Promise and reality

With a lot of promise, President Aquino III signed into law the 2011 budget on Dec. 27, 2010 — the first time in 11 years that the budget was signed into law in the same year it was submitted. The last time this happened was in 1989, on the occasion of then President Estrada’s first budget. A lot of things have happened since that triumphant day. The promise of a better life for Filipinos has faded and been replaced by growing pessimism.

As he signed the 2011 budget, Mr. Aquino said: “Its early passage means that the much-needed programs for poverty alleviation and development can be implemented earlier. This will enable us to address the urgent needs of our people in a timely manner. Such needs include building more rural health units and providing immunization for children. This also allows us to construct new classrooms and hire new teachers, as promised to the Filipino people.”

What’s the promise and what’s the reality? The promise: delivery of essential public services in a timely manner. The reality: most essential projects — school facilities, irrigation, farm-to-market roads, rural health units — have not taken off the ground.

The promise: a budget deficit of P300 billion; the reality: a likely deficit of P150 billion, half of what was promised. As of September 2011, actual budget deficit was P53 billion, P181 billion lower than the programmed deficit of P234 billion for the first three quarters of the year.

Of course, some bankers, creditors, and a few of the President’s men are thrilled with the lower-than-expected deficit. But these people operate in a different world.

On the other hand, think of the programs and projects that were promised but have yet to be delivered. Think of lost or delayed welfare benefits of the unimplemented projects. Think of the lost job opportunities. Think of the increasing likelihood that the contribution of public sector spending to economic growth will be negative.

Pity the school children who started classes last June with no classrooms or dilapidated facilities. Pity the farmers who were denied the benefits of irrigation facilities and farm-to-market roads which were yet to be constructed. Pity the jobless who were denied opportunities to work in various government projects. Pity the families of the unemployed who have to suffer occasional hunger because the economy continues to sputter while public spending remains weak.

Public spending catch-up plan a dud

Actual expenditures net of debt service continue to lag programmed spending by as much as P195 billion — P847b versus P1.04 trillion. There is no breakdown as to how much public infrastructure underspending has taken place, but I place it at around 50%, based on official fiscal statistics and recent pronouncements by Public Works Secretary Singson. As of the end of the third quarter, some 50% of hard projects have yet to be bid out or yet to start.

Some cracks in the revenue collection machinery are beginning to show. As of the third quarter, both tax collecting agencies have failed to collect what they promised to collect. BIR tax collection is 1.1% lower than planned. This is perfectly understandable given the high targets assigned to BIR and considering that economic performance was way off by a third. On the other hand, the revenue shortfall of the BOC should be a cause for concern. A shortfall of 15% from its original target is too large. Either the revenue goal was set too high or rampant smuggling has remained unchecked. To be fair, part of the shortfall is due to the overoptimistic GDP and imports assumptions.

Fiscal performance in the last quarter of 2011 will be a major challenge. The original program calls for expenditures, net of interest payments, of P355 billion from October to December 2011. But for the government to be on track with its cash disbursement program, it has to spend some P491 billion (net of interest payments). Spending close to half a trillion in one-quarter is a herculean task!

I expect half of this year’s infrastructure program will spill over to next year. I also expect that the P72-billion “economic stimulus” program will have marginal effect of public spending this year.

Lessons Learned

There are some lessons from the 2011 budget fiasco. First, the early approval of the budget is a necessary but not sufficient condition for timely delivery of essential public services. One still needs an efficient, effective, and hardworking Executive Department to convert Congress-mandated spending authority into concrete programs and projects.

Second, the Executive Department should work on more realistic macroeconomic assumptions. Realistic growth forecasts are likely to result in better budget outcomes. Rosy scenarios lull policymakers into a state of complacency. Talking of aspirational 7% to 8% growth rates with no well-designed road maps was a formula for disaster. Words, without structural reforms and well-crafted action plans, don’t matter.

Early recognition that the economy is slowing down, that faster and focused public spending is necessary to support strong growth, would have made a lot of difference.

Knowing where and at what stage of the economic cycle the economy is on makes a lot of difference. Pursuing a tight fiscal policy when an expansionary one is warranted has only exacerbated the economic slowdown. The 2011 national budget, net of debt service, is smaller than the 2010 budget. Fiscal conservatism at a time when fiscal expansion is needed has added to, not eased, the economic deceleration.

Third, a multi-year expenditure framework that provides an overall guide for the series of annual budgets should be put in place. The ease by which the pseudo P72-billion stimulus package was put in place with no reference to a multi-year spending plan reveals the lack of a long-term fiscal strategy.

The need for accelerated spending does not mean spending for spending’s sake. The administration should have allocated the P72 billion for projects that would create a lot of jobs now while at the same time accomplish society’s long-term goals (for example, universal primary education). For instance, the government could have used funds intended for programs and projects of dubious economic value for narrowing the backlogs in school buildings. Why wait until 2016 or 2014 to construct the 68,000 classrooms and school facilities? Why deny schoolchildren the benefits of decent school facilities now?

In the rush to spend public funds, policymakers should try to meet two tests — job creation and consistency with societal goals. Is the proposed activity going to create a lot of jobs, a priority for a labor-surplus economy? Is it consistent with the long-term goals of Philippine society such as inclusive, sustained, and strong economic growth? –Benjamin E. Diokno, Businessworld