INTRODUCTION TO FISCAL POLICY

What is Fiscal Policy?

In economics, fiscal policy is the use of government spending and revenue

collection to influence the economy.

Fiscal policy—the use of government of tax and its own rate of spending to

influence demand in the economy. When a government decides to lower the taxes or raise

public expenditures, the effect is to stimulate economic activities by increasing the

demand for goods and services. There is a risk that this may lead to increasing inflation

or an increase in imports, resulting in a trade deficit. In contrast, a tightening of fiscal

policy is where taxes are raised or public expenditures are reduced in order to reduce

aggregate demand.

Fiscal policy can be contrasted with the other main type of economic policy,

monetary policy, which attempts to stabilize the economy by controlling interest rates

and the supply of money. The two main instruments of fiscal policy are government

spending and taxation. Changes in the level and composition of taxation and government

spending can impact on the following variables in the economy:

• Aggregate demand and the level of economic activity;

• The pattern of resource allocation;

• The distribution of income.

Fiscal policy refers to the overall effect of the budget outcome on economic

activity. The three possible stances of fiscal policy are neutral, expansionary, and

contractionary:

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 • A neutral stance of fiscal policy implies a balanced budget where G = T

(Government spending = Tax revenue). Government spending is fully funded by

tax revenue and overall the budget outcome has a neutral effect on the level of

economic activity.

• An expansionary stance of fiscal policy involves a net increase in government

spending (G > T) through rises in government spending, a fall in taxation revenue,

or a combination of the two. This will lead to a larger budget deficit or a smaller

budget surplus than the government previously had, or a deficit if the government

previously had a balanced budget. Expansionary fiscal policy is usually associated

with a budget deficit.

• A contractionary fiscal policy (G < T) occurs when net government spending is

reduced either through higher taxation revenue, reduced government spending, or

a combination of the two. This would lead to a lower budget deficit or a larger

surplus than the government previously had, or a surplus if the government

previously had a balanced budget. Contractionary fiscal policy is usually

associated with a surplus.

The idea of using fiscal policy to combat recessions was introduced by John

Maynard Keynes in the 1930s, partly as a response to the Great Depression.

The purpose of Fiscal Policy:

• Reduce the rate of inflation

• Stimulate economic growth in a period of a recession.

• Basically, fiscal policy aims to stabilize economic growth, avoiding the boom and

bust economic cycle.

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Methods of funding

Governments spend money on a wide variety of things, from the military and

police to services like education and healthcare, as well as transfer payments such as

welfare benefits.

This expenditure can be funded in a number of different ways:

• Taxation

• Seignorage, the benefit from printing money

• Borrowing money from the population, resulting in a fiscal deficit

• Consumption of fiscal reserves.

• Sale of assets (e.g., land).

Funding the deficit

A fiscal deficit is often funded by issuing bonds, like treasury bills or consols.

These pay interest, either for a fixed period or indefinitely. If the interest and capital

repayments are too large, a nation may default on its debts, usually to foreign creditors.

Consuming the surplus

A fiscal surplus is often saved for future use, and may be invested in local (same

currency) financial instruments, until needed. When income from taxation or other

sources falls, as during an economic slump, reserves allow spending to continue at the

same rate, without incurring additional debt.

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Economic effects of Fiscal Policy

Governments use fiscal policy to influence the level of aggregate demand in the

economy, in an effort to achieve economic objectives of price stability, full employment,

and economic growth. Keynesian economics suggests that adjusting government

spending and tax rates are the best ways to stimulate aggregate demand. This can be used

in times of recession or low economic activity as an essential tool for building the

framework for strong economic growth and working toward full employment. The

government can implement these deficit-spending policies to stimulate trade due to its

size and prestige. In theory, these deficits would be paid for by an expanded economy

during the boom that would follow; this was the reasoning behind the New Deal.

