the leadership imperative - philippine center for...

Strategic Research Institute (sri)

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The Leadership Imperative Addressing Insufficient Revenues, Ballooning Debts,

and 2006 Budget

February 25, 2006

Leadership is what we need the most to end the country’s enduring fiscal crisis and realize transformations in Philippine economic performance. Leadership is a defining attribute of modern democracies. Policies may generate improvements in the economy but sustaining them requires leadership. Current socio-economic conditions heighten the importance of the role of leadership to ensure good governance and, ultimately, economic recovery.

The year 2006 greeted the Arroyo administration well with higher foreign investments, higher OFW remittances, surplus in the balance of payments, a stronger peso, and a relatively less aggressive political opposition.1 In the end, these are insufficient reasons for complacency on the part of the administration.

It should serve as a warning that recent economic movements are attributable less to internal policy measures but more to external forces including the global capital movement, significant increases in OFW remittances, and the expected stability of oil prices.

It is absolutely erroneous to admit that her set of new tax measures, said to be the Administration’s “centerpieces of economic reform,” particularly the expanded value-added tax (EVAT), have solely pulled this country out of the fiscal crisis.

In addition, the Administration cannot claim that such alleged reforms have led to results since social gains naturally do not occur immediately. It also should not claim that such “advances” led to a more satisfied public. Around 7 in every 10 Filipinos believe that their quality of life had worsened in the last few months of 2005.2 Young professionals and the middle class in general may understand what it means for the economy when the dollar fluctuates and dividends and shares of stock plummet. Some of them may even own bonds 1 Except for the benign presence of the political Opposition, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said that strong balance of payments (BOP) surplus was “due to the double-digit growth in OFW remittances, strong inflows of foreign direct investments and portfolio investments, government borrowings, and high investment income from offshore ventures.”. Retrieved January 17, 2006 from “2005 balance of payments shows surplus of US$2.41B” (2006, January), Philippine Daily Inquirer – Inq7Money: http://money.inq7.net. 2 Pulse Asia’s Ulat ng Bayan October 2005 nationwide survey on Public Perception on Poverty shows that around 7 in every 10 Filipinos (73%), most of them in the poorest (Class E) say their personal quality of life (QOL) and that of the nation worsened. Retrieved December 17, 2005 from “October 2005 Ulat ng Bayan Nationwide Survey on Public Perceptions on Poverty,” (2005, December). Pulse Asia Website: http://pulseasia.newsmaker.ph.


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and other forms of equities themselves. On the other hand, Filipinos who push fish carts and haul vegetable boxes for a living in local wet and dry markets simply might not. Majority of our population are poor and, unfortunately, do not possess the sophistication to appreciate said claims and media reports on how valuable EVAT and other taxes are for the country.

Investment analysts note that Arroyo’s monetary and fiscal stimuli are not enough to steer the country out of its impending crash.3 Indeed, there is no quick fix, fool proof, and painless solution to the country’s deepening fiscal predicament. Recent political and economic movements in the Philippines provide compelling reasons for observers and on-lookers to reassess the value that leadership brings to end the country’s worsening fiscal and economic positions.

Revenue shorts and ballooning debts amid meager economic performance necessitate the need to induce deficit spending through the national budget. The national budget is an important tool for realizing economic growth and social development. Yet the national budget fails to do these because expenditures on salaries and debt payment surpass capital outlays crucial to induce and sustain development. In addition, simplistic budget processes that fail to create meaningful results and induce performance in the bureaucracy subdue the Philippine budget process.

In this paper, we put emphasis on the primacy of political consolidation in the Arroyo administration. Efforts by the Arroyo administration to boost the President’s leadership standing are placed alongside the two biggest national concerns: revenues and debts. The paper shows that a regime bent on political survival is aimed only at one goal: self-preservation.

CRISIS OF LEADERHSIP

“Political language, as used by politicians, does not venture into any of this territory since the majority of politicians, on the evidence available to us, are interested not in truth but in power and in the maintenance of that power. To maintain that power it is essential that people remain in ignorance, that they live in ignorance of the truth, even the truth of their own lives. What surrounds us therefore is a vast tapestry of lies, upon which we feed.”4

3 Most notable of recent observations were raised by Citigroup chief global investment strategist, Clark B. Winter Jr. He asserts that for the Philippines to stay afloat and within bounds of the investment radar screen, the government should maintain the pace of its economic reforms. Retrieved January 18, 2006 from Salvosa II, Felipe F. (2006, January). “Reforms crucial for RP: Policy tools not limited to monetary and fiscal stimulation,” Business World Online: http://www.bworldonline.com 4 Pinter, Harold (2005, December) Art, Truth & Politics. Retrieved on January 8, 2006 from The Nobel Foundation 2005 Website: http://nobelprize.org/literature/laureates/2005/pinter-lecture-e.html


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These words of Harold Pinter remind us of a recent event that may eventually be vaguely stored in the memory of the nation.

It was seven o’clock in the evening, Monday, June 27, 2005. President Arroyo came out on public television and broke out a long-drawn silence of the Gloria-Garci scandal that shook the foundations of her administration. Truth, like peace, became even more elusive. In the midst of calls for her resignation for alleged cheating in the May 11, 2004 national elections, she appeared on national television to apologize and immediately urged the public to “move on” and take advantage of benefits from high levels of tax collection.

On that day, the political ethos had gone from political to moral. That the President cannot be pinned down through the political incline of the “Hello Garci” scandal, anti-Arroyo forces resorted to vague yet equally provocative and oftentimes powerful lines of truth and morality. Without much allusion to the truth of whether it was her voice or not, coupled with a well-crafted, legally worded statement, the President apologized to the public. She admitted that she had a “lapse in judgment.” Mixed emotions were felt, mixed reactions spurred. But the nation must “move on.”

The public was neither pleased nor appeased by the apology. A spur of rallies spearheaded by different civil society organizations and the political opposition took place. Opposition lawmakers at the Lower House of Congress pursued an impeachment case against the President. Much to their disgust and discomfort, the impeachment case failed. Anti-Arroyo rallies subsequently waned.

It is argued here that there was no lapse in judgment but that the parties in power have proven their shrewdness in the area of political survival.

