Failure masquerading as success

DELAYS IN the implementation of government programs and projects, not higher revenues, explain the lower-than-planned budget deficit. The Philippine government has targeted a full year budget deficit of 279 billion or 2.6% of gross domestic product (GDP). From January to September 2012, the programmed deficit is 183.3 billion. Yet, the Aquino administration underachieves once more, as its realized deficit was sharply lower at 106.1 billion.

But shouldn’t a lower budget deficit be better than being on target? Yes, if one were obsessed in convincing credit rating agencies that it is able to limit the country’s budget deficit, even if means denying its people the benefits of faster government spending. No, if one were concerned with achieving stronger and sustained growth and with easing poverty and reducing hunger.

The Aquino administration should remain focused on stimulating the economy, on higher and faster public spending for infrastructure, education, health and agricultural modernization.

So, when it failed to meet its deficit target, it is a sign of failure — no ifs and buts about it. Masquerading this failure as success is a big mistake since it might lead to complacency and inaction. It might also sap the credibility of the Aquino administration.

MAJOR CULPRIT: SLOWER SPENDING

Budget Secretary Abad explicitly failed to acknowledge that the lower-than-programmed public spending was the major culprit for the lower budget deficit. For the first nine months of 2012, public spending, net of interest payment, was 979.8 billion — 114.0 billion less than programmed spending of 1,093.9 billion. Yes, 114.0 billion is the extent of the underspending of the productive part of the budget.

But why is it important to spend on schedule what has been budgeted? First and foremost, because the economy needs it. It is critical for the administration to ramp up spending in order to achieve its goal of sustained, strong and inclusive growth. The consensus is that the world economy is still weak, perhaps stagnating, private investment sputtering, unemployment high, and poverty widespread. Hence, the public sector has to spend aggressively. At the very least, the Executive should implement as efficiently, effectively and promptly the national budget as authorized by Congress.

But after 27 months in office, the Aquino administration has yet to get out of its slow, underspending groove. It has not learned its lesson: last year, the economy slowed to a crawl because the Aquino administration failed to move its programs and projects.

Who’s to blame for the slow pace of budget execution? Certainly, not Congress.

For two consecutive years, it has dutifully approved, with only minor changes, the President’s budget before the start of the fiscal year.

We can’t blame the Department of Budget and Management (DBM) either, if one were to believe its press releases. DBM authorities said that the bulk of the authorized appropriations had been released in the first few weeks of the fiscal year — in 2011 and 2012.

Yet, project implementation remains seriously delayed. Why? This year, after three quarters, the level of actual spending for infrastructure and other capital outlays compared to program is lower by 67.7 billion or 33.1%. There are many plausible reasons for this poor performance: under-utilization of cash allocation by the Department of Public Works and Highways, delays in the implementation of farm-to-market roads, and large unreleased balances for public-private partnership strategic support funds.

The harsh reality is that the social and economic costs of program and project delays are enormous. For example, school children are denied the benefits of superior facilities as the construction of new school buildings is delayed. The economic benefits of better roads and bridges, airports and seaports, irrigation facilities and water projects, are deferred with every day of delay in project implementation.

Whatever the reasons for project delays — procedural snafus, systemic flaws, poor leadership — our political leaders have more than enough time to fix them.

OBFUSCATION IN THE WORKS

There are attempts to obfuscate the underspending. Abad claimed that the Philippine government’s budget deficit is lower than planned because first, actual revenues was higher and second, debt service was lower. “The lower-than-expected deficit is largely due to improved revenue collection for the nine-month period, which, at 1.12 billion, is 10% higher year-on-year, as well as savings generated from lower-than-programmed interest payments,” Abad said in a press release.

The first claim is false. The second claim while true, is unimportant since the allocation for debt service is generally overstated to serve as a buffer against possible contingencies.

Here’s the truth: for the first three quarters of 2012, total revenues fell short of programmed revenues by 50.9 billion or by 4%. In assessing the revenue performance of any administration, compare how much taxes it collected with what it promised to collect; that’s 1.119 billion versus 1.169 billion. Totally irrelevant is this year’s revenue collection versus last year’s.

The two major collecting bureaus — Bureau of Internal Revenue (BIR) and the Bureau of Customs (BoC) — missed their revenue targets. BIR’s collection was short by 27.8 billion or by 3% while BoC’s collection was off by 43.4 or by a staggering 17%.

The Bureau of Treasury exceeded its target by 16.5 billion or by 34%. Other offices also exceeded their actual revenue target by 3.9 billion or by 6%. Part of this over collection was due to privatization proceeds, which even the International Monetary Fund excludes in estimating fiscal balance. Privatization proceeds when used to fund regular budget operations may mean reducing the net worth of the public sector.

If I were Mr. Abad, I won’t get too excited that actual spending for interest payments is lower than programmed level. Underspending for interest payments should not come as a surprise. In my experience in government budgeting, we used interest payments as a buffer against contingencies — for shortfalls in tax revenues and surprises on the debt servicing component. Hence, in practice, the budget allocation for debt service is generally overstated.

In 2012, DBM conservatively assumed that 364-day Treasury bill rate at 3.0% to 5% and London-interbank offered rate (LIBOR) at 0.4% to 1.4%. Actual rates, to date, are on the low side, 2.27% and 0.71% respectively. The conservatism is glaring.

This year, fiscal authorities have targeted a budget deficit ceiling of 279 billion. With less than 90 days to go before the year ends, the Aquino administration has a lot of grounds to cover with very little time to do so. In order to meet its deficit goal, it has to spend, excluding for interest payments, more than half a trillion pesos, 542 billion to be exact, between October 1st and the end of the year. But given its track record, that’s a formidable task. –Benjamin E. Diokno, Businessworld

Benjamin Diokno is former secretary of budget and management and is professor of Economics at the School of Economics, University of the Philippines (Diliman).