RP’s Fiscal Situation: Filipinos Bear Brunt of VAT, Other Reforms 

Last year’s lower deficit was achieved by drastically cutting critical spending, especially on social services, and by charging higher regressive taxes on the people.

By Sonny Africa
IBON Features
Posted by Bulatlat

President Gloria Macapagal-Arroyo recently said before members of the diplomatic corps that “through the painful but necessary battles to raise new revenue, crack down on tax cheats and prosecute corrupt officials, we are now finally a nation ready to do right by our poorest citizens.” And indeed, the Arroyo administration’s major economic effort in 2006 was to rein in mounting public fiscal deficits.

At first glance, it seems to have succeeded. The full-year 2006 deficit was only P62.2 billion ($1.2 billion based on the year’s average exchange rate of $1:P52.05), a 57% decline from the P146.8 billion ($2.67 billion based on 2005’s average exchange rate of $1:P55.05) recorded last year and substantially lower than the official projected ceiling of P125 billion. These have gone far in reducing the public sector borrowing requirement to 1.8% of gross domestic product in the first nine months of the year.

However, the achievements on the fiscal front are less signs of a strengthening economy than indications of how economic burdens are placed on those already least able to bear them: the lower deficit was achieved by drastically cutting critical spending, especially on social services, and by charging higher regressive taxes.

Taxes increase, social services spending falls

For 2006, government collected P978.7 billion in tax and non-tax revenues, readily surpassing the target. This was due to additional revenues from the administration’s centerpiece reformed value-added tax (VAT) law which was implemented in February 2006. The reformed VAT increased the VAT rate from 10% to 12%, temporarily increased the corporate income tax rate from 32% to 35% and removed VAT exemptions on oil and electricity, among other provisions. It is expected to be a significant contributor to government’s goal of achieving a balanced budget by 2008.

Based on data from the Department of Finance (DoF), the VAT generated P76.9 billion in net revenues in 2006, exceeding the target of P75.8 billion, largely from consumers’ pockets. The reformed VAT also boosted total VAT collections to P268.7 billion in 2006, a 71.5% increase from P156.7 billion in 2005.

The largest part of VAT collections came from collections by the Bureau of Customs, which collected a total of P55.2 billion for the whole year, while the Bureau of Internal Revenue collected a total of P21.6 billion, ahead of its target by P1.2 billion.

But as tax revenues have increased, government has been cutting back further on social services budgets that are not only already grossly insufficient to begin with but have been declining in real terms since 1997. Real public spending on education fell to P1,331 per Filipino in the recently-approved 2007 budget after reaching a high of P1,503 in 2002. Health spending is down to just P111.78 per Filipino.

It should be noted that the declining allocations for these vital services is happening amid long-standing gross neglect. The Department of Education (DepEd) admits that there is a lack of 20,517 teachers (assuming a ratio of 45 students to one teacher), 45,775 classrooms (assuming 45 students to a classroom), 3.2 million seats and 67 million textbooks in school year 2006-07.

The burden of health spending is also increasingly borne by Filipinos who can least afford its high costs. Government’s share in total health expenditures has drastically fallen under Arroyo, with possibly the steepest drop in such a short period of time. Health accounts show that national and local government’s share in total health expenditure was 40.6% in 2000 but fell to just 30.3% in 2004. Filipinos are forced to make up the difference from private sources, primarily out-of-pocket spending.

Repayment to creditors

All these fiscally repressive measures have aimed to ensure repayments to creditors as well as to assure foreign investors that foreign exchange is available for their globally-integrated commercial, financial and pseudo-manufacturing operations. In 2006 government paid around P854.4 billion in total public debt service, which is equivalent to P9,935 per Filipino, or seven times combined spending on education and health. In nominal terms, this is a 211% increase from debt service levels in 2001. The Arroyo administration has not only brought the country to its worst ever fiscal crisis, it is making the most public debt payments and is the most indebted government in Philippine history.

As it is, the government borrowed P592.4 billion in the first 11 months of 2006, or slightly less than in the same period the previous year. Over four-fifths of this borrowing went straight back to creditors through debt servicing. Although government has tried to repay as much debt as it could, total national government debt still increased marginally to P3.914 trillion in October 2006 from P3.888 trillion in the same period in 2005. 

These pre-payments give the impression that the debt situation is improving, and to restore government creditworthiness so it can continue to borrow. But since these do not address the fundamental roots of the debt problem (economic backwardness, trade and investment liberalization, bureaucratic waste and corruption), the debt crisis cannot but eventually repeat itself. The government in early January 2007 already borrowed $1 billion from the international capital market and aims to borrow at least $1.47 billion more in official development assistance from the World Bank, Asian Development Bank and the Japan Bank for International Cooperation. Some P260 billion is also going to be borrowed domestically in 2007. 

Behind the fiscal squeeze 

The International Monetary Fund (IMF) and the World Bank (WB) have visibly supported the Arroyo administration’s fiscal squeeze. Aside from the IMF-WB issuing favourable country assessments, the Bank in December approved the immediate single tranche disbursement of a $250-million policy loan, its first in almost a decade, because the associated fiscal conditionalities were already met. So even as government plays up the repayment of its remaining $220-million debt to the IMF and its exit from the Fund’s post-program monitoring arrangement, it also affirms its compliance with the Bank’s policy conditions.

In any case, the economy’s financial backwardness and reliance on external sources of financing means that it remains on a tight leash with government economic policy-makers effectively compelled by blackmail not just through multilateral lenders but also through financial blackmail by commercial banks and through global capital markets.  

Hence, the financial sacrifices the Arroyo government asks Filipinos to make cannot be justified as short-term pain for long-term gain since the fiscal squeeze is precisely aimed at furthering the administration’s bankrupt neoliberal agenda. More than anything else the Arroyo government’s fiscal efforts have been focused on assuring debtors of repayments regardless of their impact on the general public.  

However, even the sustainability of this approach is in doubt. The expenditure cuts have been severe and the taxes burdensome. At the same time, there remain persistent problems in revenue administration such as high tax evasion and persistently over-generous incentives for foreign investors. Bureaucratic corruption also continues to bleed government resources. IBON Features / Posted by Bulatlat 

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