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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