To the dismay of the political opposition in the country, Arroyo turned out to be tougher than the ordinary politician. She even has an entire page in Time Magazine’s 2005 year-end special, entitled “People who mattered in 2005.” In reference to this citation from Time Magazine, Executive Secretary Eduardo Ermita said, "The mettle of a leader…in any endeavor is tested when he is given problems and is able to overcome them with flying colors.”5

The aftermath of President Arroyo’s June 27 public apology necessitated that she consolidate her political positioning in response to her eroded character. Despite consistent downplaying from Palace officials, political consolidation became the primary agenda of the Arroyo administration. It is the logical move for an embattled leader.

5 Avendano, Christine (2005, December) “The world loves survivors: Arroyo cited by Time.” Retrieved January 20, 2006 from Philippine Daily Inquirer: http://beta.inq7.net/nation/index.php?index=1&story_id=61385.


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Among the presidencies in the post-1986 period, public pessimism with regard to the expected change in quality of life is worst under the Arroyo presidency. The number of net optimists among Filipinos in terms of the expected change in the quality of life from start to end of each presidency, from the Aquino regime to the Arroyo, shows that the overall trend in attitudes toward quality of life had been on the decline. The biggest slide is during the term of President Arroyo. (See Table 1.)

Table 1. Estimated number of Net Optimists among Filipinos in terms of Expected Change in the Quality of Life, from Start to End6, from the Aquino to Arroyo presidency PRESIDENCY START END DIFF7

Aquino 31% 22% 9% Ramos 33 23 10 Estrada 26 4 22 Arroyo 24 08 24 Source: Social Weather Stations (SWS), 1984-2005

We arrived at the estimates using survey results from the Social Weather

Stations (SWS). They were culled from their regular Social Weather Surveys from 1984 to August 2005, two months after the June 27 apology and at the heat of the political turmoil. The estimated difference in the rate of net optimists in the population represents the extent of “leadership slide,” which pertains to the extent of increase/decrease in rate of net optimists at the start and end of each presidency; the farther the slide, the bigger the sense of pessimism in the population.

The findings also show that among the post-1986 presidencies, the Arroyo presidency ranked lowest in terms of the rate of net optimists at the start of the tenure. In February 2001, a month after it took office, the Arroyo presidency garnered only around a net optimism rate of 24%. This was the lowest since the Aquino (31%), Ramos (33%) and Estrada (26%) presidencies.

In addition, the Arroyo presidency was also rated badly when one looks at the end-of-the-year optimism of Filipinos. Normally, as the year-end approaches, Filipinos are hopeful of a better year ahead. Public perception on the expected

6 These qualifiers are based on the “start” and “end” of SWS National Survey on Expected Change in the Quality of Life in Next 12 Months: April 1984 to August 2005 on each of the presidencies presented in the study. The study used the same survey periods corresponding to each presidency as they were presented in the SWS national surveys. 7 The “difference” represents the spread of percentage points in terms of the rate of net optimists throughout each presidency. The “difference” is obtained by subtracting the rate of net optimists at “end” from the “start” of each presidency. 8 Statistically, the “End” figure in terms of the number of net optimists during the Arroyo administration became “zero” because the number of the optimists (25%) and the number of pessimists (25%) are the same. Thus, in computing for the rate of net optimists (total percentage of optimists minus total percentage of pessimists) the result becomes zero.


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change in quality of life was worst during the Arroyo administration, in which the rate of net optimists was only at 14%. The same presidency also had the lowest rate of net optimists (-5%), along with the Estrada presidency, which happened at the tail end of the latter’s tenure.

The Arroyo presidency had the highest rate of pessimists compared to the other Administrations. Worse, even the lowest rate of pessimists of the Arroyo president, which was at 18%, this figure was also the highest in comparison with the lowest rate of pessimists among the post-1986 presidencies.

Table 2. End-of-the-Year9 Highs and Lows in the number of Optimists, Pessimists and Net Optimists among Filipinos regarding the Expected Change in their Quality of Life

PRESIDENCY PARTICULARS HIGH DATE LOW DATE

Optimists 39% 39%

Oct ‘86 Sep ‘88

28% 28%

Oct ‘87 Jul ‘91

Pessimists 27% Nov ‘90 10% Oct ‘86 AQUINO

Net Optimists +29 Oct ‘86 +6 Jul ‘91 Optimists 44% Sep ‘92 25% Dec ‘96

Pessimists 23% Oct ‘95 11% 11%

Sep ‘92 Dec ‘96 RAMOS

Net Optimists +33 Sep ‘92 +6 Oct ‘95 Optimists 38% Jul ‘98 24% Sep ‘00 Pessimists 28% Sep 00 12% Jul ‘98 ESTRADA Net Optimists +26 Jul 98 -5 Sep ‘00

Optimists 32% 32%

Sep 01 Nov 02 25% Dec 04

Pessimists 30% Dec 04 18% Sep 01 ARROYO

Net Optimists +14 Nov 02 -5 Dec 04 Source: Social Weather Stations (SWS), 1984-2005

It is clear that political consolidation had been a compelling agenda for the Arroyo presidency. Although Palace officials may sustain their efforts in downplaying the political tune, the underpinning agenda remains. To begin with, the Arroyo presidency did not benefit from a needed popularity when it assumed power in 2001. It continued to be heavily embattled up to 2004 (even after obtaining electoral success) and sustained more heavy criticism until the turmoil intensified towards the end of 2005. To this end we say that crisis of legitimacy, an inherent characteristic of the Arroyo presidency, evolved into a crisis of leadership.

9 End-of-the-Year highs and lows are derived from the 3rd and 4th Quarter findings of the SWS National Surveys on Expected Change in the Quality of Life in Next 12 Months: April 1984 to August 2005. For analytical purposes, 3rd and 4th Quarter findings were extracted to describe qualifiers of End-of-the-Year results, hence the “high” and “low” distinctions.


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Notwithstanding her weakened political stance, she still believes that she can “beat the odds” which was even turned into a tagline for her administration’s fiscal agenda for 2006.

