Business World
Introspective
As one would expect, there have been a spate of nonpartisan exercises on a road map for the country post 2010 among institutions that have an interest in the long-term development of the country. I have been a participant/resource person in a number of them - including, the ADB, the Makati Business Club and the Ramos Peace and Development Foundation; the last one involving six presidentiables who were invited to present their platforms.
Giving the welcome remarks in the Ramos forum, I noted that while we keenly awaited the expositions of the aspirants, many of us are likely to believe that It is useless to try to hold people to anything they say when they are madly in love, drunk - or running for public office.
This was recently validated by good friend, economist guru Philip Medalla. He said that each time he and his collaborators from the UP School of Economics presented their road map with heavy emphasis on how to raise revenues to finance neglected public spending programs, none would publicly embrace the well-thought-out tax measures they propose, like increase in the VAT rate and oil taxes. The solution of the presidential hopefuls then (which do not include the current two front-runners) almost uniformly was, I will improve collections from the BIR and Bureau of Customs through better and more honest administration.
No one can disagree with the need for collection efficiency and honesty. However, people with first-hand experience with reform efforts in these bureaus will say that while such reforms are an essential component of a credible fiscal program and should thus be pursued with resolute political will - this will take time to yield results.
(Nor can the new government rely on privatization receipts - the bottom has been scraped with the disposal of the remaining 40% government stake in Petron.)
It does not help that the new government will inherit a practically bankrupt government, as newly resigned economic planning secretary Ralph Recto was quoted to have said last month. As a senator, he was principal author of the VAT law that is helping shore up the country's finances. In that interview, he expressed worry over the spending authorized by Congress that is contributing to future spending demands that are unmatched by corresponding revenues, i.e., the large increase in salaries and military pension over the next few years. Add to that the structural erosion in revenues that is embedded in some tax laws both passed and forthcoming (a number with doubtful economic and social justification) and the expected still weak recovery from recession keeping tax collections down. While a fiscal crisis was averted with the expanded VAT law in 2005, we are back on a worsening trajectory on all fiscal indicators, be it tax to GDP, deficit to GDP, or public debt to GDP.
Thus, absent any change in the tax structure and base, administrative reform cannot possibly generate the needed increased revenues. Nor would such a weak and incomplete fiscal program that depended on incremental improvements from administrative measures achieve the credibility demanded by the domestic markets and the international financial community to finance required infrastructure and social spending over the next six years.
We will need front-loading of strong, believable fiscal action- otherwise, it will be a case of too little too late and no money, no honey.
What are the measures that can help generate such levels of money and credibility?
The package advocated by UP economists/professor friends who have also served in senior posts in government (Dante Canlas, Ben Diokno, Philip Medalla ) included: a) reform fiscal incentives; b) reform excise taxes on cigarettes and liquor; c) increase the VAT to 15% while lowering the personal and corporate income taxes to 25%; d) adopt higher/variable tax rates on fuel products.
Items (a) and (b) have been on the legislative agenda of the Department of Finance for over a decade, and is still in the mill in the current Congress. While I have pushed for these in the past, both as a public servant and now as an economic commentator, my wish is that nothing comes out of this Congress. Why? Given that this is now election season, the risk is that what comes out will be the exact opposite of what is needed as had happened with the Comprehensive Tax Reform Package in the 1990s. It is best that the Department of Finance technocrats muster their energies for keeping further revenue erosion bills at bay. (It would be too much to expect a presidential veto when we are prematurely in full election fever pitch.)
Certainly then, (a) and (b) need to be pushed by the next president. All the technical work has been done there. What it will take is political commitment, and political skill.
I also support the proposed increase in VAT to 15% while lowering the personal and corporate income taxes. This move can increase the net take of government from a broad and neutral tax base, while giving a break to honest taxpayers who correctly report and pay their income taxes.
Finally, we need to increase the tax take from oil products, hand in hand with full enforcement of anti-smuggling laws. This can take the form of either a complex variable tariff as advocated by friend Ben Diokno, or a simpler increase in excise tax indexed to inflation, which I prefer. Either way, this will not be easy. The next administration will need to make the public understand that: a) taxes on petroleum products are progressive, i.e., the rich pay proportionately more than the poor - more progressive than excises on tobacco and alcohol and the VAT; b) the Philippines has lower oil taxes compared to most countries at a similar income level; c) the money they are paying will help build infrastructure that will generate investment and jobs, and provide direct assistance to the disadvantaged through social services like education and health.
It will also require determination to implement the law against oil smuggling.
None of these are easy, but not impossible for a new president who has a genuine mandate, has renewed people's hopes, and has the skill to do it.
The candidates do not need to talk of these hard measures at this time. What is needed is a leader who can walk the walk at the right time. A leader able to set the vision, rally the people to bring results in ways that are possible to accomplish at the given time and openings available and working through weak institutions and contending with strong vested interests. (The Political Economy of Reform, Working Paper No. 39, World Bank Commission on Growth and Development, Bernardo and Tang, 2008
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf).
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
