Business World, 6 October 2015


President Benigno S. C. Aquino III balked at the idea of having the 19-year-old personal income tax system reformed. I think he’s seriously ill-advised.

Both the House Ways and Means Committee Chairman Romero Federico “Miro” S. Quimbo and the Senate Ways and Means Committee Chairman Juan Edgardo “Sonny” M. Angara are spearheading the bill. Surprisingly, in a rare show of agreement, both business (the business community and the joint Foreign Chambers) and labor support the bill. The academic community endorses it too.

There is near unanimity that the personal income tax system is not only anachronistic, it is also unfair, burdensome, and out-of-sync with our Association of Southeast Asian Nations (ASEAN) neighbors. It needs to be reformed.

In face of an overwhelming support for the personal income tax cut, President Aquino, the administration’s presidential candidate Manuel “Mar” A. Roxas II, and Finance Secretary Cesar V. Purisima continue to oppose it.

The President warned of runaway deficit and possible downgrade by international ratings agencies. That’s rubbish. The administration can’t even implement programs and projects Congress has authorized it to implement. Its deficit-to-GDP (gross domestic product) ratio last year was 0.6% while the target was 2.0%. This year, the administration would be lucky to have a deficit-to-GDP ratio of 1.0%, half of its 2.0% target.

The possibility of a downgrade at this time is farfetched. Even with the looming global economic slowdown (due to weaker China, Europe and Japan), the Philippines remains one of the least vulnerable countries among developing and transition economies.

The Philippines’ foreign debt-to-GDP ratio is down to manageable level. The government can afford not to borrow from abroad. It gross international reserves are hefty and healthy. It is assured of a steady inflow of $25 billion to $26 billion overseas remittances yearly. This is on top of the growing inflows from the expanding business process outsourcing industry.

Mar Roxas asked: What government services may be sacrificed if the tax yield is cut by P30 billion as a result of lower personal income tax rates?

Well, the 2016 P3-trillion budget is oozing with “fat.” But let me identify just one item, the Miscellaneous Personnel Benefits Fund (MPBF). Embedded in the MPBF is a lump-sum item called “Lump-sum for Compensation Adjustment” with an allocation of P50,664,000,000.00 (2016 National Expenditure Program, Volume III, p. 864).

This P50.7 billion for salary increases of government workers, if implemented, will be a recurring expense of government. In the same manner, a tax cut will be a recurring loss of P30 billion.

Should policy makers favor government workers over the general taxpaying public? Is it smart to ignore the increasing clamor by all income taxpayers — from the public sector and private businesses alike — just to increase the salaries of public officials and employees?

Note that a personal income tax cut from 32% to 25% will favor everyone. All, including government workers (even if they do not get a salary raise), will benefit from it.

But I’m not proposing to use up the entire P50.7 billion to offset the P30-billion tax loss. Some P20.9 billion of the MPBF may still be used for the adjustment of salaries of government workers. So it will be a win-win situation.

The proposed tax cut will put more money in the pockets of individuals, which in turn will increase consumer spending, savings and investment. It will lead to lower cost of labor, which would spur more employment.

All in all, this income tax cut[ proposal is a no-brainer. It’s good economics and good politics.


Moreover, the Aquino III administration has a proven history of underspending. Its poor spending behavior might be due to poor budget planning (allocating funds for projects that are not ready for implementation), or deliberate attempt to create “fat” in the budget which could then be declared and used as “savings,” or outright incompetence, or all of the above.

From 2011 to 2014, the Aquino III administration has underspent by some P672 billion.

In 2011, the authorized expenditure program was P1.711 trillion, actual spending was P1.567 trillion, or an underspending of P154 billion.

In 2012, the authorized expenditure program was P1.854 trillion, actual spending was P1.778 trillion, or an underspending of P76 billion.

In 2013, the authorized expenditure program was P2.021 trillion, actual spending was P1.880 trillion, or an underspending of P141 billion.

In 2014, the authorized expenditure program was P2.281 trillion, actual spending was P1.982 trillion, or a staggering underspending of P299 billion.

One would think that the Aquino administration has learned from its poor spending habits and that it may now have better capacity to implement programs and projects in its penultimate year.

But no — it continues to underspend, which is mind-boggling since the budget that Congress cranks out, year-in year-out, is almost exactly what the President submitted to Congress.

This year, the planned spending from January to July was P1.470 trillion but actual disbursements was only P1.28 trillion for a whopping underspending of P180 billion. Government incompetence has reached epic proportion.

From January to July, the planned budget deficit was P173.8 billion, but actual deficit was only P18.5 billion, or only 10.6% of planned deficit.

Last year, the planned deficit was 2.0% of GDP. Actual national government deficit was only 0.6% of GDP or P73.1 billion.

But isn’t smaller deficit better than large deficit? Under normal times, it is desirable to have smaller deficits. But for the Philippines, at this stage of its development, a large deficit may be justified. In fact, I can easily justify a deficit-to-GDP ratio of 3.0% to 5.0% for as long as public spending is focused on essential public infrastructure and investment in human capital.

The Philippines has huge requirements for public infrastructure if it wants to keep up with its ASEAN neighbors. In addition, it needs to invest heavily in human capital for its burgeoning, young people.

The young population will be a valuable resource only if its well educated, healthy and well fed.

But this requires an administration that is focused, able to prepare a responsive budget, and competent to implement well-chosen programs and projects.


As the 2016 President’s budget goes through the usual congressional review and authorization phase, the following questions appear warranted.

Considering its past record of underspending, what assurances does the general public have that the Executive Department will be able to spend what Congress has authorized it in 2015?

Considering its delays in project implementation, how much of the authorized budget for 2015 will not be spent this year and therefore may spillover to 2016?

All in all, considering the authorized appropriations that the Executive Department will not be able to spend this year, and the total new appropriations that the President is seeking from Congress, how much will be the total cash budget for 2016?

Are all the programs and projects included in the 2016 annual budget ready for implementation in 2016? Or are some of these projects yet to be fleshed out in the course of the fiscal year?

The Aquino administration should justify the huge chunk of lump-sum (estimated at P424 billion) appropriations in 2016 proposed budget? This act, I think, constitutes undue delegation of congressional authority to the President, especially since department heads are likewise authorized to reprioritize their respective budgets after Congress has approved the General Appropriations Act.