SHORTCOMINGS IN ECONOMIC AND TAX REFORMS

An editorial cartoon in the Philippine Daily Inquirer depicts the country’s enduring economic difficulty.10 The cartoon shows an entangled funnel with inversely sized openings. On the larger end of the funnel are the so-called economic advancements by the Arroyo administration, namely, stronger peso, high stock index and high investor confidence. Because of severe government bottlenecks (hence the “entangled funnel” metaphor), almost nothing comes out of the other end. The editorial was aptly entitled “economic lies.”

The Arroyo administration pronounces advancements in economic performance without much recognition from the people. Overall economic well being is deemed bad while unemployment, hunger, and economic pessimism reached record highs.11

Table 3. Asian GDP Growth Rates 2001-2006

Country 2001 2002 2003 2004 2005* 2006* Singapore -1.8 3.2 1.4 8.4 4.1 4.5 Malaysia 0.3 4.1 5.3 7.1 5.7 5.3 Thailand 2.2 5.3 6.9 6.1 5.6 5.8 Indonesia 3.8 4.3 5.0 5.1 5.5 6.0 Vietnam 5.8 6.4 7.1 7.5 7.6 7.6 PHILIPPINES 1.8 4.3 4.7 6.1 5.0 5.0 China 7.5 8.3 9.3 9.5 8.5 8.7 South Korea 3.8 7.0 3.1 4.6 4.1 5.1 *Projected Source: Asian Development Bank, 2005

The economic advancements made by the Arroyo administration are

insufficient and failed to make a dent on the living conditions and the economic well-being of Filipinos. Some observe that economic growth at levels recorded over the past two decades, and the 4.7 percent to 5 percent expected economic growth for 2005 and 2006, is too low to promote rapid progress in reducing poverty.12 From a regional perspective, the Philippine economy performed poorly

10 “Economic Lies.” (2006, January). Retrieved on January 9, 2006 from Philippine Daily Inquirer: http://www.inq7.net 11 The state of economic well-being and other socio-economic indicators is based from the observations of the SWS President Mahar Mangahas. Mangahas, Mahar (2006, January) The 2006 SWS Annual Survey Review: A Year of Great Trials. Retrieved on January 27, 2006 from SWS Website: http://www.sws.org.ph/pr060126.htm 12 Excerpts from a quoted statement by Haruhiko Kuroda, Asian Development Bank President, in a speech he delivered during an Asian Society forum. Kuroda observes dismal performance of the Philippine economy, saying that the country is lagging behind its East Asian neighbors. Arcibal, Cheryl M. (2006, January) “Philippine economic growth can’t lick poverty, says ADB.” Retrieved on January 18, 2006 from


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as compared to other Asian economies based on estimates of the Asian Development Bank.13 (See Table 3.)

Figure 1. RP’s Gross Domestic Product, GDP Growth Rates, 1993 to 2004 (In Million PHP, at Constant 1985)

The recovery is going on an uphill climb, as shown by the two-step increase in Figure 1 from 2001 to 2002 and 2003 to 2004, reaching the 6.1% mark, a level only similar to the country’s GDP growth rate in 2000.

Looking at the country’s economic productivity, only the Service sector continues to perform well. With a significant number of the work force in the Agriculture sector, the plight of farmers may not be expected to improve given minimal advancements in income generation within Agriculture.

Economic advancements made by the Arroyo administration pale in comparison with the country’s needs. From a population-based perspective, such meager improvements in economic performance are diminished in relation to the country’s growing population. Annual GDP growth rates of 5% are offset by around 3% when posted against the country’s annual population growth rate of 2%.

The Manila Times Internet Edition: http://www.manilatimes.net/national/2006/jan/18/yehey/business/ 20060118bus1.html 13 Asian Development Bank (2005) Asian Development Outlook 2005: Promoting competition for long-term development.

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-101234567

GROSS DOMESTIC PRODUCT GDP GROWTH RATE

Source: BSP


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Figure 2. Gross Domestic Product by Sector, by Quarter 2003/Q1 to 2005/Q3

(In Million Pesos, At Current Prices)

Despite growth, poverty remains to be a grinding social reality. Most recent poverty indicators show that amid the recent round of economic advancements, 30% of Filipinos are still living below the poverty threshold of Php12,267. In addition, one in every four Filipino families (25%) are impoverished.14

Inequality in income distribution is reflected in the 2003 Family Income and Expenditure Survey (FIES), the richest 10% of the Philippine population has an annual income almost twenty-one times that of the poorest 10%. The 2003 FIES also indicates that the Gini coefficient, a measurement of income equality, has decreased from 0.4822 in 2000 to 0.4605 in 2003. (A Gini coefficient of 0 means perfect equality while 1 means total inequality.) Closer observation of the FIES from 1988 to 2003 will show that the income distribution in 2003 is not much different from findings in 1991. It is clearly erroneous for the government to claim that there had been significant advancements and successes in economic reform.

Labor and employment is another problem area. Estimates indicate that about 1.5 million people join the labor force in the Philippines, surpassing President Arroyo’s stated official policy to generate 1 million jobs per year. In 1956 employment was between 8.2 and 8.9 million, indicating an average of

14 “2000 and 2003 Regional Poverty Estimates.” (January, 2006) Retrieved on January 3, 2006 from National Statistical Coordination Board Website: http://www.nscb.gov.ph/poverty/2003/povInc.asp.

0200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,000

2003

/Q1

03/Q

203

/Q3

03/Q

4

2004

/Q1

04/Q

204

/Q3

04/Q

4

2005

/Q1

05/Q

205

/Q3

Agriculture Industry Services

Source: NSCB


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650,000 unemployed workers per year. By 2004, employment was at 31.6 million against a labor force of 35.86 million.15

The overall unemployment trend is rising prior to changes in statistical definition. The country’s total unemployment level in 2003 was the highest since 1971. More recent unemployment rates that went beyond 10 percent translated to about 3.5 million to 5 million jobless Filipinos. This surpasses the high unemployment trend in the late 1980s as well as during the height of the Asian financial crisis in the late 1990s.

Figure 3. Unemployment in the Philippines 1971-2003

Even those with jobs find their present work inadequate to address their needs. Such is the reason for unprecedented increases in underemployment. As of April 2005, crude estimates show that underemployment is at 26.1%, corresponding to nearly 8.4 million Filipinos.

