Business World, 17 October 2012


One of the disturbing aspects of the Senate committee on ways and mean’s Committee Report — now withdrawn or discarded — is its proposal to earmark the total proceeds of the sin tax on cigarettes and liquor. The House bill, on the other hand, proposes to earmark the incremental, not the total, proceeds of the tax. This penchant of legislators to earmark proceeds of a tax is based on the exaggerated benefits of the practice while totally ignoring its costs.

The Senate committee report earmarks the total proceeds of 50 billion (35 billion revenues based on existing laws plus 15 billion incremental revenues) as follows:

  • on top of the earmarks in Republic Act (RA) 7171 for provinces producing Virginia tobacco, 1 billion a year to be given to provinces producing burley and native tobacco; this will be used exclusively to develop alternative livelihood for tobacco farmers and workers;
  • 50%, or roughly 33 billion to the public health sector, of which 40% will go to PhilHealth to benefit at least 10.4 million families. The balance of 10%, or roughly 6.5 billion, will be equally distributed among regional hospitals supervised by the Department of Health (DoH) and district hospitals run by local government units (LGUs).
  • 100 million yearly to fund a nationwide information and education campaign on the dangers of smoking and drinking to be administered by the DoH.

Under the proposed earmarking, each of the 16 regional hospitals will receive 200 million while each of the 618 LGU-run district hospitals will get 5.25 million annually. That’s a lot of construction for new hospital buildings, extensions, wings in the years to come. That’s a lot of resources being devoted to curative, rather than preventive, health care. And should the bill be approved now in its present form, we don’t know when it will be amended again to respond to new priorities. Incredulous, but true.


The first cost of earmarking is that it will make budgeting of government resources more difficult for future Presidents and Congresses.

If the proposed bill on sin taxes were passed in its present form, a big chunk of public funds, about 50 billion and rising, would be earmarked for specific purposes by the present Congress.

Tying the hands of future governments is neither sound nor smart. Earmarking could result in fund imbalances — a surplus for the favored programs and shortage for other budget items. This could complicate decision-making on the composition and size of the budget.

The second cost of earmarking is that it will tie the hands of fiscal managers — the Secretaries of Budget and Management and Finance — on how to address any fiscal crisis should there be one in the future.

And no one has a full handle of what the future holds. Many things could go wrong. A strong recovery which could result in higher interest rates, and hence higher debt servicing. The retirement costs of the military and the police could balloon in the near future and hence put pressure on government spending and higher deficits. A much slower economy could result in lower revenues. All these suggest that a fiscal crisis cannot be ruled out in the future.

What if the government had to cut spending in order to reduce its ballooning budget deficit, but fiscal authorities are barred from touching the earmarked funds for the health sector? Even as the budget deficit is threatening to reach unmanageable levels, the subsidy to tobacco growers and workers will continue to expand, the surplus of PhilHealth will continue to swell, and new hospital buildings or extensions will continue to be built.


The benefit of earmarking is that it facilitates decision-making on how much revenues and expenditures for a particular activity are needed, simultaneously. Put differently, it is easier to push a difficult measure such as a tax increase if the uses of the incremental revenue are known before hand. In this case, the beneficiaries are the tobacco growers and farmers, the health sector (PhilHealth and DoH), public and private health providers, and health care beneficiaries in general.

Understandably, earmarking was used to build a strong coalition in favor of higher taxes. [Of course, another strategy was to limit the tax burden on liquors which was supported by a dominant political party in the House of Representatives.] Tobacco growers and farmers were assured that RA 7171, a law which provides subsidy to tobacco producing provinces, will continue.

PhilHealth and DoH were guaranteed large budgets in the years to come. Local government units were assured of additional specific grants from the central governments. The grants will be in addition to the internal revenue allotment (now in the neighborhood of 300 billion annually) which is guaranteed in the Local Government Code of 1991.

And there’s even 100 million annually for media firms that will be involved in the information and education campaign.


The perceived benefits of earmarking are not automatic, however. Earmarking works in a political environment where policy makers play by the rules, when the national budget is implemented strictly in accordance with congressional authorization.

There is a big difference between theory and practice. What Congress has authorized is not necessarily released by the Department of Budget and Management (DBM), and what is released is not necessarily spent. Occasionally, DBM impounds what has already released by issuing a negative specific allotment release order.

Last year, President Benigno Aquino III did not implement the national budget as approved by Congress. Stung by criticisms that the Aquino administration was slow in implementing government programs and projects, he authorized DBM to slice and dice the budget to come up with a package of new spending initiatives worth 72.1 billion called the Disbursement Acceleration Program (DAP). The DAP was augmented by another 13.4 billion before the year ended. That’s 85.5 billion new spending authority that did not get prior congressional approval.

Of course, the Executive invoked the “power to augment” provision in the Constitution.

But that’s hypocritical. In the past, then Senator Benigno Aquino III and the Liberal Party’s top leaders — Mar Roxas, Teofisto Guingona III, and Joseph Emilio Abaya — proposed limits to the presidential to augment to correct the abuses of the previous regime. They proposed the Budget Impoundment Control bill. Now that they are on the other side of the fence, none has been heard from them. Not even a peep.

Here’s the point: under existing rules, the President, through the Budget secretary, may impound the appropriations unilaterally on whatever pretext DBM might think of (slow-moving, non-compliance with some requirements, failure to prepare the implementing rules and regulations, and so on). Aquino unilateral impounded appropriations in 2010 and 2011. He could do it again in the days ahead.

Under our imperfectly working government financial system, earmarking is non-binding. It gives false hopes that funds will flow into some specific programs; the flow is not guaranteed. There is no assurance that appropriations made by Congress will be released, and if released, will be spent. In reality, some amounts are impounded, some parked with PhilHealth.

Earmarking becomes more credible if there is new legislation (for example, the Budget Impoundment Control Act) that will oblige the President to release appropriations authorized by Congress and will limit his power to impound appropriations.

At the same time, we need a more assertive Congress — one that is willing and able to exercise its oversight function over the budget, and an opposition that is willing and able to exercise its fiscalizing role.