Governments can use budget surplus to do two things: to slow the pace of strong

economic growth and to stabilize prices when inflation is too high. Keynesian theory

posits that removing funds from the economy will reduce levels of aggregate demand and

contract the economy, thus stabilizing prices.

Some classical and neoclassical economists argue that fiscal policy can have no

stimulus effect; this is known as the Treasury View, which Keynesian economics rejects.

The Treasury View refers to the theoretical positions of classical economists in the

British Treasury, who opposed Keynes' call in the 1930s for fiscal stimulus. The same

general argument has been repeated by neoclassical economists up to the present. From

their point of view, when government runs a budget deficit, funds will need to come from

public borrowing (the issue of government bonds), overseas borrowing, or the printing of

new money. When governments fund a deficit with the release of government bonds,

interest rates can increase across the market. This is because government borrowing

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creates higher demand for credit in the financial markets, causing a lower aggregate

demand (AD), contrary to the objective of a budget deficit. This concept is called

crowding out; it is a "sister" of monetary policy.

In the classical view, fiscal policy also decreases net exports, which has a

mitigating effect on national output and income. When government borrowing increases

interest rates, it attracts foreign capital from foreign investors. This is because, all other

things being equal, the bonds issued from a country executing expansionary fiscal policy

now offer a higher rate of return. In other words, companies wanting to finance projects

must compete with their government for capital so they offer higher rates of return. To

purchase bonds originating from a certain country, foreign investors must obtain that

country's currency. Therefore, when foreign capital flows into the country undergoing

fiscal expansion, demand for that country's currency increases. The increased demand

causes that country's currency to appreciate. Once the currency appreciates, goods

originating from that country now cost more to foreigners than they did before and

foreign goods now cost less than they did before. Consequently, exports decrease and

imports increase.

Other possible problems with fiscal stimulus include the time lag between the

implementation of the policy and detectable effects in the economy, and inflationary

effects driven by increased demand. In theory, fiscal stimulus does not cause inflation

when it uses resources that would have otherwise been idle.

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 BACKGROUND OF THE STUDY

As we all know, Fiscal policy is the means by which a government adjusts its

levels of spending in order to monitor and influence a nation's economy. It is the sister

strategy to monetary policy with which a central bank influences a nation's money

supply. These two policies are used in various combinations in an effort to direct a

country's economic goals. Here we take a look at how fiscal policy works, how it must be

monitored and how its implementation may affect different people in an economy.

Before the Great Depression in the United States, the government's approach to

the economy was laissez faire. But following the Second World War, it was determined

that the government had to take a proactive role in the economy to regulate

unemployment, business cycles, inflation and the cost of money. By using a mixture of

both monetary and fiscal policies (depending on the political orientations and the

philosophies of those in power at a particular time, one policy may dominate over

another), governments are able to control economic phenomena.

How Fiscal Policy Works

Fiscal policy is based on the theories of British economist John Maynard Keynes.

Also known as Keynesian economics—an economic theory stating that active

government intervention in the marketplace and monetary policy is the best method of

ensuring economic growth and stability, this theory basically states that governments can

influence macroeconomic productivity levels by increasing or decreasing tax levels and

public spending. This influence, in turn, curbs inflation (generally considered to be

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healthy when at a level between 2-3%), increases employment and maintains a healthy

value of money.

Balancing Act

The idea, however, is to find a balance in exercising these influences. For

example, stimulating a stagnant economy runs the risk of rising inflation. This is because

an increase in the supply of money followed by an increase in consumer demand can

result in a decrease in the value of money - meaning that it will take more money to buy

something that has not changed in value.

Let's say that an economy has slowed down. Unemployment levels are up,

consumer spending is down and businesses are not making any money. A government

thus decides to fuel the economy's engine by decreasing taxation, giving consumers more

spending money while increasing government spending in the form of buying services

from the market (such as building roads or schools). By paying for such services, the

government creates jobs and wages that are in turn pumped into the economy. Pumping

money into the economy is also known as "pump priming". In the meantime, overall

unemployment levels will fall.