Insufficient and wanting domestic employment pushes Filipino workers to seek opportunities overseas. The number of overseas Filipino workers (OFWs) deployed increased tremendously from about 30,000 in 1975 to about 1 million in 2004. (See Figure 4.)

15 Batalla, Vincent. (2005, 23 November). The Fiscal and Employment situations as Continuing Crisis. Paper presented at the 43rd Annual Meeting of the Philippine Economic Society, Asian Institute of Management.

Source: Batalla, Eric. (n.d.).


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Figure 4. Total Number of Deployed Workers and Amount of Remittances 1975-2004

At the end of 2005, remittances from OFWs amounted to US$10.9 billion, besting the 2004 level at US$8.8 billion and representing an increase of 23 percent. Total OFW remittances accounted for 13.5% of the country’s GDP. At present, estimates show that there are at least 8 million Filipinos abroad. The total number of workers deployed abroad represents 3.1% of the country’s labor force and is growing at about a rate 3.5% annually.

Recent public opinion polls show that around 1 in 3 Filipinos want to migrate to other countries. This along with the other trends mentioned indicates that the desire to move abroad may have evolved as a cultural pattern, which worsens the risk of preventing sustained growth due to loss of human capital.

THE CONTINUING FISCAL CRISIS

In 2004, President Arroyo recognized in her State of the Nation Address (SONA) that government’s worsening fiscal and debt problems are the country’s most urgent problem. By 2005, President Arroyo reported in her SONA that the country is on the verge of economic take-off, yet subdued by a “divided” Philippines, alluding to erring political factions as the culprit.

In almost every month in 2005, the Philippine government experienced fiscal deficit (see Figure 4). Erratic patterns in revenue generation indicate poor

Source: Batalla


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performance. The three periods of relative surplus was due to tax collection seasons. Sudden decline in government spending on June triggered balance only to be followed once again by a quick increase in expenditure. Towards the end of the year, revenue figures followed a gradual increasing pattern.

FIGURE 4

National Government Fiscal Position January to November CY 2005

(In Million Pesos)

The fiscal problem of government widened between 2002 and 2004,

pretty much covering the first three years of the Arroyo administration. The national government’s revenue performance was most dismal in 2002 (see Figure 5). There was unrelenting government spending until finally receding in 2004. Even in 2002, fiscal consolidation was a necessary measure to alleviate the deficit. The pronouncement of the President in the 2004 SONA was inaccurate.

The duration of the country’s fiscal problems had been on-going for more than fifty years dating as far back as the beginning of the Third Republic (1946-1948). During the last sixty years, the Philippines experienced only 12 years of fiscal surplus.16 Most Philippine administrations spend more than what it earned. (See Table 4.) The Arroyo administration is unable to tailspin the country’s incessant deficit and is no different from its predecessors. 16 Batalla (2005) argues that a review the country’s fiscal and employment situation reveals the increasing magnitude of debt and unemployment, suggesting the continuing crisis in economic management. He also notes that poor fiscal management is often criticized to be plagued by populist politics. The inability of government to expand the country’s minute tax base to augment revenues causes poor revenue generation, leading to the worsening of the crisis. See Eric Vincent Batalla (2005). The Fiscal and Employment situations as Continuing Crisis. Paper presented at the 43rd Annual Meeting of the Philippine Economic Society, Asian Institute of Management, 23 November.

0

20,000

40,000

60,000

80,000

100,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

REVENUES EXPENDITURES

Source: Bureau of Treasury


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Figure 5. National Government Fiscal Position CY 1999 to 2005 (In Million Pesos)

Table 4. Fiscal Performance of the Past Administrations

1946-2004

Political Administration

Average Annual Fiscal Surplus

(Deficit) in PhP million

Average Annual Fiscal

Surplus (Deficit) in US$ million

Roxas (1946-48) (30) (15) Quirino (1948-53) (2) (1) Magsaysay (1953-57) (76) (38) Garcia (1957-61) (107) (53) Macapagal (1961-65) (113) (40) Marcos (1965-72) (397) (85) Marcos Authoritarian (1972-86) (6,648) (537) Aquino (1986-92) (24,242) (1,030) Ramos (1992-98) (7,261) (181) Estrada (1998-2001) (111,193) (2,408) Macapagal-Arroyo (2001-04) (186,171) (3,439) Source: Batalla (2005) Note: All figures are rounded. Deficit figures during the Estrada period from 1998-2000 only and for Marcos authoritarian period up to 1985 only.

A corollary observation in relation to economic growth would show that

the country’s enduring fiscal crisis occurs with an erratic, largely meager, economic performance. This in itself further reveals inherent weaknesses in the country’s fiscal and economic performance. Revenue efforts had been weak since

0

200,000

400,000

600,000

800,000

1,000,000

1999 2000 2001 2002 2003 2004 2005*

REVENUES EXPENDITURES

*January to November 2005 only Source: Bureau of Treasury


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1997 and evolved into a constant trend, sliding from close to zero to -0.4 percent of the GDP. The worst in nearly three decades was the slump to -0.6% in 2003. Succeeding improvements were clearly insufficient considering the extent of the weakening of fiscal position. Because fiscal deficits are continuously rolled over despite poor revenue performance and lackluster economic growth, the country’s over reliance on deficit spending is bound to worsen. Thus, it is inaccurate for the national government to report a state of worsening fiscal position and that it is the country’s most urgent concern since such a fiscal condition had been a long standing inherent weakness. In the midst of its efforts to pursue a more favorable fiscal position, history shows that past Philippine presidencies have developed that distinct strategy to roll over fiscal deficits.

FIGURE 6

Government budget balance relative to GDP growth 1975-2004 (In percent)

Nevertheless, the Arroyo administration dealt with the country’s worsening fiscal problems. Only of two strategies were considered, i.e., new taxes and base increases of existing ones. The Arroyo administration opted for the implementation of new taxes. The EVAT was presented as the main tool for augmenting the country’s revenue performance.

Revenue collection remained poor, which put in question the value of all new tax measures. In 2002, the then new Arroyo administration assumed the posture of addressing the underlying issue that plagued the credibility of revenue generating authorities – graft and corruption. Still, lifestyle checks and sweeping remarks on alleged corrupt revenue officials did not augment tax collection.

