Big increases in revenue still did not result in a balanced budget

One of the items on President Gloria Arroyo’s 10-point agenda is to balance the budget by “collecting the right revenues and spending on the right things.” Her administration has fallen short of the target. Revenues have increased but expenses have soared—partly because of the need to pump prime the economy and create a dynamic economy.

But persistent Arroyo-critic Benjamin Diokno, a former budget secretary, says it is the result of “lack of fiscal discipline and poor disregard of the budget process.”

“She failed to have her budget passed on time for the entire nine-and-a-half years of her term. For all those years, she operated on a reenacted budget for three years. For some years, she operated with two budgets [prior years and current years]. She continued to spend money from unprogrammed funds even with no additional revenue support,” Diokno, a professor of economics at the University of the Philippines, said when asked what prevented President Arroyo to accomplish her goal.

Until the passage of the P1.54-trillion General Appropriations Act, or Republic Act 9970 on February 8, 2010, the Arroyo administration is operating on the 2009 reenacted budget of P1.415 trillion.

“There were large deficits in the years prior to the 2004 elections. Yet she didn’t do anything with the weak tax system. She was spending money beyond what resources the government was able to collect. There were leakages in the tax collection system,” he said.

According to estimates made by the Department of Finance, roughly P60 billion are lost yearly because of these so-called revenue-eroding measures.

These measures include the lowering of the corporate income tax rate to 30 percent from 35 percent.

Another measure is the Minimum Wage Law, which exempts minimum wage earners from income taxes.

The National Tourism Act, meanwhile, is estimated to translate to P3 billion in foregone revenues.

Another measure is the imposition of franchise tax on power transmission in lieu of all national and local taxes.

The so-called Personal Equity Retirement Account Act of 2008, a tax-free pension scheme for retiring individuals, meanwhile, is also a burden to the revenue effort.

Meanwhile, data from the Bureau of the Treasury show that from 2001 to 2009 the national government’s budget deficit is averaging P163.28 billion a year.

However, the Finance department is hopeful Congress will pass revenue-enhancing tax measures, which include rationalizing fiscal incentives, simplification of net income taxation scheme, and increasing sin tax rates.

“The increase in VAT [value-added tax] rate from 10 percent to 12 percent was a needed relief. But the world economic crisis caught us with a very vulnerable fiscal position. Revenues went up only because of the one-time bonanza owing to the high oil prices that went up to $147 per barrel,” Diokno noted.

Another reason is what the World Bank has been asking the government to correct: corruption eats up 40 percent of government budgets.

Typhoons Ondoy and Pepeng exacerbated the situation, as the disaster forced many businesses to declare losses, thus further eroding tax revenues.

With the disasters and government’s failure to dispose of two of its big-ticket items—Philippine National Oil Co.-Exploration Corp. and Food Terminal Inc.—the budget gap hit P298.5 billion, or 3.9 percent of the gross domestic product (GDP) at end-2009.

Diokno considers Mrs. Arroyo’s promise to balance the budget a total failure.

“Her fiscal performance may be characterized as overshooting her deficit target [her target was balanced budget by 2010, actual deficit for the first quarter of 2010 was 6.9 percent of the GDP] for most of the years she was in power, weak tax effort and soaring national outstanding debt. Yet education, health and public infrastructure are all in poor condition. With allegations of rampant corruption, there was little value for money for her public spending,” he said.

Other economists don’t quite agree with Diokno, however. –Manila Times