Smuggling, shadowy funds, and tax reform

DESPITE CLAIMS to the contrary, the Philippines’ fiscal space is narrow and will continue to tighten unless steady, sustainable sources of revenues are generated. For a country that is on a catch-up mode, the Philippines has large and increasing public expenditure needs for education, health, public infrastructure and military pension.

The policy options are many, but they all require political will, hard work, and superior competence. These include control of smuggling, regaining control of some shadowy funds, and tax reform.

The first two options alone could easily generate some 100 billion, roughly 1% of GDP. Rationalizing fiscal incentives, which economists deem redundant, could easily add another half percentage point of GDP. More comprehensive reforms could generate at least another two percentage points of GDP.

I have written extensively about rampant smuggling and its economic costs recently and I won’t dwell on it here. Let me focus on the shadowy funds that exist outside the Treasury and the need for these funds to form part of the General Fund.

At the moment, these funds are being allocated and distributed by unelected public officials. These arrangements were martial law creations. They have no place in an open, democratic society.

For a government that it committed to openness and to the strengthening of political and economic institutions, it would be a pity if President Aquino finishes his term without fixing how these shadowy funds are misallocated and misused.

The enormous size of these dark funds — the Charity Fund of the Philippine Charity Sweepstakes Office, the President’s Social Fund of the Philippine Amusement and Gaming Corp., and the Malampaya Special Account of the Department of Energy — create temptations for the weak and the corrupt. And even if President Aquino were honest and incorruptible, he doesn’t have the time, energy, and inclination to keep an eye on all his underlings 24/7/365.

And what about those who will succeed him? Because these funds are sliced and diced in the dark, the general public, the President’s bosses, wouldn’t know who benefits from them and whether the intended beneficiaries do receive the benefits. In the past, these funds have been misused, abused and stolen.

The truth is that a one-term President who is honest, open and fiscally responsible has no need for such large slush funds. The national budget — called the President’s budget — is more than enough to provide flesh and blood to his hopes and aspirations for the country.

This year the President’s Budget amounts to 2.0 trillion, with revenues amounting to 1.8 trillion.

LIMITED FISCAL SPACE

The fiscal space is limited. Any claims to the contrary are false. The tax effort, taxes as percent of GDP continues to be low, despite the heroic efforts of BIR Commissioner Henares. The tax-to-GDP ratio is less than 13%. It has to be increased by about 5% if the Aquino administration would like to fulfill all its promises. No less than the World Bank’s public expenditure review said so.

Proceeds from gambling are now a major source of financing the budget for many developed and developing country. That’s true for the Philippines too. And proceeds from gambling can be expected to zoom in the years ahead,

Still, revenues will continue to be scarce and difficult to raise, I do not understand why some funds continue to remain outside the Treasury, and why they continue to be allocated and disbursed by unelected officials.

This is true for the PCSO’s Charity Fund, Pagcor’s Presidential Social Fund, and the Department of Energy’s Malampaya Special Account, and some other accounts.

What happened to representative democracy? Doesn’t the power of the purse belong to the people’s representatives in Congress?

The international best practice is that all funds are remitted to the national treasury. The legislature (Congress or Parliament or Diet) then authorizes the use of such funds through the budgetary process. Operationally, this means the President submits a budget, Congress authorizes it, and then the Executive Department spends the money in accordance with the authorized budget.

Under an idealized system, there should be no room for shadowy funds lying around to be disbursed by some appointees of the President. The existence of these shadowy funds, which turned out to be in hundred-billion pesos, could, and has, led to misuse and abuse.

Because they are allocated and disbursed in the dark, these shadowy funds could be, and have been, a source of corruption for corrupt official. These funds have also become a shield of protection for an unpopular President.

According to the PCSO Charter, it has the authority: “Subject to the approval of the Minister of Human Settlements, to engage in health and welfare-related investments, programs, projects and activities which may be profit-oriented, by itself or in collaboration, association, or joint venture with any person, association, company or entity, whether domestic or foreign… for the purpose of providing for permanent and continuing sources of funds for health programs, including the expansion of existing ones, medical assistance and services, and/or charitable grants…”

The authority of PCSO to distribute the Social Welfare Fund — 30% of the net proceeds from gambling — is so archaic and feudal. In has no place in a perfectly functioning representative democracy.

The mere mention of the Minister of Human Settlements should raise a red flag. The entrepreneurial purpose of the PCSO, designed during the Marcos martial law years, has been overtaken by events. We now have a 1987 Constitution which has restored to Congress the power of the purse. The use of the Social Welfare Fund no longer rests with the Minister of Human Settlements with the approval of the Office of the President (Prime Minister); that position no longer exists.

But there has been a sea change in the way the government delivers social services. PhilHealth has its universal health care program. The Department of Social Welfare and Development has its 40-billion Conditional Cash Transfer program. In the meantime, both basic health care and social welfare have been devolved to the 45,000 or so local government units under the Local Government Code of 1991.

In brief, the delivery system for health care and social welfare exists, both at the national and local levels.

With these changes, what’s the Charity Fund for? With health and social welfare programs and activities amply provided for in the budgets of national and local governments (recall that local government units get 40% of all domestic taxes as their internal revenue allotment share), what do we need the Charity Fund for?

SUPPLY CREATES ITS OWN DEMAND

But as they say in economics, supply creates its own demand. With a lot of money floating around, the unelected officials have used the funds to give away ambulances to select politicians, cars to favored priests, and subsidies to chosen private hospitals.

A wasteful and abusive PCSO has used the Charity Fund to support the Philippine National Police that has been supportive of the incumbent in Malacañang? But doesn’t the PNP already have enough resources in its budget?

A wasteful PCSO may spend the 15% operating expenses for extravagant and unnecessary public relations activities. It doesn’t matter whether the PR activities are meant to sell sweepstakes tickets or to support the incumbent President. But doesn’t the President already have enough resources in the national budget for the Office of the Press Secretary, his other Communications Groups, and government radio and TV stations?

In the past, funds in the DoE which are meant to develop energy sources have been used to finance projects of some favored politicians and to subsidize poor electricity consumers.

And since the allocation and distribution of these charity and social funds is done in the dark rather through open budgetary authorization process, it has resulted in abuses, waste, and corruption.

The existence of these shadowy funds — the PCSO’s Charity Fund, the Pagcor’s presidential social fund, the DoE’s Malampaya special account, and many more — has led to many questionable transactions in the past. Just read the recent Commission on Audit annual reports for the gory details.

The sooner Mr. Aquino takes away these dark funds from corporations and line agencies and put them where they belong — the National Treasury — the better.

Benjamin Diokno was secretary of budget and management from 1998 to 2001. He is professor of Economics at the University of the Philippines School of Economics. –Benjamin E. Diokno, Businessworld

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