Reform efforts led to a painful and bitter cost. What took place instead in 2002 was poor performance among revenue generating bodies; tax collection

Source: SEPO (2005)


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was at its lowest. Imposing new taxes seemed to be the easier and simpler route than in addressing collection deficiencies.

Year-end estimates for 2005 on the collection rates by the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC) showed that both agencies missed their respective annual targets. For 2005, the BIR collected a total of Php534.5 billion, Php12.4 billion or 2.3 percent short of its target. The BOC collected only Php141.7 billion, similarly missing its target by Php9.5 billion or around 6.3 percent.

The shortfalls in revenues were augmented by non-tax revenues, particularly the Php70.62-billion Treasury earnings in 2005. Of this amount, Php34.8 billion were derived from income from government’s Bond Sinking Fund (BSF) and Securities Stabilization Fund (SSF), two of government’s special purpose funds under the auspices of the Bureau of Treasury.

Increasing corporate tax rates was one of the Arroyo administration’s tax reform measures. It the 2004 SONA, corporate corruption was regarded to be the “worst offender yet the hardest to pin down.” The pattern of policy making and implementation was the same, i.e., corporate taxes were increased instead of dealing with tax evasion and ensuring tax collection.

Table 5. Corporate Taxes in Other Asian Countries 2004

Country Corporate Tax Rate

Brunei Darussalam 30% China 30% Indonesia 10-30% Japan 22-30% Korea 15-27% Lao PDR 20-35% Malaysia 28% Myanmar 30% Philippines 32% Singapore 26% Taiwan 25% Thailand 30% Source: ASEAN Secretariat, Baker Tilly International (2004)

Prior to this year’s implementation of the EVAT, the corporate tax rate in

the Philippines is the one of the highest in Southeast Asia. Such a high tax rate may potentially drive out foreign investments in favor of countries that impose lower taxes especially to those with lower labor costs. (See Table 5.)


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A medium-sized firm in the country with an average of 60 employees makes 62 tax payments per year. In comparison, Indonesian companies settled taxes 52 times annually. In Thailand and Vietnam, companies pay taxes 44 times every year. Companies in the Asia-Pacific made a total of only 28 tax payments every year.17 About 46.4% of all local earnings generated by local businesses go to property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes and vehicle and road taxes.

This constraining business atmosphere has led some economic observers to say that the Philippines had been “less free” in 2005. According to the Heritage Foundation, high taxes, bad government, poorly defined property rights, and excessive regulation diminish or eliminate incentives to make productive investments.18 These are indicators that government fails to provide a business-friendly environment in favor of quick fix revenue generation through more taxes. These only favor the short-run need to provide funds in addition to increases in borrowing. Overall, all measures described do not contribute to solving the long-standing fiscal crisis.

MORE DEBTS MEAN FEWER CHOICES

The country’s debt ballooned at a time when our revenue position plunged. The country’s debt grew uncontrollably between 1997 and 2003 and was largely attributed to the Php2-trillion debt increase of the national government deficit.19 Total public sector debt ballooned from Php2 trillion in 1998 to nearly Php5 trillion in 2004. In that same year, debt-to-GDP ratio has gone beyond 120%. (See Figure 7.)

Moreover, the debt problem of the Philippines is significantly composed of foreign borrowings. The foreign denomination consequently worsens the debt problem whenever the domestic currency weakens.

17 The World Bank’s Doing Business in 2006 shows that Philippine corporate tax rates and procedures are relatively cumbersome in relation to other countries in the Asian region. In terms of tax payments, the regional average for Asia is 28 times, making tax payments in the country three times worse than the regional average. See World Bank (2006) Doing Business in 2006: Creating Jobs. Retrieved from http://www.doingbusiness.org 18 See The Heritage Foundation (2006) 2006 Index of Economic Freedom., which defines economic freedom as the absence of government coercion or constraint on the production, distribution or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. Retrieved on 5 January 2006 from http://www.heritage.org 19 Batalla, Vincent. (2005, 23 November). The Fiscal and Employment situations as Continuing Crisis. Paper presented at the 43rd Annual Meeting of the Philippine Economic Society, Asian Institute of Management.


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Figure 7. Outstanding Public Sector Debt

Closer analysis reveals that the government’s use of foreign bonds compounds the debt situation. National government foreign bonds comprise nearly twenty-five percent (25%) of total national government outstanding debt. This contributes to the vulnerability of the Philippine economy. (See Figure 8.) Consequently, these downplay much of the “soft economic gains” in 2005 such as greater domestic liquidity, stronger peso, and an influx of foreign investments.

Figure 8. National Government Debt Outstanding and Use of NG Foreign Bonds

1986-2004

The country’s debt problem is often likened to the crisis in the early 1980s. However, some economists argue that unlike the debt crisis that plagued the country in 1983-1984, the current debt problem could be attributed to

Source: Batalla (2005)

Source: SEPO (2005)


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government rather than to external factors since borrowing was used to offset the prevailing fiscal deficit.

Although borrowing is not harmful per se, it’s excessive and inappropriate use led to negative net effects such as the consequent use of current funds for debt servicing instead of spending more for urgent and crucial public services. Large public debts reduce the potential output of an economy because it decreases capital, increases taxation inefficiency, and forces the economy to service the external debts. Thus, increasing debts ultimately impede the ability of people to determine or make choices that will create significant changes in their lives. Debt payments could have been used to finance public investments in education, health, and infrastructure.

Since the early 1980’s, total national government debt service payments have been constantly increasing. Such payments peaked from 1998 to 2004. Total debt service payments also spiked beyond the 12% mark as percentage of GDP, making it the worst in a span of two decades indicating that debt management worsened under the Arroyo administration.

Figure 9. National Government Debt Service Payments

1983-2004 In 2004, nearly 86.2% of the country’s total revenues went to debt servicing. This leaves only around 14% to spend for critical social services. (See Table 6.)

