Business World
In an earlier column, I wrote about The Fiscal Imperatives for the Next Administration (No Money, No Honey) focusing on tax policy reform needed to sustain macro-stability and provide the much-needed resources for infrastructure and social spending.
This time, allow me to talk about how our government uses, well or badly, fiscal policy tools to help members of society who need help, focusing on recent programs for the poor and the elderly.
The good: Conditional cash transfers
Learning from the successful experience of two dozen countries, notably Indonesia and Brazil, to get maximum bang for the taxpayer buck to help reduce poverty, the administration, with the full technical and financial support of the World Bank, launched its own conditional cash transfer program under the banner of Pantawid Pamilyang Pilipino Program (4 Ps). It provides a monthly stipend of up to P1,400 (P500 per household for health and nutritional expenses and P300 per child for educational expenses up to a maximum of three children) to the poorest households of a community provided the children are kept in school. The DSWD selects the beneficiaries based on the targeting system developed for the program.
Despite apprehensions that this may end up being no different from many past programs done in the name of the poor that have ended up at best as wasteful political showcases, this program is showing good early results. Children are going back to school and getting immunized, while their mothers are having pre- and post-natal care. What it can achieve at the end of the day is to break, for the next generation, the cycle of poverty - poor nutrition, poor health, poor education, and resulting unemployment and impoverishment.
The credit for this program goes to highly regarded DSWD Secretary Esperanza Cabral, and of course, the full support of President Gloria Macapagal Arroyo who clearly saw not just the economic soundness of the program, but also its political benefits. (A professor friend who served in the Estrada administration quipped that the appointment of the right person for DSWD secretary is one area where President Arroyo did better than his boss.)
The bad: Nfa
Ask any good economist what is the biggest waste of government resources in recent years and he will readily point to the NFA program of rice subsidies. As a subsidy program it fails the needs test since the subsidized rice is available to all, whether rich or poor. Indeed, studies have shown that less than 25% of the poor have access to NFA rice. Worse, it is quite likely that a large fraction - maybe more than half - of the rice is sold by the NFA at the official government price to some lucky people who repack the NFA rice and re-sell them at market prices. According to a recent World Bank study, it costs the NFA an estimated average of P5 to deliver P1 of subsidy to the poor, the big number reflecting the wastes, leakages, and the governance deficit in its administration. It does nothing for the poor farmers who especially at a time of high rice prices (like now) are deprived the benefits of a remunerative price. On a more fundamental level, it distorts market signals and misallocates resources in the agricultural sector and rest of the economy. Finally, it is very expensive: in 2008, NFA lost P37 billion per data from the Philippine Institute of Development Studies. According to the World Bank, this may have racked up to P63 billion in 2009 (coming from losses that averaged only P5 billion annually in earlier years).
Many studies have been written on why NFA needs to be re-engineered, and how better off consumers and farmers would be if funding is redirected as targeted subsidies to poor consumers and invested in productive assets like rural infrastructure to help farmers. (You can view the most recent one in the November quarterly report of the World Bank - Towards an Inclusive Recovery at http://siteresources.worldbank.org/INTPHILIPPINES/Resources/PHLQuarterly November2009FINAL.pdf) Indeed, generations of technocrats in NEDA, Finance, and the Department of Agriculture, assisted by multilateral and bilateral institutions, have tried to push for reform without success. The vested interests are just too entrenched, and the rents too much.
Contrast the cost of NFA with the cost of the conditional cash transfer. The P10 billion this year under the 4Ps program will benefit around 3.5 million people. Consider what this means: If we had shut down NFA last year and diverted the P63 billion to a conditional cash transfer program, we would have been able to cover 100% of the country's poor (against the 25% with NFA), with each household receiving 7 times the benefits!
(The next president, whoever he may be, can't do better than reappoint Secretary Cabral to see this program move to a higher level, perhaps refined to include conditions covering other socially desirable objectives like reproductive health. NB. I have never had the privilege of meeting Dr. Cabral.)
The somewhat stupid
Despite strong recommendation from the secretary of Finance for her to veto it, the President recently signed into law a bill that would give exemptions from VAT for purchases of senior citizens for restaurant food, medicines, transportation, and movies. Like many tax exemption bills, one cannot find fault with the objectives - in this case to help the elderly, most of whom no longer receive current income. Indeed one can even argue that the amount of tax leakage is not that large, at least compared to NFA deficits, only P1.68 billion per DoF estimate; so it is not that bad from a fiscal standpoint.
However, it is somewhat stupid. Why? Because there are so many other ways of helping the elderly without reaping the unintended consequences of creating a loophole in the VAT system that create a compliance and administration nightmare, or be vulnerable to abuse by crooked traders and BIR agents. The most straightforward way is the one suggested by the Department of Finance: simply raise the discount from 20% to 30%, thus restoring the savings to the elderly that the VAT law is supposed to have deprived. The stores will simply recoup this additional expense from sales to other customers.
This will also keep the integrity and efficiency of the VAT system, one which is self policing - somebody's credit is somebody else's payment - and does not create precedence for others to clamor for the same. (Doesn't society care for the young? Why not exempt children's medicines and baby milk from VAT? How about purchases of the handicapped? Or of our soldiers, teachers, or OFWs?)
If we want to help the elderly poor, how about conditional cash transfer for them? Isn't this much better than this prime example of poorly thought out, politics of pander, VAT exemption for seniors that subsidizes in proportion to one's purchases, to the richer, the more subsidy and for the poorest, nada?
More fundamentally, if we are to improve revenue collection and maintain macrostability, we need to make our tax system - already complicated, full of discretion and loopholes - simple and easy to administer. Let us not overburden it further. Let us instead use expenditure policy to help the poor and the elderly, or for that matter all other sectors asking special support like industries seeking/enjoying fiscal incentives. This way, it is transparent, targeted and needs based, and subject to annual evaluation if still deserving, all under the discipline of a budget process.
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.
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