2010 NG Budget: Confirming

GMA’s Legacy of Fiscal Decay

IBON Foundation
September 17, 2009
Intro (1)
 Budget objectives (for a socially responsible
govt): raise revenues & spend in ways that
promote people’s well-being
 Public spending is a key instrument for
development
 Providing social services
 Subsidizing consumption
 Subsidizing agriculture & domestic industry
 Building infrastructure
Intro (2)
 Minimizing public spending & deficits
are not automatically best way to
promote people’s welfare…
 … although IMF, WB and intl finance
markets (ex. credit rating agencies)
prefer “balanced budgets” as better
ensuring continued debt payments
GMA’s fiscal record (1)
1. Anti-developmental spending
 Overall spending compression
 Absolute priority to debt service
(interest & principal)…
 … always at expense of social services (poor
education, health & housing services delivery)
 Unproductive military spending spawning HRVs
 Unhindered corruption (‘standard’ leakages,
items subject to GMA discretion & patronage)
 Note: Arroyo admin greatest payer of debts in
country’s history (in both absolute & relative
terms)
GMA’s fiscal record (2)
1. Regressive revenue-raising
& debt-dependence
 Stress on consumption/indirect taxes that
unfairly burdens low income families (ex. RVAT)
 Avoids direct taxation (ex. corporations, high-
income individuals)
 Preserves tax breaks & subsidies for
corporations and foreign capital
 Aggravated by trade liberalization/tariff cuts &
corruption
 Steadily rising NG debt
 Note: Arroyo admin most indebted in country’s
history (in both absolute & relative terms)
GMA’s fiscal record (3)
 (indirect impact) NG budget supporting
& reflecting implementation of
backward economic policies
 Policies resulting in record joblessness & forced
migration, falling incomes, and rising poverty
(despite economic growth)
 Even upon onset of global crisis, policies
keeping economy dependent on debt & on
external sources of growth
 ‘Economic services’ & ‘social services’ for whom?
Anti-developmental
spending
Note: mainly overall
quantitative analysis, not
yet looking into sectoral
detail or quality of
spending
General decline in govt budget,
even amidst crisis
General increase in debt service,
even amidst crisis
Only slight nominal increase in 2010,
continues overall trend of budget
compression
Real decrease in non-debt NG
spending in 2010
Debt service given priority over social
services, especially under Arroyo
administration
Average spending in national
budget per admin (% of GDP)

Aquin Ramo Estra Arroy

o s da o
Education 2.7 3.1 3.7 2.7
Health 0.7 0.5 0.5 0.3
Housing 0.0 0.1 0.2 0.1
Defense 1.3 1.3 1.1 0.9
Debt service
(interest &
principal) 8.9 6.8 6.6 10.1
Arroyo admin paying the most
out of revenues to debt
Debt service as share of total revenue, 1987-2010e

100.0

90.0

80.0 65.2
70.0
% of total revenue

60.0
59.8
50.0

40.0 40.9
30.0

20.0
36.2
10.0

0.0
86
87
88
89

91

93
94
95
96
97
98

00
01
02
03

05

07
90

92

99

04

06

20 8
20 e
e
0
09
10
19
19
19

19

19

19

19
19

20

20
20

20

20
19
19

19

19

19

19

20

20

20

20
Year
Average sectoral allocation in
national budget per admin (%)

Aquin Ramo Estra Arroy

o s da o
Education 12.3 15.5 18.7 15.1
Health 3.1 2.6 2.4 1.8
Housing 0.1 0.6 0.8 0.4
Defense 6.1 6.7 5.6 5.0
Debt service
(interest only) 40.0 25.3 19.2 25.2
Debt service always at
expense of social services (1)
Debt service always at
expense of social services (2)
Regressive revenue-raising
& debt-dependence
Declining revenue & tax effort
since 1990s: Arroyo admin worst
revenue effort since 1986

18.82
16.27
15.53
15.50

16.2
14.6
13.4
12.8
… despite unprecedented
privatization
Declining revenues due
to trade liberalization
Worsening debt-dependence:
Arroyo admin most indebted in
country’s history

65.8
60.1
57.7
49.8

1972-85 ave.: only 18.8 %

Budget supporting
backward economic policies
Increasingly jobless growth
Philippines Real GDP Growth and Unemployment
by Administration, 1986-2009e (% )

14.0
Real GDP growth
Unemployment rate
12.0

10.0

8.0

6.0
4.9%
%

4.0 3.9%
2.0 3.8%
2.4%
0.0
86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09
19

20
19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20

20
(2.0)

Year
Looming fiscal crisis
Debt service single biggest
factor driving fiscal troubles
Debt paid for by further borrowing:
Arroyo admin biggest borrower in
country’s history
Fiscal deficits reflecting burdensome debt
service & leading to more debt: Arroyo admin
has worst deficits in country’s history
Note: Rising debt not just due to deficits
National govt debt increases due to:
1. NG deficit
2. Off-book items (ex. GOCC contingent
liabilities)
3. Non-budgetary accounts (ex. other
assumed GOCC debt)
4. Peso depreciation
5. Increase in cash
Moreover…
 National govt debt + GOCC, GFI, BSP, LGU
debt = Total public debt
Non-solutions, temporary:
Privatization/oil price windfall

(12.4)? (68.1)?

(103.1)
(119.4)

(211.3)

(297.9)
Roots of fiscal troubles remain
1. Fundamentally, backward economy & low
economic activity (doesn’t generate
substantial resources)
2. Vicious cycle of debt-dependence & debt
service
3. Revenues lost/uncollected/foregone due
to:
i. Corruption (tax evasion)
ii. Trade liberalization (tariff cuts)
iii. Investment liberalization (tax breaks, subsidies
& incentives)
 Soaring debt service, social service
cuts, new taxes…
 2002-06 fiscal crisis resulted in:
1. P3.0 trillion in debt service
2. Regressive RVAT (Nov-05)
 every Filipino 15 years old and over paid
an extra P5,059 in taxes over 2006-2008
1. Falling budget shares, 2000-06:
 Education – 17.1%  13.8%
 Health – 2.1%  1.5%
 Housing – 1.2%  0.6%
 … again in period to come?
 2009-?? fiscal crisis:
1. Trillions more in debt service
2. New taxes
 ? “sin taxes” (P19-20 B)
 ? telcos metering device (?6 B)/text tax
 ? gasoline taxes
 ? “rationalization” of tax incentives (P10 B)
 ? “simplification” of net income tax (P6 B)
1. New round of cutbacks in social services
Final notes
 Revenue prospects poorer than as
projected in budget
 2009 revenue performance: 3.0% growth
projected but -4.1 so far (Jan-Jul)
 2009 tax performance: 3.2% projected but -5.4
so far (Jan-Jul)
 ? Projected 2010: 7.8% revenue growth, 10.5%
tax growth
 IMF-WB has long been pushing for new
taxes (esp. Article IV Consultation and
Post-Program Monitoring Discussions)
Addressing the fiscal crisis
 Debt cancellation, repeal law on automatic
appropriation
 Real crackdown on corruption
 Overhaul tariff & investment incentive
policies
 Cut unproductive/wasteful spending (ex.
military, non-essentials)
 Strategic development of agriculture &
industry
 (Oppose new burdensome taxes &
regressive tax system)
Salamat po