Source: Batalla (2005)


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Table 6. Total Debt Service as Percentage of National Government Revenues 1995-2004

Particulars 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Total Debt Service 38.0% 28.7% 26.7% 35.6% 42.9% 44.3% 48.7% 63.1% 75.0% 86.2% Domestic 23.6 17.6 16.2 22.1 28.5 27.0 29.6 35.4 47.1 56.2 Foreign 14.4 11.1 10.5 13.5 14.4 17.3 19.1 27.7 27.9 30.0 Source: Bureau of Treasury This heavily worsened beginning the 2001 to 2002 period when total debt service as percentage of national government revenues increased from 48.7% to 63%. The same trend continued up to 2004.

A brief review of the country’s economic performance, fiscal position, and state of indebtedness discounts the possibility of achieving economic growth and fiscal recovery in the long-run. Meanwhile, government has gained relative liquidity enabling it to obtain more disposable cash. Such short-term economic gains provide the government with the necessary financial elbow room.

This brings us to the discussion of the 2006 national budget.

LEADERSHIP WOES AND THE NATIONAL BUDGET

The Arroyo administration and the political opposition have engaged each other within and outside formal venues through both impeachment proceedings and street protests. Deliberation of the national budget had customarily been a similar venue, an area of engagement. A review of the budget is inescapable as a result when analyzing the links between political activities and corresponding socio-economic consequences.

The national budget is a principal policy of the State to induce spending within the economy. If used prudently, the national budget can be harnessed to contribute to stability, growth, and development. The national budget in itself is a potent political tool for every administration. It is a critical means to create equitable distribution of public goods. However, it is often criticized for its inability to finance valuable infrastructure, generate employment, and realize development, especially in the countryside. The proper allocation of resources consequently becomes a pressing need.

In the proposed 2006 national budget, the two biggest expenditure items of government are interest payments and personal services. These two items constitute nearly 65% of the total budget. (See Table 7.)


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Table 7. National Expenditure Program by Object 2004-2006

Current operating expenditures will increase by 11.9% in 2006. Personal

services grew only by 1.2% between 2004 and 2005. However, Personal Services component of the national budget in 2006 increased by 14.3% from 2005. Maintenance and other Operating Expenditures (MOOE) spending will also incur a 9.6% increase in 2006.

In absolute terms, capital outlays will increase by close to 38% in 2006. This is very much laudable considering the dismal growth between 2004 and 2005 at -7.0%. However, while Capital Outlays may incur increases in absolute terms and in relation to the previous national budget programs, it comprises only 12.6% of the national budget. Infrastructure allocations comprise only 7.5% of the national budget.

By sectoral appropriations, interest payments comprise the biggest share of the proposed 2006 national budget, representing nearly 6% of total GDP. Since 2004, total budget allocation for debt servicing remained well above 5.5%.

Economic services in 2006 will incur a big increase of 24.8% in relation to its 2005 figure. Total appropriations for Economic services represent only 3.3% of projected GDP for 2006.

Social services expenditures will also incur an increase in absolute terms. Spending on education, housing, and other social services will increase by nearly 16%. Total services allocation represents only 4.9% of total GDP in 2006.

Levels (Billion Pesos)

% Share of Total NG Budget

Growth Rates (%) Particulars

2004 2005 2006 2004 2005 2006 04-05 05-06 Current Operating Expenditures 757.3 815.0 911.9 87.4 88.7 86.5 7.6 11.9 Personal Services 285.8 289.2 330.5 33.0 31.5 31.4 1.2 14.3 MOOE 80.3 86.5 103.5 9.3 9.4 9.8 7.8 19.6 Allotment to LGUs 112.8 121.3 133.2 13.0 13.2 12.6 7.5 9.8 Interest Payments 260.9 313.4 340.0 30.1 34.1 32.3 20.1 8.5 Subsidy 17.6 4.5 4.7 2.0 0.5 0.4 (74.3) 4.1Capital Outlays 104.0 96.7 133.2 12.0 10.5 12.6 (7.0) 37.7 Infrastructure 58.6 57.2 79.0 6.8 6.2 7.5 (2.4) 38.1 Corporate Equity 3.6 0.2 1.2 0.4 0.0 0.1 (94.7) 551.2 Special Shares to LGUs 1.6 1.9 2.1 0.2 0.2 0.2 18.2 9.0 Other Capital Outlays 12.0 7.1 17.5 1.4 0.8 1.7 (41.0) 148.4 Capital Transfer to LGUs (IRA) 28.2 30.3 33.3 3.3 3.3 3.2 7.5 9.8 Net Lending 5.7 6.9 8.3 0.7 0.8 0.8 22.1 19.1

TOTAL 867.0 918.6 1,053.3 100.0 100.0 100.0 6.0 14.7Source: Congressional Planning and Budget Department, House of Representatives, Republic of the Philippines (2005)


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Table 8. National Expenditure Program by Sector 2004-2006

Levels (Billion Pesos)

Growth Rates Percent of GDP PARTICULARS

2004 2005 2006 04-05 05-06 2004 2005 2006Economic services 168.2 158 197.2 (6.1) 24.8 3.5 3 3.3 Social services 250.2 254.3 293.9 1.6 15.6 5.3 4.8 4.9 Defense 42.7 44.2 52.4 3.5 18.7 0.9 0.8 0.9 General public services 139.3 141.9 161.5 1.8 13.8 2.9 2.7 2.7 Net lending 5.7 6.9 8.3 22.1 19.1 0.1 0.1 0.1 Debt service 260.9 313.4 340 20.1 8.5 5.5 5.9 5.7

TOTAL 867 918.6 1,053.30 6.0 14.7 18.3 17.3 17.6 Source: Congressional Planning and Budget Department, House of Representatives, Republic of the Philippines (2005).

Table 9. Social Services Appropriation

2004-2006 Levels

(Billion Pesos) % Share of Total NG

Budget PARTICULARS

2004 2005 2006 2004 2005 2006Education, Culture, and Manpower Development 128.8 135.4 146.4 14.9 14.7 13.9

Health 14.5 12.9 13.7 1.7 1.4 1.3 Social Security, Welfare and Employment 44.8 40.1 58.6 5.2 4.4 5.6 Land Distribution (ARF) 7.4 4.4 4.4 0.8 0.5 0.4 Housing and Community Development 1.6 1.7 2.8 0.2 0.2 0.3 Other Social Services 1.1 3.6 6.5 0.1 0.4 0.6 Subsidy to Local Government Units 52.5 56.1 61.60 6.0 6.1 5.8

TOTAL 250.2 254.3 293.9 28.9 27.7 27.9 Source: Congressional Planning and Budget Department, House of Representatives, Republic of the Philippines (2005).

