Populism, the bad and the good

Populism has acquired a dirty meaning. Its poster boys are usually fiery strongmen like the late Hugo Chavez of Venezuela, Donald Trump of the United States of America, and our very own Rodrigo Duterte.

Populism is on the rise all over the world — in the Americas, in Europe, in Asia. It thrives in rich and developing countries. It has found appeal among the left-wing and the right-wing radicals. Whatever its variety, populism in many instances has ultimately brought economic and political hardship to the common folk.

But by its very definition, populism is not bad. The dictionary’s definition of populism has a positive ring. Says the American Heritage Dictionary of the English Language, Fifth Edition (2016), populism is a “political philosophy supporting the rights and power of the people in their struggle against the privileged elite.” Random House Kernerman Webster’s College Dictionary (2010) defines populism as an “egalitarian political philosophy or movement that promotes the interests of the common people.”

In short, populism is notionally good. But somewhere along the way, bad economics and bad politics have given populism an ugly connotation.

Popular measures such as free goods and lower taxes obviously satisfy people’s immediate needs. But in a world of scarce resources, such popular measures have to be kept in check. In the end, the people themselves suffer from the terrible consequences of excessive populism — a destabilized economy characterized by a fall in production, high unemployment, and hyperinflation.

IMPRUDENT SPENDING
The bad side of populism is emerging in the Philippines.

For instance, President Duterte insists on doubling the pay of the rampaging police. The good thing is Budget Secretary Diokno has the courage to defy his boss by saying that there is no money in the budget for that.

To get around the budget constraint, Duterte has issued an Executive Order that increases the combat duty pay of police from P340 to P3000 a month and of soldiers from P500 to P3000 a month. On top of this, the police and soldiers will benefit from a big increase in combative incentive pay from P150 a day or a maximum of P1500 a month to P300 a day or a maximum of P3000 a month. What a strongman cannot get from legislation, he does through an Executive Order.

Recently, Congress has approved a budget amounting to P8.3 billion that will provide free tuition fee to students in the state universities and colleges (SUCs). But it entails a trade-off. The story is that the budget will come from what is originally intended for the Autonomous Region of Muslim Mindanao, the country’s poorest region.

On the other hand, the students of the University of the Philippines (UP) will be among the lucky beneficiaries of free tuition fee. My niece Ariana, a UP freshman whose parents can well afford to send her to any elitist school, is not for the free tuition fee for all, even if it would benefit her. I am proud that my niece is pro-poor. She believes that those families who can afford the tuition fee of their children should pay, and what they pay will be used to subsidize the poor students.

The funny thing is that the “Dutertards, “Yellowtards,” and others in between them enthusiastically support this free tuition fee policy for all SUCs. I have read different posts on Facebook that assign credit for the passage of the free tuition either to Duterte or to the opposition.

The anti-Duterte people say Duterte should not claim credit for the legislation on free tuition fee because this is Senator Bam Aquino’s initiative. Otherwise, newly appointed Commissioner on Higher Education Prospero de Vera wrote on Facebook, “Proud to be a PRRD [President Rodrigo R. Duterte] appointee!! Improving access to higher education!! Mabuhay ka Mayor!”

The Commission on Higher Education’s (CHED) Executive Director Julito Vitriolo — infamous for demanding the removal of CHED Chairperson Patricia Licuanan from the leadership post (thereby paving the way for de Vera’s ascendancy) — has a contrary view. Although expressed way before the recent legislation, Vitriolo told Rappler (April 2016), “It will impact adversely on the viability of private schools. On the other hand, it will put so much pressure on the SUCs, and, in general, on government financing or budgeting. We don’t have enough, so we cannot subsidize everybody. The equitable approach would be those who can afford should pay, those who cannot afford should avail [themselves] of scholarships if they are qualified.”

Here, I agree with Mr. Vitriolo, although I detest him on other matters, especially on how he has demeaned the CHED institution.

Free college education for all is nice. But the reality is, it remains aspirational.

To quote Vitriolo, and CHED Chairperson Licuanan will likewise agree, “we don’t have enough, so we cannot subsidize everybody.”

Meantime, CHED Commissioner de Vera, is gung-ho about Duterte’s populism. On Facebook, he said: “Free irrigation for farmers, free education in public universities, next year free hospitalization. PRRD is really going to uncharted territory… and I love it!!”