With more money in the economy and less taxes to pay, consumer demand for

goods and services increases. This in turn rekindles businesses and turns the cycle around

from stagnant to active.

If, however, there are no reins on this process, the increase in economic

productivity can cross over a very fine line and lead to too much money in the market.

This excess in supply decreases the value of money, while pushing up prices (because of

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the increase in demand for consumer products). Hence, inflation occurs.

For this reason, fine tuning the economy through fiscal policy alone can be a

difficult, if not improbable, means to reach economic goals. If not closely monitored, the

line between an economy that is productive and one that is infected by inflation can be

easily blurred.

When The Economy Needs To Be Curbed

When inflation is too strong, the economy may need a slow down. In such a

situation, a government can use fiscal policy to increase taxes in order to suck money out

of the economy. Fiscal policy could also dictate a decrease in government spending and

thereby decrease the money in circulation. Of course, the possible negative effects of

such a policy in the long run could be a sluggish economy and high unemployment

levels. Nonetheless, the process continues as the government uses its fiscal policy to fine

tune spending and taxation levels, with the goal of evening out the business cycles.

Who Does Fiscal Policy Affect?

Unfortunately, the effects of any fiscal policy are not the same on everyone.

Depending on the political orientations and goals of the policymakers, a tax cut could

affect only the middle class, which is typically the largest economic group. In times of

economic decline and rising taxation, it is this same group that may have to pay more

taxes than the wealthier upper class.

Similarly, when a government decides to adjust its spending, its policy may affect

only a specific group of people. A decision to build a new bridge, for example, will give

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work and more income to hundreds of construction workers. A decision to spend money

on building a new space shuttle, on the other hand, benefits only a small, specialized pool

of experts, which would not do much to increase aggregate employment levels.

Conclusion

One of the biggest obstacles facing policymakers is deciding how much

involvement the government should have in the economy. Indeed, there have been

various degrees of interference by the government over the years. But for the most part, it

is accepted that a degree of government involvement is necessary to sustain a vibrant

economy, on which the economic well being of the population depends.

Fiscal policy can be used in various different ways. It may be used to try to boost

the level of economic activity when the economy is flagging a little. In this case it is

called reflationary policy. Alternatively the economy may be doing a little too well and in

need of slowing down. In this case deflationary policy is called for. The final use for

fiscal policy is as a tool of supply-side policy

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 DEEPER UNDERSTANDING ON FISCAL POLICY

Fiscal Policy—The Government and Economy

When the government decides on the goods and services it purchases, the transfer

payments it distributes, or the taxes it collects, it is engaging in fiscal policy. The primary

economic impact of any change in the government budget is felt by particular groups—a

tax cut for families with children, for example, raises their disposable income.

Discussions of fiscal policy, however, generally focus on the effect of changes in the

government budget on the overall economy. Although changes in taxes or spending that

are “revenue neutral” may be construed as fiscal policy—and may affect the aggregate

level of output by changing the incentives that firms or individuals face—the term “fiscal

policy” is usually used to describe the effect on the aggregate economy of the overall

levels of spending and taxation, and more particularly, the gap between them.

Fiscal policy is said to be tight or contractionary when revenue is higher than

spending (i.e., the government budget is in surplus) and loose or expansionary when

spending is higher than revenue (i.e., the budget is in deficit). Often, the focus is not on

the level of the deficit, but on the change in the deficit. Thus, a reduction of the deficit

from $200 billion to $100 billion is said to be contractionary fiscal policy, even though

the budget is still in deficit.

The most immediate effect of fiscal policy is to change the aggregate demand for

goods and services. A fiscal expansion, for example, raises aggregate demand through

one of two channels. First, if the government increases its purchases but keeps taxes

constant, it increases demand directly. Second, if the government cuts taxes or increases

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transfer payments, households’ disposable income rises, and they will spend more on

consumption. This rise in consumption will in turn raise aggregate demand.

