grade rating, Moody’s noted that the Philippines which had an average revenue-to-GDP ratio of 14.7% from 2006 to 2010 compared unfavorably with similarly rated peers in its category which averaged 23.7% in that period.

While it recognized the existing proposals to rationalize fiscal incentives and to index sin taxes to inflation as a positive first set of steps, it encouraged the country to go down a path of fiscal reform to improve its “ratings trajectory”. This is probably the loudest endorsement for what we have been espousing in this column.

Considering the problems the government has encountered in rolling out its PPP projects (with the first one being taken off the table), the government has to consider such recommendations seriously. Given the increasingly menacing headwinds coming from Europe, MENA, Japan, China and the US, it will have to find a way to pursue infrastructure and social spending in the future as the period of low interest rates (read: cheap capital from abroad) is bound to come to an abrupt halt.

Promises Promises (you knew you'd never keep)

Yesterday, it was reported that the Finance Department was preparing a new raft of taxes for next year’s budget. Having promised “no new taxes” at a speech to prominent businesspersons and having by and large kept to that declaration during his first year in office, the president apparently has given the go ahead to pursue new ways of raising revenue.

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.

Window Closed

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.

[youtube]http://www.youtube.com/watch?v=2D7GVyTtH1M[/youtube]

C’mon sing along!

Never had a doubt
In the beginning
Never a doubt
Trusted too true
In the beginning
I loved you right through
Arm in arm we laughed like kids
At all the silly things we did

You made me promises promises
Knowing I’d believe
Promises promises
You knew you’d never keep

Second time around
I’m still believing words that you said
You said you’d always be here
“In love forever”
Still repeats in my head
You can’t finish what you start
If this is love it breaks my heart

You made me promises promises
You knew you’d never keep
Promises promises
Why do I believe

Arm in arm we laughed like kids
At all the silly things we did
You can’t finish what you start
If this is love it breaks my heart

You made me promises promises
You knew you’d never keep
Promises promises
Why do I believe
All of your promises
You knew you’d never keep
Promises promises
Why do I believe

Promises
Promises
Promises
Promises
Promises