Crossroads (Toward Philippine economic and social progress)
Philippine Star, 31 August 2016


Last week, the Duterte administration submitted its first budget proposal for enactment by Congress. Aside from providing for the day to day business of the government as an institution, the budget does not disappoint in outlining the new directions and programs of the new administration.

The proposal contains major expenditure priorities. They also involve new and larger expenditure commitments that would need new resources and income from the government.

New priorities focused on war on drugs and on peace and order. The heavy footprint of the war on illegal drugs is robustly represented in this budget. The war against illegal drugs is the signature program of the Duterte administration, and is the critical program of the new leadership.

Two other equally important endeavors are tied up with the war on drugs: the program of settling the insurgencies in the countryside and the NPA-communist insurgency and Bangsa Moro in Mindanao.

These three related problems, if carried to a successful conclusion, will lay the basis for more solid economic development programs in the country. The budget proposal ties up the actions of the new government with expenditure realities.

The current budget proposal does not include the requirements of paying for salary and wage adjustments the President has promised to give to the police and armed forces. These numbers are still of unknown quantity. In the future, these adjustments will require a permanent rise in requirements for the standing forces in the service.

The economic reform agenda in the budget. During the presidential campaign period, candidate Rodrigo Duterte did not show much interest in “economic issues” except to say he would copy the good programs of other candidates.

As an outsider from the power centers in Manila, he could be more receptive to serious economic reforms suggested by other economic experts and business groups who are not tied up to the strong and entrenched economic interests in Manila.

The 10-point economic agenda of the Duterte government contains many reform measures that have wanted adoption in vain by the Aquino government. These reform measures were adopted very quickly and found a home in this government’s economic plan. Thus, prospectively, there are more wide-ranging and stronger reforms that could be realized under this presidency than in those carried out under former President Benigno Aquino III.

Budget magnitudes for programs and sectors. The total budget calls for public expenditure totaling P3.35 trillion. This amount represents an increase of 11 percent over the 2016 budget, the last presented by the Aquino administration.

The same budget expenditure is 20.4 percent of GDP (gross domestic product). This is slightly better than the 20.1 percent of the last Aquino budget.

The police agencies (under the Department of Interior and Local Government) and the armed forces (under the Department of Defense) receive a large chunk of budgetary increases for their needs, with the police allocation rising by 25 percent over the previous year’s budget and the armed forces receiving a 15 percent increase in budget for modernization. All three areas of programs get a new and substantial rise of the budget allocation for these groups.

The budgetary allocation for infrastructure is 13.8 percent higher than that allocated for the previous year’s budget. In total, the planned expenditure for infrastructure amount to P860 billion, distributed principally among the Public Works, the Transportation, and other departments that have capital expenditures, to raise their infrastructure services capacity.

Public expenditures and fiscal management. An important element of the budgeting process is the financing of public expenditure. Most government budgets are financed from tax proceeds. When this happens, there is price stability. Of course, deficits open the door to other forms of financing, some of which may have different degrees of influence on price stability.

Expenditures and taxes produce opposite economic processes. Any expenditure is a stimulus to further spending and, therefore, encourages more expansion. Any tax takes away purchasing power from those paying the tax.

The other part of sound public spending programs is a fiscal management that is prudent. This means that for the most part, the financing of government’s current expenditures would be covered by government taxes. This helps to neutralize the impact of fiscal budgets on public expenditure that is not backed up by government tax collections.

Experience in the country’s fiscal history has shown that booms and busts in economic activity could be traced by episodes of budgetary imbalances that are large and unsustainable. When this happens, as in the case of fiscal deficits, the result often is price inflation. A secondary but related impact is that the exchange rate of the currency in question falls in value, that is, depreciates.

On the basis of the current strengths of the Philippine economy, there is consensus among experts – including those from the IMF – that the economy can achieve sound economic growth under stable prices, if the spending program is kept within a deficit level that does not exceed three percent of the GDP.

To keep to the three percent of GDP deficit level, the imbalance between total spending and total tax collections should not be allowed to go off track. This means either one or the other: (1) Given the level of spending, the tax collection should not fall lower than three percent of GDP in relative values; or (2) Given the level of tax collections, the public expenditure allowed in the budget must not exceed the equivalent of three percent of GDP.

Tax reforms are needed. This theoretical but simple explanation emphasizes the point that the current budget, which calls for higher levels of spending, implies that there is need for tax resources of the government to grow almost to the same extent as the growth in spending. In fact, finding new sources of tax would enable a larger level of public expenditure on projects of high priority and social benefit.

Thus, it is important to pay attention to the tax reforms being suggested by the government in order to raise government revenues and produce matching sources of income so that it can finance a rising level of government spending.