Economic issues for the next administration

Part 1 of 2

The next Philippine president will have his work cut out for him.Apart from addressing new challenges that may arise during his or her term, the next administration will also have to tackle the old problems that are dragging down the country’s growth.

Urgent issues such as alleviating poverty, sustaining fiscal discipline, and stimulating investments, among others, should remain on top of the new government’s list.

Prior to this week’s general elections, the UP School of Economics (UPSE), together with the Ayala Corporation, held the forum Elections 2010: The Morning After (Economic Issues for the Next President) last April 14 to present the country’s most pressing challenges as well as to offer viable options to address them. This article recaps these issues.

Alleviating Poverty

A Social Weather Stations survey last March showed that an estimated four million households, or 21.3% of the country’s households, had suffered from involuntary hunger at least once a month in the past three months. The result was the fourth-highest hunger incidence recorded since mid-1998. Meanwhile, the same survey also said that 8.1 million families, or 43%, considered themselves poor, matching the record-low seen in March 1987.

These figures suggest that poverty alleviation remains a major concern in this country. Although poverty has decreased from 46.4% in the 1980s to 29.6% in the late 1990s, poverty incidence has risen to 33% (2006 estimate) despite steady economic growth. That poverty is mainly a rural phenomenon also still holds true. In fact, three out of four poor people come from the rural areas.

The situation appears even more unfortunate. Poverty reduction in East Asia has been quite fast, and the Philippine case appears as an exception. Poverty incidence in the country has fallen by just 1.6% for every 1% change in mean income, a small number compared to the reduction of 2.3% and 4.9% in Indonesia and Thailand, respectively.

Dr. Arsenio Balisacan, UPSE professor and former Undersecretary of the Department of Agriculture, has recommended that for poverty reduction to be more responsive to growth, the government should focus on creating productive employment opportunities for the poor, as well as expanding their access to basic social services such as education, health, and family planning.

As poverty is still rural in nature, Mr. Balisacan stressed the need to improve the linkages between the leading/urbanizing and lagging/rural areas by providing better infrastructure and market-friendly institutions.

Mr. Balisacan further noted that greater spending on basic education, technical education, and skills development, especially in the rural areas, and added that spending on tertiary education should be reduced while scholarship programs for the poor are to be expanded. (Various studies have shown that the returns to public spending are highest for basic education and least on tertiary education.)

Conditional cash transfers, like subsidies are given to households so long as their children attend school, family members visit health clinics, or parents practice family planning, should also be considered. All these appear to support a holistic agenda to promote basic education, health, and population management.

Finally, the Comprehensive Agrarian Reform Program (CARP) has been criticized for not living up to its promise to reduce poverty. In this regard, Mr. Balisacan advised that spending for the conversion of collective Certificates of Land Ownership Awards (CLOAs) to individual titles be increased as individual land titles enable the farmers to access credit in the financial markets. Likewise, spending on CARP in urbanized or rapidly urbanizing areas should be decreased.

Restoring fiscal balance

Aside from poverty reduction, the next administration will also have to restore fiscal balance. The global crisis in 2008-2009, coupled with this year’s elections, has prompted heavy government spending and borrowing to sustain economic growth.

Amid weak revenue collections, however, the country’s fiscal position has again deteriorated, and the gains from revenue-enhancing measures such as the EVAT earlier in the Arroyo administration have now almost been reversed.

The numbers suggest just as much. The country’s tax effort (the ratio between tax revenue and GDP), for one, has remained anemic at only around 12% to 13%, lower than the average of around 15% to 17% in the ASEAN region. Also, the deficit of P298.5 billion in 2009 represents nearly 4% of GDP. Finally, the country’s debt-to-GDP, at 57%, is among the highest in Eastern Asia; other countries in the region post ratios of 35% to 45%.

Dr. Benjamin Diokno, UPSE Professor and former Secretary of the Department of Budget Management, said that fiscal adjustment — a mix of tax increases and spending cuts — of between 3% to 5% of GDP would be needed to keep the economy on a modest growth path. On the other hand, severe under-spending in public infrastructure and social services means that, albeit painful, a chunk of the needed adjustment must come from tax increases.

Mr. Diokno has also proposed that tax reform should broaden the tax base, reduce the tax burden of corporations and fixed-income earners, and simplify and make more neutral and efficient the tax structure of the financial sector.

He recommended that corporate income tax be reduced from 25% to 18%, but the cut should be accompanied with rationalized fiscal incentives.

A harder revenue measure, as what Mr. Diokno has indicated, is increasing the Value-Added-Tax (VAT) from the current 12% to 15%. This, however, should go together with lower personal income tax rates, say, a flat-tax of 18%. Aside from these, excise taxes on cigarettes and liquor should be replaced by ad valorem taxes.

Finally, Mr. Diokno added that the new Congress must approve new revenue measures within 100 days upon assuming office, although the implementation may be on a staggered basis depending on the state of the economy.

However difficult these tax reforms are, Mr. Diokno stressed that these must be seen by the people as a part of a complete package of reforms that will ultimately benefit the economy, especially the poor.

To be continued next week. Part 2 of this article will discuss proposals in the areas of investments and public goods.

The Institute for Development and Econometric Analysis, Inc. (IDEA) is an economic think-tank based in the University of the Philippines – Diliman. For inquiries on IDEA, please contact Eduard Robleza at edjrobleza@idea.org.ph.