Earmarking of State revenue is overrated

THE PROPONENTS of higher tax on sin products, especially on cigarettes, argue that earmarking of incremental revenues is one way of ensuring the adequacy of government spending for basic health care. While I agree that the government is perhaps not spending enough for health care, I doubt that earmarking of government revenue would be a game changer.

Economists disagree on the merits of earmarking. Those who are for it argue that priority programs (like public health care) are protected from changing priorities, changes in government, political bargaining in congressional budget allocation, and corruption. In addition, earmarking facilitates decision-making on how much revenues and expenditures for a particular activity are needed, simultaneously, in cases where there would be no consensus about raising either separately.

Those who are against earmarking argue that it introduces inflexibility in managing fiscal affairs. What if the earmarked funds exceeded the requirements of a particular program? Won’t this then create an imbalance of funds — a surplus for the benefited program and shortage in other areas of expenditure — which could further complicate decision-making on the composition and size of the budget?

A 1991 study by William McCleary, entitled “Earmarking of Government Revenue: A Review of Some World Bank Experience,” looks at earmarking and goes on to illustrate the discussion with case studies from World Bank experience. The author concludes that “The lessons from the real world appear to bear out the skepticism of the majority about earmarking: in general, it has not worked very well. The article, therefore, concludes by cautioning against the practice except under certain defined and restrictive conditions.”

Earmarking works in a perfect — OK, near perfect — world, when policy makers play by the rules in a transparent way, when the national budget is implemented strictly in accordance with congressional authorization.

But President Benigno Aquino III and Budget Secretary Abad do not play by sound budget rules. Under their watch, there is a big difference between what Congress authorized the Executive to spend and what is actually spent. What you see is NOT what you get.

Remember last year. President Benigno Aquino III did not implement the national budget as approved by Congress. Stung by criticisms that the Aquino administration was slow in implementing government programs and projects, he authorized the Department of Budget and Management (DBM) to slice and dice the budget to come up with a package of new spending initiatives worth 72.1 billion called the Disbursement Acceleration Program (DAP). The DAP was augmented by another 13.4 billion before the year ended. That’s 85.5 billion new spending authority that did not get prior congressional approval.

Of course, the Executive will invoke the “power to augment” provision in the Constitution.

But that’s hypocritical. In the not too distant past, then Senator Benigno Aquino III, Senator Mar Roxas, then Representative (now Senator) Teofisto Guingona III, and Representative Emilio Abaya proposed limits to the augmentation power through the Budget Impoundment Control bill. Now that these gentlemen are on the other side of the fence, none has been heard from them about pushing for this transparent and fiscally responsible piece of legislation. Not even a peep.

Here’s the point: the President, through the Budget Secretary, may impound the appropriations unilaterally on whatever pretext DBM might think of (slow-moving, non-compliance with some requirements, failure to prepare the implementing rules and regulations, and so on).

This unilateral impoundment of appropriations has happened in the past. And it is still happening now.

Here’s a real world, not hypothetical, question: what would prevent the Executive to propose a budget for DoH (say 40 billion) that reflects the earmarked fund (say 5 billion), have congressional authorization, and then during budget execution, Malacañang impounds 10 billion (on the pretext that DoH is slow in disbursing funds) so that DOH’s budget is cut to 30 billion? It is real world because it is happening.

Here’s another real world question: Since public funds are fungible, what would prevent DBM from slowly reducing the budget allocation for DoH that will be funded from the general fund as earmarked fund increases? Assume a baseline budget for DoH of 30 billion. As the earmarked fund increases, say from 2 billion to 4 billion to 6 billion, what would prevent DBM from reducing the baseline budget from 30 billion to 28 billion to 26 billion to 24 billion, keeping the DoH budget constant in nominal terms?

Unfair, yes, but it could happen. If the idea is to have the budget allocation for DoH to rise overtime, here’s the next question: How does one establish the baseline budget for public health care.

How much does the government really spend for public health care right now? While not impossible, the answer is not straightforward.

A look at the figures in the national budget leads to an inaccurate answer. For example, in 2011, Congress authorized new appropriations of 31.8 billion for the Department of Health.

