Too much taxes, too little service

The Aquino administration is shortchanging Filipinos in terms of services rendered as compared to taxes collected, according to a study conducted by Prof. Benjamin Diokno of the University of the Philippines School of Economics (UPSE).

The study by the former budget secretary, titled “Limited Government, Negative Impact on the Economy,” also showed that the government, instead of contributing to the country’s economic expansion, has been one of the major factors for the limited growth achieved because of its inefficient use of the national budget.

The study showed that the country’s tax effort (or taxes as percent of GDP) was at 14.4 percent last year, while government spending, net of interest payments as percent of GDP, was 13.2 percent. This showed that the government collected more taxes from Filipinos than what it gave back to them in terms of public goods, services, and public infrastructure.

“Put differently, the average Filipino paid more taxes to the government than what he received from it in terms of public goods and services,” the study noted.

Diokno cited the recent conclusion by the International Monetary Fund (IMF) Manila mission head Chikahisa Sumi that last year’s “fiscal policy was contractionary with the budget deficit of 0.6 percent of GDP.”

Analyzing the impact of low government spending on the economic development, the study found that as a percent of gross domestic product (GDP), a measure of the size of the economy, government spending net of interest payments has been shrinking.

“No wonder its impact on the economy is unequivocally negative. Hence, all these pronouncements that government spending has stimulated the economy are pure hogwash,” Diokno said.

At the Euromoney Investment Forum last March, President Aquino listed his administration’s economic achievements as making 2014 the banner year for net FDI (foreign direct investment), which reached an all-time high of $6.2 billion or 65.9 percent higher than in 2013. From 2010 to 2013, the Philippines averaged a GDP (gross domestic product) growth of 6.3 percent, compared to the 4.3-percent average of the previous administration; and investment grades from all three major credit-rating agencies in 2013, and continued credit rating upgrades ever since.

Diokno, however, said the productive part of the budget, which he identified as government spending less interest payments, was 13.6 percent of GDP in 2010 from 14.2 percent in 2009.

“Last year, after four years of President Aquino, it was 13.2 percent of GDP. That’s how small government spending for goods and services was last year. That’s how incredulous the administration’s claim that the government is responsible for the growth of economy,” Diokno said.

Diokno said a more accurate assessment of the sources of economic growth is that the economy has grown in spite of a passive and ineffective government.

“This early, there are signs that the Philippines government will not meet its economic goal of 7 percent to 8 percent GDP growth in 2015,” Diokno said.

The study showed that FDIs have slowed significantly in February.

“Blame it on the slowing United States economy and the economies of Europe, Japan and China. Not only is the Philippines not attracting as much FDIs as its Asean-6 peers  (Indonesia, Malaysia, Singapore, Thailand and Vietnam), the flow of FDI has hit a bump in January this year. Net inflows of FDIs reached $263 million in January, lower by 71 percent year-on-year,” Diokno said referring to recently released Bangko Sentral ng Pilipinas (BSP) data.

“Imports were down 14.2 percent in January 2015 and were generally in the negative territory during the last nine months. The import plunge in recent months is largely because of cheaper world oil prices. The benefits of cheaper oil prices on consumer demand are oversold. First, they do not translate into lower transport fares for most commuters because of administered transport pricing policy. Fare adjustments are slow to adjust to plunging oil prices,” the study noted.

“A big part of reduced oil prices at the pump is eaten up by graver traffic congestion. With cheaper oil prices, more cars—old and new—inhabit the streets. As a result, it takes more time to get from point A to point B,” Diokno added.

The study also showed merchandize exports also fell from December 2014 to February 2015.

“The decline in exports maybe attributed to weak world economy and the rising uncompetitiveness of Philippine exports, primarily because of high power and transport costs,” Diokno said.

He said agricultural outputs face the risk of a prolonged and more severe El Niño weather aberration.

“A by-product of El Niño is more serious absence of irrigation facilities. This will result in higher agricultural prices since drought in the Philippines means El Niño, too, in other parts of monsoon Asia,” he said.

Diokno said reduced farm activities mean more labor will be released in the agricultural sector, which will then join the work force in the industry and the services sectors.

“Its impact will be higher overall unemployment or lower real wages, or both,” he said.

The study noted that the government is faced with shrinking resources mainly because of the halving of the price of oil in the world market.

In planning the 2005 budget, the economic managers assumed that the Dubai Crude Oil price would be from $90 to $110, the study noted.

As a result, the study showed the Development Budget Coordination Committee (DBCC) has cut the government revenue target by P62 billion, from P2.337 trillion to P2.275 trillion.

The revenue target for the Bureau of Internal Revenue was cut by P50 billion from P1.72 trillion to P1.76 trillion, while the revenue target for the Bureau of Customs was cut by P20 billion, from P456 billion to P436.5 billion. Non-tax revenues were adjusted upward by P8 billion, the study showed.

“I estimate that these downward adjustments are on the conservative side, first, because the DBCC officials continue to stick to the original GDP goals, and second, the revenue impact of lower oil prices are much more serious than what fiscal authorities are willing to admit,” Diokno said.

“They revised their projected Dubai crude oil from $50 to $70 per barrel (from $90 to $110 per barrel). I expect it to average $45 per barrel this year,” Diokno added.

He asked: With the revenue target now sharply reduced, are the fiscal authorities going to stick to the 2015 expenditure program (P2.6 trillion), and, consequently settle for a larger budget deficit (P246 billion)?

Diokno said the appropriate policy is to adopt the expenditure program as approved by Congress, regardless of the revised revenue program.

“The wrong thing to do is to settle for the same deficit level, and cut government spending by P62 billion or by an amount equal to the fall in revenue target; that would make fiscal policy contractionary once more,” he said. LUIS LEONCIO