27 March 2009
Debt & Public Finance
The recent pronouncement of National Economic Development Authority (NEDA) Secretary Ralph Recto that the country’s budget deficit this year could range from P200 billion to P257 billion if tax collections and revenues from privatization proceeds fall short of its target is worrisome.
We in the Freedom from Debt Coalition (FDC) assert two major points that must be considered on the issue of deficit spending. First, while such spending is intended to augment government expenditures in order to stimulate the domestic economy amid the global economic crisis, without enough transparency and efficient monitoring, such “stimulation” would be vulnerable to abuse, plunder and corruption especially now when the election season is just around the corner.
Second, to rely solely on a stopgap measure such as deficit spending without proposing bold and forward-looking schemes to radically reform the entire public finance system such as imposing a moratorium on foreign debt payments would pave way for new, yet regressive tax collections, fast track privatization of important government assets and incur new borrowings.
On Transparency and Monitoring
The vulnerability to abuse of obscure deficit spending can be seen in the “economic stimulus fund” provided by the 2009 National Government Budget.
When Congress passed the P1.41 trillion 2009 budget, it bragged of an economic stimulus fund worth P 50 billion. However, the Report of the Bicameral Conference Committee tasked to reconcile the disagreeing budget versions of the Senate and the House of Representatives will reveal that only P 10.070 billion was specifically allocated to an item called the “economic stimulus fund” and which have specific details where it will go. Interestingly, the same report showed that total new congressional insertions is P 50 billion—the stimulus fund which our legislators are talking about.
Yet, a large part of the increases has no specific details where it is intended to go. Examples of this are the budgets of the Department Public Works and Highway (DPWH) and the Department of Transportation and Communication (DOTC), notorious government agencies “renowned” for its anomalous foreign-financed projects and corruption. DPWH got an increase of P17.5 billion or from P112.4 billion to P 129.8 billion while DOTC’s budget increased by P2.57 billion from P22.49 billion to P25 billion. Equally, the Priority Development Assistance Fund (PDAF) known as the controversial pork barrel fund of legislators had an increase of P3.4 billion or from P6.24 billion to P 9.66 billion.
This is apart from the recent decision of Mrs. Gloria Macapagal Arroyo to veto a transparency provision in the final 2009 budget which simply requires every government agency to provide data to any citizen requesting information pertaining to the implementation of the appropriations under the said budget.
As a result, the economic stimulus fund which is an outcome of deficit spending and which should theoretically help boost the domestic economy and create new jobs through public investment in infrastructure, education, and public health is now likely to stimulate not the economy but the obese pork barrel fund of some legislators and/or augment their respective electoral campaign kitty.New Tax Collections, More Privatization and Debts
On the other hand, the possibility of using the growing budget deficit to justify new tax collections, push for more privatization and borrowings is increasingly becoming a reality. NEDA Secretary Ralph Recto said that even if tax revenues can be achieved this year, the deficit would still be P 200 billion. As such, Recto said this must be buttressed by privatization proceeds if the deficit is to be curbed.
But given the track record of our government in tax collection, achieving targeted tax revenues for 2009 is a pipe dream and accordingly, will surely push for more privatization of important government assets. Proof of this, the Arroyo administration registered the lowest tax effort since 1988 or 11.53% in 2004 while revenue effort is 13.47%. Even in 2008, while there is substantial increase to 15%, this is nowhere near the revenue effort generated in 1994 which is 19.8%. Likewise, lower tax collections are also likely this year given a slowing and contracting economy. This in turn points the government to the policy of privatization to generate revenues.
Unfortunately, privatization is not a sustainable method of generating new revenues as the state can sell its assets only once not to mention the risk of failing to sell particular assets at the targeted price which will essentially affect the projected revenues of a particular year. This is on top of the fact that in order for a government asset to be saleable, capital expenditure is necessary, given the deteriorating conditions of assets due to years of government neglect. As for assets which are saleable, they are saleable because of their profitability – profitability which the government is willing to give-up as a “subsidy” to the private sector.
However, when all else fails, the government will be forced to incur new borrowings and debts, all at the expense of an already debt-burdened populace. The reason why we are always cash-strapped is due to the humongous fiscal drain of debt servicing: a case of “indebtedness” leading to more “indebtedness”. This was substantiated by a pronouncement by Finance Secretary Margarito Teves earlier this month stating that the government is not keen on cutting spending to limit the deficit and as a result, would try to secure more loans from multilateral development lenders.Drop the Debt, Restructure the Public Finance System
Without doubt, Mrs. Arroyo’s economic managers are in a dilemma. It is a dilemma of wanting the best of the both worlds. They want increased state spending as a response to the economic crisis and yet, they want to curb the deficit at the same time. Such wishful thinking is not bad, and not an impossibility if only the Arroyo government will see the already obvious.
As we have said before, one of the best ways for the government to weather the global economic crisis is for it to implement a moratorium on foreign debt payments many of which are challenged as illegitimate and which can substantially erase a large part of the deficit. Also, sincere efforts in reforming and democratizing the public finance system must be enforced starting with the implementation of an equitable tax collection system as well as transparency in spending.
To do not, is for the Arroyo government to bask in a “fantastic hope” of increased spending and less deficit without doing much effort in implementing necessary reforms. In this situation, increased yet ambiguous state spending will not only be a detriment to the people, they will once again be at the losing end because of more taxes, increased privatization and new debts. -30-