Fiscal policy also changes the composition of aggregate demand. When the

government runs a deficit, it meets some of its expenses by issuing bonds. In doing so, it

competes with private borrowers for money loaned by savers. Holding other things

constant, a fiscal expansion will raise interest rates and “crowd out” some private

investment, thus reducing the fraction of output composed of private investment.

In an open economy, fiscal policy also affects the exchange rate and the trade

balance. In the case of a fiscal expansion, the rise in interest rates due to government

borrowing attracts foreign capital. In their attempt to get more dollars to invest,

foreigners bid up the price of the dollar, causing an exchange-rate appreciation in the

short run. This appreciation makes imported goods cheaper in the United States and

exports more expensive abroad, leading to a decline of the merchandise trade balance.

Foreigners sell more to the United States than they buy from it and, in return, acquire

ownership of U.S. assets (including government debt). In the long run, however, the

accumulation of external debt that results from persistent government deficits can lead

foreigners to distrust U.S. assets and can cause a deprecation of the exchange rate.

Fiscal policy is an important tool for managing the economy because of its ability

to affect the total amount of output produced—that is, gross domestic product. The first

impact of a fiscal expansion is to raise the demand for goods and services. This greater

demand leads to increases in both output and prices. The degree to which higher demand

increases output and prices depends, in turn, on the state of the business cycle. If the

economy is in recession, with unused productive capacity and unemployed workers, then

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increases in demand will lead mostly to more output without changing the price level. If

the economy is at full employment, by contrast, a fiscal expansion will have more effect

on prices and less impact on total output.

This ability of fiscal policy to affect output by affecting aggregate demand makes

it a potential tool for economic stabilization. In a recession, the government can run an

expansionary fiscal policy, thus helping to restore output to its normal level and to put

unemployed workers back to work. During a boom, when inflation is perceived to be a

greater problem than unemployment, the government can run a budget surplus, helping to

slow down the economy. Such a countercyclical policy would lead to a budget that was

balanced on average.

Automatic stabilizers—programs that automatically expand fiscal policy during

recessions and contract it during booms—are one form of countercyclical fiscal policy.

Unemployment insurance, on which the government spends more during recessions

(when the unemployment rate is high), is an example of an automatic stabilizer.

Similarly, because taxes are roughly proportional to wages and profits, the amount of

taxes collected is higher during a boom than during a recession. Thus, the tax code also

acts as an automatic stabilizer.

But fiscal policy need not be automatic in order to play a stabilizing role in

business cycles. Some economists recommend changes in fiscal policy in response to

economic conditions—so-called discretionary fiscal policy—as a way to moderate

business cycle swings. These suggestions are most frequently heard during recessions,

when there are calls for tax cuts or new spending programs to “get the economy going

again.”

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 Unfortunately, discretionary fiscal policy is rarely able to deliver on its promise.

Fiscal policy is especially difficult to use for stabilization because of the “inside lag”—

the gap between the time when the need for fiscal policy arises and when the president

and Congress implement it. If economists forecast well, then the lag would not matter

because they could tell Congress the appropriate fiscal policy in advance. But economists

do not forecast well. Absent accurate forecasts, attempts to use discretionary fiscal policy

to counteract business cycle fluctuations are as likely to do harm as good. The case for

using discretionary fiscal policy to stabilize business cycles is further weakened by the

fact that another tool, monetary policy, is far more agile than fiscal policy.

Whether for good or for ill, fiscal policy’s ability to affect the level of output via

aggregate demand wears off over time. Higher aggregate demand due to a fiscal stimulus,

for example, eventually shows up only in higher prices and does not increase output at

all. That is because, over the long run, the level of output is determined not by demand

but by the supply of factors of production (capital, labor, and technology). These factors

of production determine a “natural rate” of output around which business cycles and

macroeconomic policies can cause only temporary fluctuations. An attempt to keep

output above its natural rate by means of aggregate demand policies will lead only to

ever-accelerating inflation.

