Our public finance is quite problematic. While the Department of Finance (DoF) is pretty hard at work raising money for the national budget through taxes and better tax administration, it is not always enough. Higher public spending is crucial in fighting the pandemic and further strengthening the momentum of business activities. The Bureau of the Treasury (BTr) borrows from the capital markets here and abroad to finance the budget deficit.听
This is the primary reason why in the past we would always insist听that听higher credit ratings are essential. Since we started to receive credit upgrades in 2012, the credit spreads on sovereign borrowings and private corporate debt have tightened. With stronger confidence in our macroeconomic fundamentals, foreign investments started to climb. However, our weak pandemic response reversed the country鈥檚 20-year impressive advance by the downgrade of the country鈥檚 outlook from stable to negative.听
If the House of Representatives鈥 initiative pushes through to scrap the excise taxes on diesel, kerosene,听and liquefied petroleum gas (LPG), reduce them on low-octane gasoline and retain them on high-octane gasoline, the National Government (NG) estimates its loss at some P38 billion in six months. Last month, though, the听DoF鈥檚听computation for one full year of tax suspension stood at P147 billion in excise tax and value-added tax, or around 8% of the expected budget deficit of P1.86 trillion this year.听
Without a compensatory revenue measure, this much will have to be covered by borrowings. Budget realignment might be difficult to pursue because obviously the other elements in the budget must have already been earmarked.听
This must be one of the reasons why听the听NG听and Congress are scrounging for additional revenues. For instance, Congress proposes through House Bill 7425 to impose听a听value-added tax on digital transactions by amending relevant portions of the National Internal Revenue Code. In the same spirit,听the听DoF听is also sounding the call for proper regulation and taxation of fintech companies. Working with both听the听Bureau of Internal Revenue and听the听Securities and Exchange Commission,听DoF听is also collaborating with the Department of Trade and Industry 鈥渨hich has done a lot of groundwork on fintech.鈥 Whether this new proposal is already covered by the House bill is something that should be threshed out by both Malaca帽ang and Congress to avoid overlaps and more market worries.听
While both measures could raise potential revenues, the NG should balance them with their potential impact on digital transactions which were found to be extremely helpful during the lockdown. Taxation of digital transactions and fintech companies is now the subject of many public debates in several member countries of the International Monetary Fund. Cross-border transactions involving at least one digital firm which may not be necessarily headquartered in Manila makes this fiscal measure more complex than it appears.听
These initiatives may indeed yield some dividends but only in the future, and definitely not this year.听
This must be the reason why听BTr听decided to raise P114 billion from the capital market the other day, one among many, through the five-year-and-a-half retail treasury bonds (RTBs). In February,听the NG听also sold P463.3 billion in three-year maturity. There were previous external borrowings by听NG听in euro and Samurai bonds. All in, planned borrowings could easily amount to P3 trillion to cover an expected P1.9 trillion deficit or around 9.3% of GDP. For the first eight months of 2021 alone, the听NG听has borrowed P1.8 trillion, P1.5 trillion from domestic sources and P300听billion from external sources.听
We could just imagine the consequent debt servicing requirements in the succeeding years to cover both principal and interest, all because of some populist inclinations prevailing in the House today.听
But public finance could also be messed up when听the听Department of Budget and Management (DBM)听is less than fastidious in screening each and every proposed line item of public spending. That is the job of the budget department: to prepare the budget and to manage it well.听
A large part of our fiscal woes today is precisely听due to听the failure of听the听DBM to keep the gates. The devil in the budget details appears to have been ignored. For instance, there should be some space for scrutinizing each and every proposed Build, Build,听Build听infra project, both big and small, but definitely some are critical and听more听urgent than others. The pandemic budget is another. While it would be good for transparency for听the听DBM to disclose how much was budgeted for vaccines and protective gear, it is also important to keep a close watch on the large part of the budget lodged with the Procurement Services (PS) of the DBM itself. This is the origin of the听Pharmally听scandal. This is the origin of the many unexplained audit findings of different government departments engaged especially in common-use big-ticket items. In some cases, extra-ordinary items have been reclassified as common-use and therefore may be procured by PS itself.听
In fact, in the recent Senate hearing on the budget of the Department of National Defense (DND), another smoking gun was found.听The听DND听had听parked P10 billion worth of funds with the PS-DBM and the Philippine International Trading听Corp.听(PITC) for the procurement of 鈥渘eeded supplies and equipment.鈥 Senate Minority Leader Frank Drilon and his colleagues questioned the Armed Forces鈥 decision to allow these two agencies to do the procurement for them 鈥渨hen its personnel have better expertise in the procurement of military supplies.鈥听
Earlier, Senator Ping Lacson called to task the DND about its 鈥渁nomalous鈥 practice of parking huge funds for various procurements with听the听PITC but听seeing these听ending up unspent and undelivered. In so many words, it is almost criminal to have those funds sitting idly outside听the听DND while听the听NG is听racking its brain squeezing every peso from all line items and borrowing heavily to manage the pandemic and ensure the resumption of business activities. The Commission on Audit, according to Senator Lacson, has already flagged the unliquidated cumulative amount of P8.523 billion out of P15.9 billion lodged with听the听PITC in the last 13 years.听
What is unconscionable is that in 2019 and 2020,听the听PITC did not deliver anything to the military, while charging 4% for service fees. We don鈥檛 need rocket science to figure out that the military was better off doing the procurement itself. And certainly, we don鈥檛 need rocket science to determine why this practice persists to this day.听
Another potential leakage in the budget is the proposed funding of the anti-insurgency task force amounting to P24 billion in 2022, coinciding with the national election. This amount would have granted funds to identified insurgency-cleared barangays 鈥渢o implement community-driven socio-economic development projects.鈥 Insurgency-free barangays would have been entitled to P20 million each for such projects as farm-to-market roads, school buildings, water and sanitation systems, reforestation,听and health stations.听The听DBM should ensure that these are not duplicative of both national and provincial spending for similar projects, and would not be diverted to election-related spending.听
The Senate therefore must have a compelling reason for deciding to slash the original budget of P24 billion to only P4 billion. That is a big savings that could instead fund health and other social needs of the population, or as much in less borrowings by听the听BTr.听
If we put these fiscal dynamics together, we would agree with such observation that fiscal consolidation in the Philippines 鈥渋s going nowhere.鈥 Public revenues are effectively waived in the spirit of populism, while leakages persist under a culture of corruption and bad governance. One unavoidable outcome is greater reliance on borrowing until debt sustainability metrics are breached. We hope we are wrong, but when that happens, pronouncements about those concrete signs of economic recovery might be premature, or aspirational at best.
