Mr. Banez’s Challenge

The author is currently a professor in the Department of Economics of the Ateneo de Manila University, and was the secretary of Socioeconomic Planning and NEDA director-general throughout the Ramos administration. The above article is an excerpt from his contribution to the Yellow Paper II entitled “The Estrada Angat Pinoy Plan: How Not to Implement a Development Plan.”

Most economic analysts agree that the gaping fiscal deficit is the
single biggest factor that will drag our economic recovery in the next
few years. Critics of the President Gloria Macapagal-Arroyo’s SONA
mainly questioned the doability, not the merits, of her concrete
proposals, citing the serious fiscal constraints facing the government.
But we are in this situation because actual government fiscal
performance in the past two years had deviated widely from the
projections made in the Estrada Angat Pinoy Plan.

In particular, revenues – especially tax revenues – fell far short of
the targeted levels for 1999 and 2000. Expenditures, on the other hand,
went beyond planned levels, though not as much as the shortfalls on the
revenue side. Together, these have led to fiscal deficits much wider
than projected. What is particularly alarming is that the fiscal
deficit had gone way beyond 3% of GNP, usually considered the threshold
“safe” level.

Rather than improving in accordance with what the Estrada Plan had
projected, revenue effort and tax effort (i.e. ratio of overall
revenues and tax revenues respectively to GDP) had actually
deteriorated badly since 1998. An examination of revenue effort and tax
effort since 1990 shows how these indicators had markedly improved in
the early to mid-1990s (i.e. the Ramos years), with revenue effort
reaching close to 20% and tax effort exceeding 17%. In contrast, these
indicators have continuously declined since 1997.

It must be emphasized that the economic slowdown sparked by the Asian
financial crisis is not an excuse; note that it is ratios to GDP being
measured here. One may give allowance for the fact that the proportion
of tax-exempt transactions and income rises when GDP slows down, and
that import tariff rates have been generally declining. Still, the drop
in revenue and tax effort looks far too large to be explained by these
factors alone.

At the end of 2000, revenue effort stood at 15.5%, even lower than what
it was in 1990 (16.8%). Tax effort stood at 13.6%, again lower than
what it was in 1990 (14%). Interestingly, the Philippine economy was at
a virtual standstill (zero growth) in 1990-91 due to the various
disasters that had pummeled the country, while in 2000, GDP was
reported to have grown by 3.9%, faster than the previous year’s 3.3%.
In the two years under Estrada, even as GDP growth supposedly speeded
up, both revenue effort and tax effort fell!

The conclusion one is led to is that revenue “leakages” were on an
uptrend under the previous administration. In other words, the large
fiscal deficit Estrada left behind was as much the fault of corrupt
revenue officials and evasive taxpayers, as it was of profligate
spenders in government.

The critical task in the short term is therefore to reverse the slide
in revenue and tax effort, even as the government buys time through
another painful round of belt tightening. Government, through the new
Medium-Term Development Plan, must consciously and aggressively (not
implicitly, as appears to have been the case) target achieving distinct
levels of tax and revenue effort, and bring it beyond 20%, i.e. closer
to that of our neighbors. So much hinges on the main revenue agencies
(BIR and Customs) if we are to get back on track. Mr. Banez deserves
all the support he can get in correcting the obvious failures of his
immediate predecessors.

But the job of revenue raising need not be confined to those two. So
much potential revenues have been forgone by the government by failing
to auction out the lucrative telecommunications air frequencies to the
service providers, for example. Such auctions have become common in
other countries, which are able to raise substantial revenues from this
source. But our own National Telecommunications Commission has remained
reluctant to adopt this economically efficient and revenue-generating
scheme for allocating a privilege which clearly yields the private
providers large economic rents (how else can they afford those lavish
multiple full-page ads in the papers, expenses for which one wishes
could just be put into lowering what we consumers have to pay for the
erratic cellphone service?).

Similar opportunities for earning increased revenues from other
government agencies continue to abound and remain untapped. These are
measures that do not require legislation – only good sense and
political will.

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