The fact that output returns to its natural rate in the long run is not the end of the

story, however. In addition to moving output in the short run, expansionary fiscal policy

can change the natural rate, and, ironically, the long-run effects of fiscal expansion tend

to be the opposite of the short-run effects. Expansionary fiscal policy will lead to higher

output today, but will lower the natural rate of output below what it would have been in

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the future. Similarly, contractionary fiscal policy, though dampening the output level in

the short run, will lead to higher output in the future.

A fiscal expansion affects the output level in the long run because it affects the

country’s saving rate. The country’s total saving is composed of two parts: private saving

(by individuals and corporations) and government saving (which is the same as the

budget surplus). A fiscal expansion entails a decrease in government saving. Lower

saving means, in turn, that the country will either invest less in new plants and equipment

or increase the amount that it borrows from abroad, both of which lead to unpleasant

consequences in the long term. Lower investment will lead to a lower capital stock and to

a reduction in a country’s ability to produce output in the future. Increased indebtedness

to foreigners means that a higher fraction of a country’s output will have to be sent

abroad in the future rather than being consumed at home.

Fiscal policy also changes the burden of future taxes. When the government runs

an expansionary fiscal policy, it adds to its stock of debt. Because the government will

have to pay interest on this debt (or repay it) in future years, expansionary fiscal policy

today imposes an additional burden on future taxpayers. Just as the government can use

taxes to transfer income between different classes, it can run surpluses or deficits in order

to transfer income between different generations.

Some economists have argued that this effect of fiscal policy on future taxes will

lead consumers to change their saving. Recognizing that a tax cut today means higher

taxes in the future, the argument goes, people will simply save the value of the tax cut

they receive now in order to pay those future taxes. The extreme of this argument, known

as Ricardian equivalence, holds that tax cuts will have no effect on national saving

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because changes in private saving will exactly offset changes in government saving. If

these economists were right, then my earlier statement that budget deficits crowd out

private investment would be wrong. But if consumers decide to spend some of the extra

disposable income they receive from a tax cut (because they are myopic about future tax

payments, for example), then Ricardian equivalence will not hold; a tax cut will lower

national saving and raise aggregate demand. Most economists do not believe that

Ricardian equivalence characterizes consumers’ response to tax changes.

In addition to its effect on aggregate demand and saving, fiscal policy also affects

the economy by changing incentives. Taxing an activity tends to discourage that activity.

A high marginal tax rate on income reduces people’s incentive to earn income. By

reducing the level of taxation, or even by keeping the level the same but reducing

marginal tax rates and reducing allowed deductions, the government can increase output.

“Supply-side” economists argue that reductions in tax rates have a large effect on the

amount of labor supplied, and thus on output . Incentive effects of taxes also play a role

on the demand side. Policies such as investment tax credits, for example, can greatly

influence the demand for capital goods.

The greatest obstacle to proper use of fiscal policy—both for its ability to stabilize

fluctuations in the short run and for its long-run effect on the natural rate of output—is

that changes in fiscal policy are necessarily bundled with other changes that please or

displease various constituencies. A road in Congressman X’s district is all the more likely

to be built if it can be packaged as part of countercyclical fiscal policy. The same is true

for a tax cut for some favored constituency. This naturally leads to an institutional

enthusiasm for expansionary policies during recessions that is not matched by a taste for

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contractionary policies during booms. In addition, the benefits from expansionary policy

are felt immediately, whereas its costs—higher future taxes and lower economic growth

—are postponed until a later date. The problem of making good fiscal policy in the face

of such obstacles is, in the final analysis, not economic but political.

