> Budget unbalanced, injustice in tax policy – Cielito Habito

Budget unbalanced, injustice in tax policy
By Cielito Habito
Philippine Daily Inquirer
First Posted 04:06:00 07/24/2009

MANILA, Philippines — Rightly or wrongly, some quarters cite management of government finances as one bright spot in the current administration’s economic scorecard.

As if to reflect its top priority, balancing the budget was the top item in President Gloria Macapagal-Arroyo’s 10-point agenda that she proclaimed early in her administration: It was the “B” in the agenda’s “BEAT THE ODDs” mnemonic.

A balanced budget, however, proved to be a moving target. Originally set for 2008, its attainment had to be moved to 2010—and even that, under current circumstances, is a pie in the sky.

The passage of the expanded VAT (“reformed VAT” or RVAT) law in 2005 has often been mentioned by some quarters to support their positive assessment of how the administration managed the state coffers. Malacañang has also cited the law as proof of Ms Arroyo’s political will in the face of wide public opposition.

But that is to take a rather narrow and amnesic view of the Arroyo administration’s overall fiscal performance. Has fiscal management really merited a feather in the cap for Ms Arroyo, the economist-President?

Debt penalty

There are, to be sure, upsides and downsides in the Arroyo administration’s fiscal performance the past eight and a half years.

True, the passage of the RVAT law in 2005 helped arrest a fiscal crisis that had prompted prominent economists to sound a strong alarm in late 2004.

But it was precisely that crisis situation we had been led to which defines the fiscal management—or lack of it—that has marked the greater part of Ms Arroyo’s watch over the economy.

When she took over the presidency in 2001, total debt payments for both interest and principal (P274 billion) amounted to slightly less than half of all revenue collections (P564 billion).

This ratio jumped to 60 percent the following year, climbed further to 75 percent in 2003, and peaked at 86 percent a year later. The ratio stayed above 82 percent for two more years even as the RVAT had boosted revenues by 2005.

The government was in such dire financial straits that in the 2004-2006 period, debt payments were taking up the equivalent of more than eight out of every 10 pesos of revenues it was receiving!

And with tax collection efficiency well below what it had been in the 1990s, the situation naturally made it necessary for the Arroyo administration to keep relying on borrowings—simply to keep the government operating, much less fund key expenditures and public investments in the economic and social sectors.

Vital expenditures

The data in fact show a declining trend in the shares of the national budget allotted to vital concerns such as education, health, agriculture and infrastructure, especially in the earlier years of the Arroyo administration.

Education, which claimed close to a fifth of the budget in 1997, was receiving less than 15 percent by 2006. Similar declines were seen in the budgetary shares of health, agriculture, and infrastructure—their shares falling by nearly half between 2001 and 2004. Even absolute amounts allocated to these vital sectors actually declined in certain years.

It is on the expenditure side where an administration’s weak fiscal performance directly impinges on the lives of ordinary Filipinos.

And worsening human development indicators recorded in many parts of the country—including declining enrollment, rising school dropout rates, and worsening nutrition levels among children—merely mirror these adverse expenditure trends.

Dr. Rosario Manasan of the Philippine Institute for Development Studies estimated a funding gap of around P90 billion that makes the attainment of the Millennium Development Goals (MDGs) for poverty reduction highly unlikely by the target year of 2015.

Ironically, these adverse trends, whether in expenditure shares or human welfare yardsticks, were happening in the same years that the Arroyo administration was boasting record economic growth.

Tax performance

It is in tax collection efficiency, however, where the biggest disappointment lies.

Manasan, who has been tracking the country’s tax performance through the years, observes that apart from a momentary improvement in 2005 ushered in by the RVAT, the country’s tax-to-GDP ratio (tax effort) had either declined or stagnated under Ms Arroyo’s watch.

Tax effort had in fact declined steeply from its Ramos-era peak of 17 percent in 1997 to a record low of 11.4 percent in 2004 (calculated from updated data from the Department of Budget and Management website, and lower than Manasan’s estimate of 12.4 percent).

The tax-to-GDP ratio has since moved up to 12-13 percent and has hovered around that figure in the last three years. It has yet to recover, however, to its 2001 level of 13.5 percent when the Arroyo administration started.

Even the slight recovery in tax effort since 2005 was found by Manasan to be undermined by results of her closer analysis of tax performance trends.

In her calculations, Manasan found that relative to 2004 levels, tax leakage at the Bureau of Internal Revenue (BIR) grew by 0.78 percent of GDP in 2005, 0.22 percent in 2006, and 0.51 percent in 2007.

In 2007, this translated to an additional leakage of P37 billion in BIR collections over what they were in 2004—an amount that could have wiped out that year’s government deficit three times over.

All this tells us that the government has been losing tremendous sums of money to poor tax compliance and collection. And we haven’t even begun to look at equally daunting amounts lost to corruption on the spending side.

Second best solution

To be fair and as already indicated, the general picture had improved somewhat after RVAT. But the stagnant tax effort data tell us that things could have been far better.

It must be noted that the VAT rate increase was a second best solution made imperative when the Arroyo administration eased up on what should have been a tougher and much more revenue-productive sin taxes law.

It will be remembered that the final outcome of Republic Act No. 9334 was widely lamented to have been severely watered down from the original sin taxes bill proposed by the Department of Finance—allegedly in the aftermath of a not-so-secret meeting between Ms Arroyo and major tobacco companies in her Forbes Park home.

Many still see this as a case of sparing the rich and powerful at the expense of poorer taxpayers on whose shoulders now rest the increased VAT take.

But the longer-standing injustice lies in how the country’s honest taxpayers are perennially called upon to make even greater sacrifices through further tax increases every time government coffers run short.

Especially affected are middle-class wage earners whose taxes are taken away even before the money hits their hands, and the general consumers whose pockets take a direct hit from higher taxes on the products they buy.

Now, there is new talk of raising taxes once again to address the resurgent budget deficit, even as tax collection efficiency remains far below that of our neighbors, and far below what had already been achieved in the 1990s. It’s much easier, after all, to go after the obedient than the disobedient!

No passing grade

In the end, sound fiscal management is more than just balancing the books. It is about managing government finances in a way that does not give undue advantage to those who are already privileged and wealthy, is fair to the common Filipino taxpayer, and uplifts the maximum number of Filipino lives.

On this score, the Arroyo administration has remained wanting, hardly meriting a passing grade.

(Editor’s Note; Cielito Habito served as director general of the National Economic and Development Authority under the Ramos administration. He has masters and doctorate degrees in economics from Harvard University. His column “No Free Lunch” comes out in the Business section of the Philippine Daily Inquirer every Monday.)

source: http://newsinfo.inquirer.net/inquirerheadlines/nation/view/20090724-216967/Budget-unbalanced-injustice-in-tax-policy

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