POSTSCRIPT / October 5, 2004 / Tuesday


Philippine STAR Columnist

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Palace upwraps roadmap to fiscal stability, growth

FISCAL DEFICIT: Malacanang sent us yesterday its “Roadmap to Fiscal Strength for Fighting Poverty,” a 5,000-word document with six charts.

It was too long to fit here, so we tried boiling it down. As we fear that we failed to do it justice, we urge those who want to read the paper in its entirety to go to our website

For over two decades, the government has been operating on a fiscal deficit, except in 1994, 1995, 1996 and 1997. Since then, total government expenditures, to include debt payments, exceeded revenues.

The roadmap takes off from the fact that the government can no longer afford to subsist on loans. Any expenditure financed by borrowing contributes to the ballooning deficit. Soon, interest payments will eat up an increasing share of the budget.

If this happens, public services and social reforms would slow down or come to a full stop. The poor will suffer — in greater numbers and deeper magnitude.

The Arroyo administration has prepared a roadmap to recovery, a six-year plan to balance the budget and deliver institutional reforms. We got our copy yesterday.

It has three policy objectives: (1) Balance the budget in six years, (2) reduce the ratio of Consolidated Public Sector Deficit to Gross Domestic Product from 6.8 percent to 3 percent, and (3) reduce the ratio of Public Sector Debt to GDP from 136.5 percent in 2003 to 90 percent by 2010.

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RAISING REVENUES: The action plan for raising revenues consists of (a) improved administrative efficiency and (b) proposed legislative measures.

The goal is to generate revenues of over P180 billion by next year. Executive reforms could effect savings of around P100 billion. The remaining P80 billion or more is expected from legislated revenue measures.

For the Bureau of Internal Revenue, this means computerization/automation of operating systems; enhancement of audit programs; intensified enforcement; and campaigns for taxpayer compliance.

For the Bureau of Customs, this will entail modernizing information systems; creating an anti-smuggling task force; strengthening of internal audit; and installing container x-rays for ports.

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NAPOCOR SALE: The privatization of the National Power Corp . is among the most urgent non-tax revenue measures. Its privatization can fetch $4-5 billion to pay part of the national government’s debt, resulting in savings of P20-P30 billion in interest payments.

If privatization fails, the government would have to generate additional P30 billion in revenue on top of what was initially projected.

Assuming favorable economic conditions over the medium term, even if no new taxes are passed, total revenues are expected to grow at an average 11.3 percent, with tax receipts growing more vigorously at 12.8 percent.

With proposed tax measures, revenue efforts are estimated to reach as high as 18.5 percent, with tax effort projected to reach 17.6 percent in 2010. Customs collection ratio to GDP would go up to 3.5 percent by 2010, relying mainly on improved efficiency.

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TAX MEASURES: An Executive Order has been signed increasing duty on petroleum products from 3 percent to 5 percent. In addition, Malacanang has sent to Congress eight tax measures:

  1. Adoption of gross income taxation. This measure will replace the net income tax system with gross income taxation of corporations and self-employed individuals through payment of a fixed percentage or a fixed amount.
  2. Indexation of excise tax on “sin” products. The current specific tax for tobacco and liquor does not allow for adjustments arising from inflation. An estimated P7 billion is expected to be collected on its first year of implementation.
  3. Excise tax on petroleum products. This will increase the specific tax rates on petroleum products by P2 across the board, except for LPG that will be increased by no more than 50 centavos. The tax rates will be adjusted to price increases of the products.
  4. Rationalization of fiscal incentives. This gathers all the special investment incentives provided in several laws; withdraws inefficient, irrelevant and duplicative incentives; limits the time frame for them; selects qualified investments; and abolishes incentives not consistent with the World Trade Organization.
  5. General tax amnesty with SAL. This will generate immediate revenues and broaden the tax base by granting tax amnesty to delinquent individual and corporate taxpayers through the payment either of 3 percent of the taxable income or a fixed scheme. Every taxpayer of a given income threshold is required to file a Statement of Assets and Liabilities to qualify for amnesty. Around P10 billion is expected from this program.
  6. Lateral attrition system. This is an attrition system for revenue personnel. Incentives are granted to those who meet targets while sanctions are imposed on those who fail.
  7. Franchise tax on telecoms. This reimposes the franchise tax on telecom companies to give government a share in the tremendous growth of the industry. The additional revenues, estimated at P5 billion, can be used for health and education.
  8. Two-step increase in VAT rate. Pending a review of the VAT system, this will increase the VAT rate from 10 percent to 12 percent. The administration aims for a VAT-to-GDP ratio of 4 percent in 2005 and 5 percent in 2006. If these are met, the two-point increase will not be imposed.

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BALANCED BUDGET: Balancing the budget in six years requires a gradual reduction of the deficits every year until a zero deficit is reached in 2010.

The plan calls for reducing both the Consolidated Public Sector Deficit and the National Government Deficit so that the CPSD will be down to 3 percent in 2009 while the National Government Deficit will be .2 percent of GDP in 2009, and finally wiped out in 2010.

National government debt will be lowered from its current 78 percent to 58 percent of GDP in 2010, while Public Sector Debt will go down from 135.6 percent to 90 percent of GDP. Both can be achieved with immediate fiscal reform, particularly with revenue-generating measures.

Government-owned and -controlled corporations and government financial institutions must undergo rate adjustments, through streamlining or privatization or outsourcing. Their debt guarantees must be regulated.

Local governments will have to carry out austerity measures to adjust to reductions in their internal revenue allocations (IRA).

Increases in debt servicing and IRA payments have shrunk capital spending and other productive expenditures. In 2004, interest payments grabbed 32 percent and IRA ate 16 percent of the budget, leaving only 6 percent for infrastructure.

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EXPENDITURES: The expenditure pattern targets a reduction of interest payments from 5.8 percent of GDP in 2004 to 3.7 percent in 2010. Interest payments and expenditures for personal services are also set for pruning.

The plan calls for raising the ratio of capital outlays to GDP from 2.1 percent to 4.0 percent in 2010.

Capital expenditures for infrastructure will be prioritized for those that would ensure transport and communication linkages, provide base power and water supply, and promote agribusiness.

Interest payments are projected to decline from 5.8 percent in 2004 to 3.7 percent in 2010.

The management of expenditures demands austerity, rationalizing personal services, improving management of GOCCs, devolution of local governments, looking after social safety programs, and transferring dormant accounts to the General Fund.

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FIGHTING POVERTY: Official Development Assistance is preferred over commercial borrowings for funding large infrastructure projects, but this requires a local counterpart fund. Progams prioritized for ODA funding are those that will BEAT THE ODDS, the acronym for the administration’s 10-point agenda to fight poverty.

B is for a balanced budget.
E is for education for all.
A is for automated elections.
T is for transport and digital infrastructure to connect the entire country. That is B-E-A-T for BEAT.

T is for terminating the MILF and NPA conflicts
H is for healing the wounds of EDSA.
E is for electricity and water for the entire country.
That is T-H-E, THE.

And finally, ODDS.
O is for opportunities for 10 million jobs.
D is for decongesting Metro Manila by developing new centers for government, business and housing in Luzon, the Visayas and Mindanao.
DS is for developing the Subic-Clark corridor.

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(First published in the Philippine STAR of October 5, 2004)

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