Fiscal Policy - Reflationary Fiscal Policy

Governments may choose to use reflationary fiscal policy in times of recession or

a general downturn in economic activity. In this situation they will use their fiscal policy

to give a boost to the economy. They may do this by lowering taxes in some form or by

increasing the level of government expenditure. This will encourage people to spend

more. If they lower indirect taxes then this will lower the prices of the taxed goods and

encourage more demand. Alternatively they could lower direct taxes. This will raise

people's disposable income (their take-home pay) and therefore encourage them to spend

more. Both way the level of demand in the economy should rise and help encourage

economic growth.

Reflationary fiscal policies could therefore include:

• Cutting the lower, basic or higher rates of tax

• Increasing the level of personal allowances

• Increasing the level of government expenditure

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Fiscal Policy - Deflationary Fiscal Policy

Deflationary fiscal policy is likely to be most appropriate in times of economic

boom. If the economy is growing at above its capacity this is likely to cause inflation and

balance of payments problems. To try to slow the economy down the government could

either raise taxes in some form or perhaps reduce government expenditure. Either of these

will reduce the level of demand in the economy and therefore the level of economic

growth. It may increase indirect taxes which will raise prices and deter people from

spending so much, or it may increase direct taxes, which will leave people with less

money in their pockets and so stop them from spending so much.

Deflationary fiscal policies could therefore include:

• Increasing the lower, basic or higher rates of tax

• Reducing the level of personal allowances

• Reducing the level of government expenditure

Fiscal Policy as a Supply-side Tool

Supply-side policies are policies that aim to increase the capacity of the economy

to produce. Fiscal policy usually acts on the level of demand in the economy and the

deflationary and reflationary policies on pages 2 & 3 are often known as demand-side

policies. However, it is also possible for fiscal policy to act on the level of supply as well.

Income tax will always have an effect on people's incentives to work. This will be true at

most income levels. If income tax at low income levels is too high, people may choose

not to work but to remain on benefits instead. If income tax on high levels of income is

17
too high, people may choose not to work so hard and take risks. Ultimately they may

even choose to leave the country if taxes elsewhere are much lower (a "brain drain").

Supply-side fiscal policies could therefore include:

• Cutting the lower and basic rates of tax to open up the gap between earnings in

and out of work and ensure people have an incentive to work

• Increasing the level of personal allowances for the same reason

• Reducing the top rate of tax to encourage enterprise, risk-taking and the incentive

to work hard

Criticisms of Fiscal Policy

1. Disincentives of Tax Cuts. Increasing Taxes to reduce AD may cause

disincentives to work, if this occurs there will be a fall in productivity and AS

could fall. However higher taxes do not necessarily reduce incentives to work if

the income effect dominates.

2. Side Effects on Public Spending. Reduced government spending to Increase AD

could adversely effect public services such as public transport and education

causing market failure and social inefficiency.

3. Poor Information Fiscal policy will suffer if the government has poor

information. E.g. If the government believes there is going to be a recession, they

will increase AD, however if this forecast was wrong and the economy grew too

fast, the government action would cause inflation.

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4. Time Lags. If the government plans to increase spending this can take along time

to filter into the economy and it may be too late. Spending plans are only set once

a year. There is also a delay in implementing any changes to spending patterns.

5. Budget Deficit Expansionary fiscal policy (cutting taxes and increasing G) will

cause an increase in the budget deficit which has many adverse effects. Higher

budget deficit will require higher taxes in the future and may cause crowding out

6. Other Components of AD. If the government uses fiscal policy its effectiveness

will also depend upon the other components of AD, for example if consumer

confidence is very low, reducing taxes may not lead to an increase in consumer

spending.

7. Depends on Multiplier And change in injections may be increased by the

multiplier effect, therefore the size of the multiplier will be significant.

8. Crowding Out Increased Government spending (G) to increased AD may cause

“Crowding out” Crowding out occurs when increased government spending

results in decreasing the size of the private sector.

• For example if the government increase spending it will have to increase

taxes or sell bonds and borrow money, both method reduce private

consumption or investment. If this occurs AD will not increase or increase

only very slowly.