But there’s a big difference between appropriations and obligations and disbursements. I assume the relevant variable is actual disbursement, what was actually spent for health beneficiaries by the government.

There were adjustments to the 31.8 billion. Automatic and continuing appropriations were added. Other budgetary adjustments were effected, including pork barrel from legislators and positive and negative contributions to overall savings. After a slew of adjustments, the 31.8 billion new appropriations ballooned to total available appropriations of 38.1 billion.

But that’s not all. Of the total available appropriation of 38.1 billion, some 1.1 billion appropriations remained unreleased (could be permanently impounded), and some 6.8 billion of released allotment remained have yet to be obligated. In sum, total obligations amounted to 30.2 billion. This is not equal to total disbursements or actual spending, which was lower.

In 2010, Congress approved a total new appropriations of 24.6 billion for DoH. After a series of adjustments, total new appropriations ballooned to 33.5 billion, of which 9 billion were unused (2.4 billion unreleased appropriations and 6.6 billion allotment were not obligated). Hence, total obligations was 24.5 billion.

But that’s not all. We need to add the disbursements from the use of income. The Department of Health is authorized to use incomes collected by regional and other hospitals under its control. All the above are for DoH Proper.

But what we need to know is the sum of health expenditures by the total public sector. Then we have to look at the budgets of specialty hospitals, namely: the Heart Center of the Philippines, the National Kidney Institute, the Lung Center of the Philippines and the National Children’s Hospital. Aside from budgetary support from the national government, these hospitals are also allowed the use of their incomes. In addition, there are funds coming from the pork barrel of legislators for the use by their ailing political supporters and constituents.

And what about hospitals and health facilities run by the Armed Forces of the Philippines (AFP) and the Philippine National Police (PNP)? And the medical facilities and health care of the Bangko Sentral ng Pilipinas, the government financial institutions, and government-owned and -controlled corporations (National Power Corp., PSALM, National Food Authority, National Irrigation Administration, National Electrification Administration, and others)?

And then add to that local government spending for hospitals run by them plus their own budgetary allocation for health care. Recall that the provision of basic health care is one of the devolved functions in the Local Government Code of 1991.

And don’t forget the financial assistance to the Philippine Health Insurance Corp. (PhilHealth)? This is in addition to the health premiums that it collects from both public and private sector workers. And here, the accounting is somewhat tricky. Premiums are not equivalent to spending for health care. Beneficiaries get reimbursed only for a fraction of their total hospital bills. This is the reason why PhilHealth is sitting on a huge reserve.

Government funds released to PhilHealth unless paid to patients do not constitute expenditures for health care. But it forms part of the total public sector surplus. Is this why some fiscal managers are not mindful of the rising PhilHealth reserves?

From all of the above will emerge total public sector spending for health care.

In a recent Senate hearing, Senator Franklin Drilon, chairman of the Senate finance committee, asked why PhilHealth was holding on to an estimated 90.7-billion reserve fund as of July this year when what is required by law at the present level should only be about 30 billion, which is equivalent to two years worth of compensable fees.

And here’s a question on the financing side: Do earmarked funds get released as provided for by law? For example, do the DoH and PhilHealth get their share of the collection of sin taxes imposed on cigarettes and alcoholic beverages as provided for in Republic Act 9334.

Senators Drilon and Pia Cayetano raised these questions in a recent Senate hearing. Both didn’t get a satisfactory answer.

Under our imperfectly working government financial system, earmarking is overrated. It gives false hopes that funds will flow into some specific programs. In reality, it is not necessarily true. It is also not true that appropriations made by Congress are all released, and actually spent. In reality, some amounts are impounded, some parked with PhilHealth.

What we need is a new legislation (for example, the Budget Impoundment Control Act) to define clearly the role of the Executive and Congress in the budget process. What we need is strict compliance with earmarking provisions in existing laws.

We need a Congress that is willing and able to exercise its oversight function over the budget, and an opposition that is willing and able to exercise its fiscalizing role.

Benjamin Diokno is professor of Economics at the School of Economics, University of the Philippines (Diliman). He was formerly secretary of budget and management in the Estrada Cabinet and undersecretary for budget operations in the Aquino 1 administration. –Benjamin E. Diokno, Businessworld