BATU, Indonesia. Photo by Jes Aznar

Friday, July 8, 2011

Critics Divided On Administration's Fiscal Policies One Year On

My latest project for the Philippine Public Transparency Reporting Project (PPTRP):

Fragile but improving: Critics say the government needs to move faster so the economy will move forward and the people, especially the poor, would feel that things are getting better. JES AZNAR (
Fragile but improving: Critics say the government needs to move faster so the economy will move forward and the people, especially the poor, would feel that things are getting better. JES AZNAR (
When Secretary Cesar Purisima took over the helm of the Department of Finance (DOF) in July last year, he conceded right away that it would not be an easy task.

It was like stepping on a treadmill, he said during his first days in office.

Now, one year on, the country’s fiscal health remains fragile –but improving.

Yet Purisima believes that the positive rating actions received by the Aquino administration are strong testament to the government’s accomplishments.

Over the past 11 months, global debt watchers have given the Philippines' credit rating – a measure of the country’s credit worthiness – an upgrade. This typically translates to lower borrowing costs for governments since it means less risk for investors.

The latest upgrade for the Philippines came from London-based Fitch Ratings which upgraded the country’s sovereign rating by one level to "BB+" from "BB."

By contrast, some governments –including the United States– are being threatened by suggested moves to downgrade their credit worthiness.

“The actions of the major rating agencies mean that we are [moving] in the right direction,” Purisima says.

Similarly, the head of the Bureau of Internal Revenue (BIR), the government’s main revenue agency, believes it has accomplished a good deal over the past 12 months.

“The biggest accomplishment is making clear to everyone that we are serious in implementing the law because we know what the law is,” BIR Commissioner Kim Henares told the Philippine Public Transparency Reporting Project (PPTRP).

Henares said the task is not easy given that the BIR is a big agency that is more than 100 years old.

“It's hard to change 106 years of bad habits: The biggest challenge is making people understand we are serious,” Henares said.

According to the latest DOF data, the national government has registered a fiscal surplus of PhP 61 million (USD 1.4 million) from January to April this year.

This is because revenue collections reached PhP 461.413 billion (USD 10.73 billion) from January to April, of which the BIR accounted for PhP 302.942 billion (USD 7.04 billion) during the period. The Bureau of Customs (BOC) meanwhile has collected PhP 85.058 billion (USD 1.98 billion).

These BIR collections show an increase of 14.29 percent over a year ago. The BOC’s collections meantime show an improvement of 2.04 percent.

‘No projects, no corruption’

Some experts say however that the Aquino administration needs to do even more.

University of the Philippines Economics Professor Benjamin Diokno believes the fiscal improvement is actually “illusory” and is more a result of an underspending more than any improvement in economic generation.

He told PPTRP that the government’s “no new tax” policy until 2013 will not work.

“[The President’s] ability to fulfill his election promises and achieve a balanced budget by 2016 is not possible with the present tax system,” Diokno argues.

And while Diokno says it is clear President Noynoy Aquino “is clean and incorruptible,” – he says it is too early to say whether he can keep “his other men and women's hands clean”.

“To date, he's talking of corruption in GMA's (Gloria Macapagal Arroyo) projects. There is no corruption in Aquino's projects because there are no projects yet implemented. I recall that during President Cory's early months in office, she had a very 'clean' and incorruptible Department of Public Works and Highways Secretary. But what happened? No projects were approved -- no projects, no corruption,” Diokno says.

He told PPTRP he believes the government needs to move faster in implementing projects so the economy will move forward.

“One year is too long to review projects done by the previous administration. I do not accept the proposition that projects are not moving because the administration is still reviewing projects. The projects that are in the 2011 budget are his projects,” Diokno says.

Political analyst Ramon Casiple adds there is widespread perception that President Aquino has not addressed job insecurity because the government does not have enough fiscal resources to tackle it.