Social spending for 2006 is nonetheless disappointing. Total investments

on public education, health, and housing are dismally low and clearly insufficient for improving quality of life of the majority of Filipinos, especially the poor.

In terms of total share of the national budget for 2006, education spending will decrease to 13.9%, health care will decrease to 1.3% (the lowest since 2004), while housing appropriations remains to be insignificant at 0.3%.

Total appropriations for Social Services as a percentage share of the national budget declined between 2004 and 2005. For 2006, Social Services spending comprise only 27.7% of the national budget.

Another key dimension of expenditures is capital outlays. Total capital outlays allocation for 2006 will be the highest thus far in the history of government budgeting. Estimates from multilateral institutions such as the World


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Bank suggest infrastructure spending should comprise at least 5% of the GDP of middle-income countries as bare minimum. At present, total capital outlays of the country represent close to 2% of the GDP only. Because infrastructure spending has declined over the years, growth is limited and inhibited.

Such is the cause of the disparities in regional development. Constraints in infrastructure spending contribute to disparity in regional growth. For instance, the biggest spending feature of the 2006 infrastructure budget will be for roads and bridges at Php37 billion. The National Capital Region will receive the fourth highest allocation with Php3-billion but ranks first in terms of budget-to-land area ratio of Php4.9 million per square kilometer. Second to Metro manila is Region I at a distant Php319,000 per square kilometer.20

Amid declining levels of social spending, the Arroyo administration has identified several new items in the national budget which can be regarded as allocation for political outlays. Two of these projects are the Kalayaan Barangay Program Fund (Php3 billion) and the Kilos Asenso Support Fund (Php5 billion). Critics dismiss these budgetary allocations as mere spending for political consolidation purposes.

From a policy perspective, prioritizing debts over social services exacerbates tax inefficiencies and ultimately subdues the ability of individuals to determine choices to improve their social condition.

At the same time, it does not create a good impression for a national leader to buy out political support from local political leaders. Politically this may be a necessary evil for an embattled leader. But the disadvantages far outweigh the benefits. The amount spent on political outlays can be better utilized for much needed fiscal spending, especially in social and economic services spending.

The national budget is a critical tool for distribution. Yet the distributive effects of the budget are marred by the prevailing attitude in government budgeting where stated priorities are not reflected. Vested political interests keep the national budget from serving as a tool for meaningful social change.

CONCLUSION: TRANSITION OR DECLINE?

Meager economic growth, ailing revenues, ballooning debts and a national budget that fails to address needs in infrastructure and social services counter incentives to exercise leadership and practice sound governance. Little incentive is left to do “good” because of incessant weaknesses in the country’s fiscal and

20 See Business World (January,2006) Infrastructure spending remains inadequate to boost development. Retrieved on 27 January 2006 from http://www.bworldonline.com


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economic positions. Persistent fiscal and debt problems are rolled over consistently thereby worsening as we move towards succeeding administrations. Structural deficiencies in Philippine economic management build up to worsen already ailing institutions.

The new taxes of the administration and their believed effects are yet to be seen. Detractors of the President would criticize the new tax measures as unpopular, overly ambitious, and ill-advised. But given our worsening debt situation and long on-going fiscal crisis, the imposition of new taxes becomes an undeniable short-term need. Moreover, the present administration’s imposition of new taxes along with more borrowings are ultimately provided with excuses despite how much they would lead to a worsened fiscal position.

Yet, the imposition of new taxes addresses not primarily the need for fiscal but political consolidation. The Arroyo administration had difficulties in improving collection and plugging inefficiencies in tax administration in the earlier part of its tenure. Now that it is bent on political survival, the Arroyo administration finds its discretionary fiscal policy prudent in what appears to be a decisive step to cover up for its previous shortcomings. It is worth noting that the EVAT, even the Excise Taxes on tobacco and alcohol, the Lateral Attrition Act and even the Road User’s Tax are not entirely against the poor. This then makes the Arroyo regime relatively safe despite its bad political standing.

To some farther extent, the hype on the new taxes creates uncertainty, making it disturbingly neutral. This is bad for the country’s relatively gentle political opposition. This uncertainty leads only to ambiguity. It is this environment of uncertainty that the Arroyo administration generates its own recovery room for it to consolidate its eroded political character. At best, the Administration has proven to have the needed acumen for political survival as evidenced by their use of the power of taxation coupled with good timing.

Since the administration is able to make a decisive effort to implement laws without actually significantly distorting the present scheme of things, it may be possible, much to the dismay of the fragmented political opposition, that Arroyo might finish her term as President.

Whether or not the Arroyo Administration will be able to survive its continued loss of credibility and political standing, efforts to survive come with a huge cost.

Political consolidation does not necessarily translate into better economic performance. The primary agenda does not address the intricacies of our economic and social problems. President Arroyo may have survived the political turmoil but she has left the economic problems unsolved, the fiscal crisis continues to endure, and the country getting more heavily indebted.


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Her administration may gain relatively stable political footing (and still has), the economy may advance moderately, the peso may be the region’s strongest currency but in the final analysis, good leadership is realized when a majority of the populace, especially those at the periphery, experience significant improvements in their lives. The distribution of economic gains requires strong, principled leadership.

Until such time that President Arroyo is able to fulfill her genuine role as leader, i.e., steering this country out of its condition to make every other Filipino’s life better, this country remains on a steady course towards institutionalized social and economic decline.

As long as people fall into the illusory trap of addressing present short-term expenditures without dealing with the costs to be incurred in the long-run, the country will not realize that increased taxes will not make significant changes in our lives. This fiscal delusion becomes a contributing factor for the persistence of the fiscal and debt problems of our country. Getting the people to understand these things raises the need for the leadership imperative.

RECOMMENDATIONS

In this regard, the following policy recommendations are raised to address the ailing fiscal and economic position of the Philippines. These recommendations are intentionally simple (but not simplistic) and practical. They were formulated to ensure that with genuine leadership, people will follow to make contributions and collectively address the complex national problem of having a government consistently operating through deficit spending.