What de Vera said can explain Duterte’s continuing popularity — measures providing free goods and services to people, increasing the take-home of the police and soldiers, jacking up pensions, etc.

POOR TAXATION
Here’s the rub: Where do we get the money to fund all this? And even if we raise revenue significantly, how should we spend the money in the most effective, efficient, and equitable way?

At the rate that Duterte wants to pursue populist actions, he must find a way to raise revenue dramatically. But what’s happening on that front?

Good tax performance must translate into growth in collection that surpasses the nominal GDP growth rate. But this so far has not been the case in the first several months of the Duterte administration. Although tax collection in November increased by 15.34% (year on year), the average increase in tax collection in the first few months of the Duterte administration is 7.6%. This is below the nominal GDP growth rate of approximately 9.3% for the third quarter of 2016.

In addition, a good proxy for BIR performance is compliance on the tobacco excise tax, a cash cow for government. Compliance is measured by the presence of the tax stamp on cigarette packages. This has sharply dropped — from more than 99% of cigarette packs with tax stamps in mid-July 2016 to 85% in late September 2016 (even dipping to a low of 75% in mid-September).

Financing new populist policies cannot depend on existing revenue, which is not being efficiently collected at present. Additional revenue is necessary to finance far more important programs than free college tuition fees. Programs like infrastructure and transportation and primary health and basic education are likewise popular.

In this light, Secretary Sonny Dominguez and his team at the Department of Finance (DoF) have crafted a sound and coherent tax reform program. It contains popular measures like the reduction of the personal income tax rate, with the current marginal top rate going down from 32% to 25% but maintaining a higher 35% marginal rate for the richest of the rich (constituting .01% of the population).

The tax reform package intends not only to offset the revenue loss arising from the reduction of individual and corporate income tax rates but more importantly, to generate much higher revenue for the government’s longer-term development plan.

Sadly, the proposed comprehensive tax reform is foundering. Congress takes no interest in passing the first package that features the personal income tax reform paired with the increase in excise taxes on gasoline and automobile and the lifting of too many exemptions on the value-added tax.

Revenue measures have to originate in the House of Representatives. But no Duterte supporter — neither Speaker Pantaleon Alvarez nor Ways and Means Committee Chairman Dakila Cua — wants to be a champion of tax reform.

What the House has railroaded is a weak bill or House Bill (HB) 4144 on tobacco taxation. It will result in far less revenue than what the Finance department wants and will have a trifling effect on reducing smoking. The bill wants a complicated two-tier taxation for low-priced and high-priced cigarettes and introduces a low rate of P32 and P36 for low-priced and high-priced cigarettes, respectively. This is a negligible increase from the unitary tax of P30 in 2017.

GOOD POPULISM
Lo and behold, an indio knight on a white charger appears. His name is Honorable Jose Sarte Salceda, Representative from the second district of Albay.

He has filed a bill, House Bill (HB) 4575, which counters the weak tobacco tax bill filed by the pro-tobacco legislators. HB 4575 calls for a unitary tax of P40 in 2018, followed by a series of five-peso increases every for the rest of Duterte’s term. However, the Ways and Means committee, in which Salceda is the Senior Vice-Chairman, has ignored his HB 4575.

The snub from his colleagues has not prevented Rep. Salceda from filing another bill that the DoF will appreciate. It is HB 4688, which consists of the basic features of the DoF package — lowering of the personal income tax rate, lifting of inappropriate value-added tax exemptions, and excise taxes on gasoline and automobiles. It comes with improvements like extending the period of unconditional transfers, which will be more than enough to counteract the price impact of the slight increase in consumption taxes. Overall, HB 4688 will be a gain for an overwhelming majority of the people — the poor and the middle class.

Salceda is the atypical astute politician.

He knows the game of traditional politics, and he is likewise a populist. But he is the good populist. He knows what good populism is — one that addresses the needs of the masses but at the same time one that is prudent and responsible in squarely tackling the costs and trade-offs. He will champion popular measures, but he will do at the same time the hard reforms that the traditional politicians will avoid.

The latter point might be the reason why he is an asset to any political administration. The Duterte administration must listen to him and support his bills.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

www.aer.ph

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