Carlito Anonuevo, Jenina Joy Chavez, Sylvia Estrada-Claudio, Nepomuceno Malaluan, Cristina Morales, Rene Raya, Jessica Reyes-Cantos, Filomeno Sta. Ana III
A full-blown economic crisis is looming. This is no exaggeration, even as we emphasize the gravity of our collective concern.
In truth, we are already experiencing a fiscal crisis. This description
came from no less than former Finance Secretary Jose Isidro Camacho.
The Asian Development Bank (ADB) and the International Monetary Fund
(IMF) had also expressed their fear—and dismay—in more subtle words.
But Today’s top business story on 1 April 2004 was: “IMF gives
government stern warning.” The report said: “Long-time IMF economic
observers noted that the tone of the Fund’s latest public information
notice was ‘unheard of’ in the recent past, and is usually reserved for
warning belligerent governments about imminent trouble if immediate
steps to correct economic imbalances are not taken.”
Despite ADB and IMF prescriptions to ensure that we toe the
international finance system line no matter what—sometimes against
national interest—here we should heed their dire warnings.
To repeat, what we have is a fiscal crisis, not just a problem. Consider the following facts:
- The government is at least five years behind in trying to meet
its target of a balanced budget. The Gloria Macapagal-Arroyo (GMA)
administration’s original goal was to achieve a balanced budget by
2005. Now, it has set back the time for having a balanced budget to
2010. This also means that the debt stock of the national government
will begin to decline only in 2010. But even this 2010 target is iffy. - The fiscal deficit is at a critical level. It increased from 4.0
percent of gross domestic product (GDP) in 2001 to 5.2 percent in 2002.
In 2003, the fiscal deficit declined to 4.6 percent, but this
nonetheless remained at an alarming level. The significant decline in
revenues principally explains the chronic deficit. - In the meantime, the consolidated public sector deficit was 5.8
percent in 2002 and was expected to hit 6.5 percent or more in 2003. A
big component of the deficit is the hemorrhaging of the National Power
Corporation (Napocor). - The relative decline of the fiscal deficit in 2003 is attributed
to the performance of the revenue collection agencies. Both the Bureau
of Internal Revenue (BIR) and the Bureau of Customs (BoC) surpassed
their revenue targets for the year. But here lies the rub: In spite of
the higher revenues collected by the BIR and the BoC, in spite of their
best effort, the tax effort ratio (tax collection as a proportion of
GDP) in 2003 did not gain an inch. It remained stagnant at 12.4
percent. This suggests that the tax structure has to be overhauled and
that tax policy has to be aggressive. In 1997, the tax effort ratio
peaked at 17.0 percent. To propel sustained high growth rates, the tax
effort ratio must hence be above 17 percent. - The debt-to-GDP ratio of the national government is 70 percent.
The debt-to-GDP ratio of the consolidated public sector is 120 percent.
Again, these are critical levels. Interest payments eat up close to
half of the national government budget. Government has become dependent
on borrowing in light of the poor tax or revenue effort.
All told, the country’s fiscal sustainability is seriously undermined.
Moreover, the figures we have enumerated indicate that the economy,
despite the current growth rate, has not extricated itself from the
boom-and-bust cycle.
We must likewise point out that the economic cycle goes hand in hand
with the political cycle. That is, the economy’s busts occur during
election periods or political turnovers.
We nevertheless pray that the economic crisis be prevented. Time is
running short, but there is still that space, no matter how narrow, to
undertake the bold and tough measures to avert a crisis.
Pity the incoming President. The incoming President must be prepared to
become unpopular. He or she has to immediately prepare the ground for a
soft landing. To alleviate the fiscal crisis and avoid an economic
crash, he or she must lead and convince the people to rally behind the
key tax and other fiscal measures, which will hurt in the short term.
These measures include the following:
1. The indexation to inflation of the excise tax on sin products.
It is not entirely correct to say that Congress is solely to be blamed
for the non-passage of this measure, which could have generated
revenues amounting to at least PhP14 billion. It is a fact that the
President can dominate Congress. The Congress is controlled by GMA’s
party and allies. As Emannuel S. de Dios and and Hadi Salehi Esfahnahi
(Centralization, Political Turnover, and Investment in the Philippines,
in Campos J. Edgardo, ed., Corruption, The Boom and Bust of East Asia,
Ateneo de Manila University Press, 2001) explains: “It is important to
point out that, while its powers have been diminished relative to the
dictatorship, the presidency has remained a powerful office that by and
large dominates other branches of government. Among the powers of the
presidency that have remained are the item or partial veto and the use
of large discretionary funds not subject to congressional appropriation
or scrutiny (contingency, calamity and intelligence funds). Notably,
the president also wields a powerful influence over Congress through
bureaucratic discretion over the timing of the release of funds for
projects of locally elected officials, especially the ‘pork barrel’ of
members of the House of Representatives.”
2. The rationalization, nay, reduction of fiscal incentives.
These fiscal incentives have increased as the current administration,
in an election year, has given favors to different vested interests.
The irony, too, of the fiscal incentives, is that while the tax effort
is low, the high-growth sectors have been exempted from paying taxes.
Take the case of the Agricultural and Fisheries Modernization Act
(AFMA) that provided certified agriculture and fisheries enterprises
exemption from the payment of tariff and duties for the importation of
all types of agriculture and fisheries inputs, equipment and machinery.
While intended primarily for small and medium enterprises, it is the
big corporations such as Purefoods, Vitarich, San Miguel Corporation
and Swift Foods that have benefited heavily from the program.
3. Pollution taxes based on the principle that polluters pay.
A tax on gasoline consumption would be a smart and even progressive
tax.. A well-designed tax on gasoline can help alleviate traffic
congestion and reduce urban pollution. The majority of gasoline
consumers are the middle and upper classes. To protect the vulnerable
poorer sectors (fishermen and mass transport drivers), a subsidized
voucher system can be put in place.
4. A definite end to politicized bailouts and subsidies to government corporations and the private sector.
Overgenerous subsidies and irresponsible bailouts, without rhyme and
reason, have worsened the consolidated public sector deficit. Recently,
the national government bailed out the corruption-ridden Public Estates
Authority (PEA). The Philippine Deposit Insurance Corporation (PDIC)
bailed out two private banks, even though the closures of these banks
would not have led to a loss of confidence in the whole baking system.
The review and renegotiation of Napocor contracts with independent
power producers must be reopened, even as consumers must anticipate
higher tariffs. The list goes on. In short, the incoming president must
undo these onerous arrangements or contracts.
The tasks are daunting. That is why the incoming President must muster
all the courage and resolve to undertake these hard measures, among
others. It is thus absolutely necessary for the incoming President to
gain substantial credibility and legitimacy to weather the storm.