Inflation, he notes, also remains high. Inflation rose to a 13-month high of 4.5 percent in May from 4.3 percent in April.

And yet inflation is substantially up in many countries around the world.

“From the high inflation rate, job insecurity and perils of the overseas Filipino workers, and local job creation to urgent political reforms, there is developing unease on how this administration tackles them,” he told PPTRP.

He believes the government has been too busy “vindictively” going after its political enemies.

Sonny Africa, executive director of the non-government think tank IBON Foundation meanwhile believes the government should go after high profile tax evaders to prove its fight against corruption.

And yet Henares points out the filing of a tax evasion case against former presidential son Juan Miguel “Mikey” Arroyo before the Department of Justice (DOJ).

Last April, the BIR filed a tax evasion case against Arroyo who is now representative of Ang Galing Pinoy party-list.

Henares told PPTRP that the Arroyo couple failed to file income tax returns from 2004 to 2009.

“Based on our investigation there’s a deficiency income tax of PhP 73.8 million (USD 1.7 million). Mikey did not file his income tax returns for 2004, 2008 and 2009,” Henares said when she filed the case in April.

She claims Arroyo and his wife Angela failed to pay the commensurate taxes on the properties they declared in their Statements of Assets, Liabilities and Net Worth (SALN) from 2004 to 2009.

This year, the BIR is tasked to collect PhP 940 billion (USD 22 billion): This is an increase over last year’s target of PhP 860 billion (USD 20 billion).

The Customs bureau, on the other hand, has been given a target to raise PhP 320 billion (USD 7.44 billion) this year above the PhP 280 billion (USD 6.51 billion) required last year.

Raising sin taxes

It should also consider raising taxes on tobacco and alcohol instead of succumbing to pressure. JES AZNAR (
It should also consider raising taxes on tobacco and alcohol instead of succumbing to pressure. JES AZNAR (
Another expert, Filomeno Sta. Ana, executive director of the non-government Action for Economic Reforms (AER) says that improving tax administration efforts can only go so far.

“We all know that President Aquino has resisted from having new taxes for the first year of his term. This is a serious handicap in raising revenues,” Sta. Ana told PPTRP.

He says that while efforts to improve tax collection are commendable, they are not enough.

“Part of addressing the leakage is reforming tax policy,” Sta. Ana says.

Sta. Ana noted for instance that the government should seriously consider raising taxes on alcohol and cigarettes instead of succumbing to the lobbying of tobacco industry players.

And he further believes that the Executive has not made known what it really wants to do in relation to tax reforms.

As a result, he said, representatives of vested interests are exploiting the situation to propose weak and compromised legislation.

“For example, the Ways and Means Committee of the Lower House is attempting to rush a consolidated bill on sin taxes that favors the tobacco industry,” Sta. Ana says.

According to government estimates, the sin tax measure, which remains pending in Congress, could raise as much as PhP 19 billion to PhP 20 billion (USD 442 million to 465 million) in the first year of implementation; PhP 30 billion to PhP 40 billion (USD 698 million to 930 million) in the second year; PhP 40 to P50 billion (USD 930 million to 1.16 billion) in the third year; and PhP 60 to PhP 70 billion (USD 1.40 billon to 1.63 billion) in the fourth year.

The Finance department says the current tax structure is inequitable because products having the same current net retail price can be taxed differently if one was introduced before January 1997 and other one after 1997.

Almost every administration has attempted to raise sin taxes but was unable to do so because of the strong lobbying of tobacco players such as Lucio Tan’s Fortune Tobacco and the American brand Philip Morris.

The two tobacco giants have merged and now control 90 percent of the tobacco market here.

Tan, one of the richest Filipinos, is known as a big campaign contributor during elections and a staunch lobbyist in Congress against measures that would raise sin taxes.

Against this backdrop, the Aquino administration needs to work in different areas to show it is serious and able to fix the government’s revenue stream. Philippine Public Transparency Reporting Project