Business World, 2 May 2012


The view that the Philippine government is out of its fiscal woes is demonstratively premature. Tax effort, defined as taxes as percent of gross domestic product (GDP), which hit its peak in 1997 at 17%, remains precarious. In 2010 and 2011, it was 12.1% and 12.3%, respectively. On the expenditure side, the government would need to increase public spending by about 5-7% of GDP to make up for past neglect in infrastructure, education and health care.

Indeed, those who say that the present administration can do what it plans to do to achieve inclusive, sustained, strong economic growth without fixing its broken fiscal sector is not helping public authorities do the right thing. Such views have the effect of condoning policy inaction.

The numbers are clear: tax effort which peaked at 17% 15 years ago on the back of the 1986 tax reform plummeted to 12.1%, the first year of the Aquino III administration. Despite heroic efforts by Bureau of Internal Revenue Commissioner Kim Henares, tax effort barely budged; it was 12.3% last year.

But that level of tax intake is woefully inadequate to cover the expenditure needs of a growing and modernizing economy. In a recent World Bank Public Expenditure Review (2011), the international lending agency recommended: “increasing expenditures in priority sectors by around 5-7% of GDP.”

“For basic education, filing the gap in school infrastructure, hiring additional teachers and extending the cycle to 12 years would cost slightly over 2% of GDP. Bringing up public expenditures on health to regional levels requires an additional 0.7-0.8% of GDP. Finally, overall infrastructure expenditure should eventually be stepped up by 3-4% of GDP. A 0.1% increase will be needed by the justice sector.”

The World Bank’s study recommended an overhaul of the public investment management system. The report argues: “The overhaul should aim to make project selection more technical, less political, and more strategically aligned with the country’s development objectives as defined in the new Medium-Term Philippine Development Plan (MTPDP). In particular, the government should consider reducing and, if possible, eliminating Congressional allocations (Department of Public Works and Highways and Priority Development Assistance Fund).”

The World Bank’s study further recommended that investments in public infrastructure and communications be increased. “Once the public investment management system has been overhauled and revenues sufficiently increased, expenditures on infrastructure and communications should be strategically stepped up. In the short run, increases in total public infrastructure expenditures are unlikely. This is due to the absence of fiscal space owing to the impact of revenue-eroding measures enacted in 2009, the implementation of the Salary Standardization Law III, and the need to rein in the ballooning budget deficit.”

The World Bank recognized that the fiscal space does not exist and that the process of choosing projects are too political and less than optimal.

The decline in budget deficit in 2011 to 2% of GDP from 3.7% in 2009 and 3.5% in 2010 is interpreted by some as an indicator of fiscal progress.

Wrong! That’s a monumental mistake. The observed fiscal consolidation was unintended. The original planned deficit was 3% of GDP, but only 2% was realized because the government failed to implement what little amount has been appropriated for public infrastructure. Note that the public infrastructure program in 2011 was smaller than that in 2010.

The smaller deficit-to-GDP ratio is now given a positive spin: it shows a government that is fiscally sound. But the harsh reality is that it shows an inept administration, one that is unable to implement authorized projects in a timely manner. The boastful announcements of zero-based budgeting and front-loading of budget releases turned out to all talk, no action.

But the administration’s fiscal agony may not be over yet. The fiscal numbers for the first quarter of 2012 suggest a repeat performance of the severe underspending the previous year. Despite the early approval of the national budget and its early releases, actual deficit (P34 billion) for the first quarter was only 41% of planned deficit (P83 billion).

At the end of the day, the government will be judged on the basis of its success in providing essential public services and infrastructure to its people, rather than how by much money has been hoarded by postponing or delaying project implementation. Delaying or not implementing an authorized program or project, assuming such is economically worthwhile, means postponing or denying its intended beneficiaries the benefits from the project.

Finally, the existence of fiscal space is a necessary but not sufficient condition for running the government effectively. The capacity of the existing revenue system to mobilize resources should be increased through fundamental reforms and improved tax administration. The project selection mechanism should be overhauled and improved. And the present administration’s ability to implement programs and projects authorized by Congress should be enhanced.

Delays in project implementation — whether involving roads, water system, irrigation canal, power project or school facility — deprive intended beneficiaries of the project’s benefits. Put differently, procrastination or incompetence is not costless.