1. Break the fiscal delusion. Voters must realize that government spending, revenues, and the public debt have crucial impacts on economic growth and stability. Fiscal delusion is propelled by populist politics, which in turn are promises to the public to ensure political survival. The public must remember that every promise delivered has a corresponding cost.

The electorate must be educated well that increasing demands for social and economic needs is followed by government spending. The electorate must be well informed of the need to have governments that seek a stable balance between what they are promised by politicians (which lead to spending) and how such allegedly populist policies will be financed. But because government is often unable to raise the needed money, fiscal troubles merely continue to worsen.

Every presidency thrives on voters suffering from this fiscal delusion. By the time each presidential term ends, the demands of the people would not have been addressed completely since more debts have been incurred and the fiscal


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position has worsened thereby offsetting social benefits that may have been gained from such satisfied short-term public demands. Hence, the deficit is rolled over. The burden is shifted to the next generation of voters suffering form the same fiscal delusion. This has become a vicious circle of delusion, deficit, and indebtedness that needs to finally be stopped. A real leader is needed to exact this real change.

2. Improve tax collection, address structural deficiencies in tax administration. By mid-2006, the national government would have reached the much desired levels of liquidity more than ever. This puts government in a better position to spend.

Yet this liquidity of the government is gained not necessarily because of good revenue performance. The newly imposed taxes will work best if collection rates are up, attrition and delinquency are eliminated, and government works with a broader tax base. The well-being of 85 million Filipinos must not be financed by some 1 million OFWs sending money back to the country or by the minority the labor force from the Services sector.

3. Remove budgetary allocations for political outlays. The Php8-billion allocation for political outlays is an exemplary case of unwise spending for a heavily indebted and fiscally impoverished government. The Arroyo administration must acquire the support of local leaders and politicians not through transactional politics but through principled, mutually-rewarding political leadership.

Simply put, budgets for political expenses would be better invested where strategic benefits will be the result. Human capital investments and agricultural modernization have been regarded as key result areas that have yet to receive sustained public investment.

4. Use the budget as means to take stock of human capital. Gary Becker, the 2001 Nobel Prize winner for economics, writes that the stock of education, training, skills and even the health of people constitutes about 75 percent of the wealth of a modern economy.21 Hence, it is human capital that ushers growth and development in modern economies. Meanwhile, it takes leadership to fully harness a country’s human capital. This begins by channeling more funds to social services spending until it meets international standards. The next step is to sustain it.

5. Simply the business process. The best ally for generating added financial resources is the market. Government should give emphasis on creating a better business environment to attract foreign direct investments. Reduction of steps in

21 Wheelan, Charles (2002) Naked Economics, USA: New York. W.W. Norton & Company, Inc. p.106.


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tax payments and the number of needed transactions would be a welcome improvement. In addition, corporate taxes should be rolled back. Otherwise, it leads to penalizing properly tax-paying businesses. Resulting negative externalities can reverse the foreseen effects of increasing effective corporate tax rates from 32 to 35 percent. It is again stressed that ensuring tax collection is the key.

6. Manage the debt. There is only one law that makes the Philippines heavily indebted. It is not even a statute. Presidential Decree 1177 is an erring legal and structural barrier that siphons public money from critical social and economic services badly needed by this country to debts incurred, rather rolled-over, by previous presidencies. P.D.1177 is a remnant of the Marcos regime. It is a built-in mechanism that ensured debt payments incurred through heavy government spending during the first five years of Martial Law. This should be abolished. It is imperative to set limits on debt servicing and put more money where it should be going first: services for the people.

7. Leadership now. More and more Filipinos are hungrier, poorer and less educated than we were a decade before. This drives a crucial point: Leadership as an element of good governance is not only important but essential. Economic solutions are always easier to generate than political ones. While there will always be a logical formula to address deficits in the economy, there are simply no quick fix political solutions to a leadership crisis, let alone the deficit in principled leaders. The increasing magnitude of declining public trust is a worrying and urgent concern. Achieving growth, sustainability and stability amid waning public trust and growing cynicism is a formidable challenge among modern leaders. Globally, good leaders are fast becoming scarce. The leadership crisis is a global crisis. Although the world we now live in is fast becoming cynical and skeptic about the decision-making capabilities of leaders and institutions, this must not be an excuse for the present administration to falter in the exercise of good leadership as well as in the pursuit of efforts towards political transition and, at the same time, meaningful social development through sound fiscal policies.

REFERENCES

Asian Development Bank (2005) Asian Development Outlook 2005: Promoting competition for long-term development. Hong Kong, China. Asian Development Bank.

Association of Southeast Asian Nations, Report on Taxation in ASEAN member countries. Retrieved from www.aseansec.org/6524.htm.

Baker Tilly International (2004) Guide to Taxes in the Asia Pacific Region 2004-05. Retrieved on 05 January 2006 from www.bakertillyinternational.com


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Bureau of Treasury. Statistics on NG Cash Operations, NG Debt and BTr Operations. Various periods.

Bangko Sentral ng Pilipinas. Selected Economic and Fiscal Indicators, Reports from the International Financial Statistics. Various Periods.

Congressional Planning and Budget Department (October 2005) Dimensions of the 2006 Expenditure Program. CPBD, House of Representatives, Republic of the Philippines.

“Fiscal Rules: The Way Forward?” Policy Insights. (August 2005). SEPO, Senate of the Philippines.

National Statistics Office. Results of the Family Income and Expenditure Survey, 1988 to 2003.

National Statistical Coordinating Board. Statistics on National Economic Accounts. Various periods.

Samuelson, Paul A. and Nordhaus, William D. (1995) Chapter 32: The Economic Consequences of Debt in Economics: Fifteenth Edition. New York: McGraw-Hill, Inc. pp.624-642.

Senate Economic Planning Office (July 2005) Economy at a Glance. SEPO, Senate of the Philippines.

Social Weather Stations. Results of Social Indicators Survey. Various periods.

The Macroeconomic Perspective: The 2006 Budget Amid Risks and Uncertainty. (October 2005). CPBD, House of Representatives, Republic of the Philippines.

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