The Market Monitor Minding the Nation's Business
By Luis Leoncio
Incoming Budget Secretary Benjamin E. Diokno is confident of finally completing his “unfinished business” of making the annual national budget as an anti-poverty tool, which he started during the short-lived presidency of Joseph Estrada.
In a question-and-answer e-mail interview, Diokno said the budget under his term would be “well-spent” and that he would be guided by the principle that “when you allocate money, you should remember this is hard-earned so you need to give it back to the people.”
Lump sums in the budget, which were a fixture of the budget under the Aquino administration, would be reduced if not eliminated, he said.
“The budget has to be authorized by Congress,” Diokno said in reference to his aversion to discretionary funds.
He added that the controversial bottom-up budgeting (BuB) favored by outgoing Budget Secretary Florencio Abad would be limited for now.
Abad had described his BuB as a “reform measure” but many saw it as a resurrection of the pork barrel system that the Supreme Court declared as unconstitutional in 2013.
“Pending Mr. Duterte’s approval, I want to limit bottom-up budgeting to depressed municipalities,” he said. “I will continue it but it will be subjected to the President’s desire.”
Diokno said the scheme under the Aquino administration was turned into a political tool.
He also said the incoming administration is determined on its tax-reform package of reducing income tax in exchange for a higher sales tax.
He said the increase in sales tax or value-added tax (VAT) from 10 percent to 12 percent was a success. “It’s a good tax,” Diokno added. “The International Monetary Fund (IMF) said our VAT rate is mildly progressive because we exclude food in its original state.”
He said the maximum income-tax rate should be reduced from 32 percent to 25 percent.
“(Incoming Finance Secretary Carlos) Dominguez and I are working on making the tax system efficient and competitive with (Asean) neighbors,” he added.
He said the national budget would be used primarily to invest in good-quality education and health to boost human capital.
“It should also focus on agriculture because half of the poor are dependent on it,” he said, adding that the overall target would be to spread development throughout the country.
“Mr. Duterte wants to get things done as soon as possible, We have to develop alternative urban centers to decongest Manila,” Diokno said.
He said that the development plan through infrastructure has long been identified.
“Needed infra projects were identified as early as the Marcos administration,” he said. “We should choose small-and medium-scale projects that are ready to be implemented; you have to bid for projects simultaneously. And you should be willing to remove people who are incompetent.”
On the country’s growth momentum, Diokno said the economy will realize its potential with the efficient use of the yearly budget.
“The average gross domestic product (GDP) growth during Aquino’s term was 5.9 percent, which is a reasonable rate of growth. But an 8-percent GDP growth is achievable in the last three years of Mr. Duterte’s term,” he said.
He said the national budget could reach P5 trillion by the end of Duterte’s term.
“I’m excited for the possibility of major reform—for the masses and whole economy,” he added.
Diokno said the Duterte administration plans to continue and maintain the current macroeconomic policies.
“However, reforms in tax-revenue collection within the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) will be complemented by reforms within the bureaucracy of these tax-collecting agencies,” he said.
“I disagree with Mr. Aquino’s contractionary fiscal (expenditure-tax) policy. It should be reversed. Past and future growth could have been faster had the Aquino administration allocated and spent more money for public infrastructure. For the last six years, the outgoing administration had underspent close to P1 trillion,” he said.
He added that the efforts of the Bureau of Customs have to be stepped up.
“Smuggling is at its historic heights,” he said.
Diokno said infrastructure spending would be ramped up by addressing, among other things, major bottlenecks in the Private-Public Partnership (PPP) program.
“Maintain the target of setting aside 5 percent of the country’s gross domestic products (GDP) to infrastructure spending,” he said.
He said public-infrastructure spending should not be limited to PPP programs. There are many capital projects, especially in the countryside, which are not susceptible to capital-intensive PPP arrangements. For a labor-surplus economy like the Philippines, the government should put equal emphasis on many small- and medium-size projects. They create a lot of jobs and they are faster to implement,” he added.
He said the public infrastructure target of 5 percent of GDP should just be the beginning and added that it should be as high as 7 percent by the end of 2022.
The attractiveness of the Philippines to foreign direct investments (FDI) can be done by addressing restrictive economic provisions in the Constitution and our laws, and by “enhancing competitiveness of the economy.”
He said the pursuit of a genuine agricultural-development strategy is possible by providing support services to small farmers to increase their productivity, improve their market access, and develop the agricultural value chain by forging partnership with agribusiness firms.
“Under the Aquino administration, agriculture grew by a measly average of 1.6 percent and was practically flat (0.2 percent) last year,” Diokno added.
Diokno said that given an annual population growth of about 2 percent, agriculture should grow by at least 3 percent every year.
“But for this to happen, it requires massive infusion of productivity-enhancing public infrastructure (farm-to-market roads, irrigation facilities including small water impounding projects), fertilizer, high-yielding seeds, and investment in research and development,” he added.
The country’s basic education system should be strengthened and scholarships for tertiary education that are relevant to the needs of private-sector employees be provided.
“The cold reality is that unemployment is highest among college-trained and college graduates. This implies a mismatch between what the education system produces and what the economy needs,” he said.
“Strengthening the basic education system is also a way of providing better foundation for technical-vocational and college work. Scholarships should be provided on the basis of academic performance and needs, not on political connection,” he said.
Diokno is also looking at a “wider budget deficit” to fund new infrastructure, which he hopes would boost growth momentum and spread the benefits of the Philippines’s economic improvement in recent years.
Diokno said he is looking at a budget deficit equivalent to 3 percent of GDP under the Duterte administration to inject more funds into the economy.
At that level, the budget deficit based on the projected nominal GDP for 2016 could reach around P420 billion, the widest since the record P314.46-billion deficit posted in 2010.
“A deficit-to-GDP ratio of 3 percent is manageable, especially if the higher deficit would be used to fund infrastructure,” Diokno said.
He said credit-rating companies shouldn’t be alarmed at the impending change in fiscal targets since the country’s debt is already low as a percentage of economic output; most of the debt is now in local currency, and the economy has a steady stream of foreign exchange.
“There is no risk that the Philippine government will default, given the low foreign-debt-to-GDP ratio, the high gross international reserve, and the steady stream of overseas Filipino workers’ remittances,” Diokno said.