Experience is the best teacher

Published May 25, 2022, 4:25 AM

by Milwida Guevara

A fiscal crisis is nothing new to the Philippine government.   Our Presidents faced shortages in revenues and mounting debts, albeit under different conditions. The problem of President Marcos was the civil unrest due to abuses of the martial law regime. President Cory inherited the instability brought about by corruption and loss of trust in the Marcos’ government. President Ramos faced high budgetary deficits due to years of blackouts and coup d’état. President Arroyo battled governance crisis from the anomalous ZTE deal and the Garci scandal. The pandemic eroded the gains from the fiscal reforms of the Duterte government. 

To deal with the fiscal crisis they faced, every administration adopted different measures, each with some degree of success and failure.

President Marcos abolished all special funds. Earmarking the budget for specific purposes such as tourism and scholarships limited government’s space to deploy funds to finance changing priorities and emergencies. It was scandalous, to say the least, that the General Fund was in deficit and all the Special Funds had surpluses.

President Cory ushered the regimes of Privatization and Public-Private Sector Partnerships to finance infrastructure using the public sector’s resources and expertise. The goodwill she brought served as capital in restructuring debts and arranging debt swaps.

President Ramos carried PPPs and privatization to the hilt. He mandated a 10% to 15% cut in the budget of government agencies, including a cut in the Internal Revenue Allotments of local governments. A freeze on hiring, procurement of equipment, and official travels was strictly observed. We had to adopt all sorts of creative measures—no meals for meetings, shutting off-air conditioners at 4:00 P.M.  I had to buy duty-free wine that was served during the OECD meeting. President Ramos milked government corporations dry by requiring them to pay dividends in advance in a meeting he chaired on Christmas day.

Certainly, tax reforms were part of their strategies. Every President claimed credit for introducing tax reform packages. The modified income tax for wage earners and the final tax on passive incomes reaped significant benefits in terms of revenues and improvements in tax administration and compliance. Tax amnesties were introduced by President Marcos. The first tax amnesty was a huge success. But when amnesties were oft-repeated, the measure lost its luster and attraction. But there were reforms that the “New Republic” introduced which had disastrous effects. The 1% turnover tax collected in every transaction resulted in cascading taxation and the concomitant price increases. There was, of course, the travel tax which was paid in dollars to shore up foreign exchange.

President Cory, through Secretary Ongpin developed a Comprehensive Tax Reform Package. Income tax rates were lowered, the value-added tax was introduced to replace a host of indirect taxes, and limitations on income tax deductions were introduced. Secretary Ongpin made a bold move to eliminate the tax incentives but was unfortunately rebuffed by his “colleagues” in the Cabinet.

President Arroyo took the plunge and increased the VAT rate from 10% to 12%, promising that it was just a temporary measure. But what government taketh, it finds it difficult to give back.

The normal line of defense of government is to introduce tax reforms to shore up revenues. But there are severe limitations in increasing the tax effort—not only because inefficient administration foils up noble policy intentions. But we have a huge underground economy, several avenues for tax avoidance, e.g., economic zones, and, I hate to mention it, corruption. The leakages in the revenue stream remain unplugged. It is time to look at the budget to trim the fat, enforce discipline and efficiency, and postpone less-strategic expenditures. User charges, such as fees for government services can be adjusted to reflect market prices. Government corporations need to level up and share a bigger part of their earnings to help finance a healthier community. And take a look at all those special funds.  They may have more efficient uses in health, and education.

There is a huge room for tax reforms, but there is an equally spacious room to use the budget to manage the deficit and redistribute wealth.

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