• Also Classical economists argue that the government is more inefficient in

spending money than the private sector therefore there will be a decline in

economic welfare

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 • Increased government borrowing can also put upward pressure on interest

rates. To borrow more money the interest rate on bonds may have to rise,

causing slower growth in the rest of the economy.

9. Monetarist Critique. Monetarists argue that in the LR AS is inelastic therefore

an increase in AD will only cause inflation to increase

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 FISCAL POLICY IN THE PHILIPPINES

Overview

Historically, the government has taken a rather conservative stance on fiscal

activities. Until the 1970s, national government expenditures and taxation generally were

each less than 10 percent of GNP. (Total expenditures of provincial, city, and municipal

governments were small, between 5 and 10 percent of national government expenditures

in the 1980s.) Under the Marcos regime, national government activity increased to

between 15 and 17 percent of GNP, largely because of increased capital expenditures

and, later, growing debt-service payments. In 1987 and 1988, the ratio of government

expenditure to GNP rose above 20 percent (see table 1). Tax revenue, however, remained

relatively stable, seldom rising above 12 percent of GNP (see table 2). Chronic

government budget deficits were covered by international borrowing during the Marcos

era and mainly by domestic borrowing during the Aquino administration. Both

approaches contributed to the vicious circle of deficits generating the need for borrowing,

and the debt service on those loans creating greater deficits and the need to borrow even

more. At 5.2 percent of GNP, the 1990 government deficit was a major consideration in

the 1991 standby agreement between Manila and the IMF.

Over time, the apportionment of government spending has changed considerably

(see table 3). In 1989 the largest portion of the national government budget (43.9 percent)

went for debt servicing. Most of the rest covered economic services and social services,

including education. Only 9.1 percent of the budget was allocated for defense. The

Philippines devoted a smaller proportion of GNP to defense than did any other country in

Southeast Asia.

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 The Aquino government formulated a tax reform program in 1986 that contained

some thirty new measures. Most export taxes were eliminated; income taxes were

simplified and made more progressive; the investment incentives system was revised;

luxury taxes were imposed; and, beginning in 1988, a variety of sales taxes were replaced

by a 10 percent value-added tax--the central feature of the administration's tax reform

effort. Some administrative improvements also were made. The changes, however, did

not affect an appreciable rise in the tax revenue as a proportion of GNP.

Problems with the Philippine tax system appear to have more to do with

collections than with the rates. Estimates of individual income tax compliance in the late

1980s ranged between 13 and 27 percent. Assessments of the magnitude of tax evasion

by corporate income tax payers in 1984 and 1985 varied from as low as P1.7 billion to as

high as P13 billion. The latter figure was based on the fact that only 38 percent of

registered firms in the country actually filed a tax return in 1985. Although collections in

1989 were P10.1 billion, a 70 percent increase over 1988, they remained P1.4 billion

below expectations. Tax evasion was compounded by mismanagement and corruption. A

1987 government study determined that 25 percent of the national budget was lost to

graft and corruption.

Low collection rates also reinforced the regressive structure of the tax system.

The World Bank calculated that effective tax rates (taxes paid as a proportion of income)

of low-income families were about 50 percent greater than those of high-income families

in the mid-1980s. Middle-income families paid the largest percentage. This situation was

caused in part by the government's heavy reliance on indirect taxes. Individual income

taxes accounted for only 8.9 percent of tax collections in 1989, and corporate income

22
taxes were only 18.5 percent. Taxes on goods and services and duties on international

transactions made up 70 percent of tax revenue in 1989, about the same as in 1960.

The consolidated public sector deficit--the combined deficit of national

government, local government, and public-sector enterprise budgets--which had been

greatly reduced in the first two years of the Aquino administration rose to 5.2 of GNP by

the end of 1990. In June 1990, the government proposed a comprehensive new tax reform

package in an attempt to control the public sector deficit. About that time, the IMF,

World Bank, and Japanese government froze loan disbursements because the Philippines

was not complying with targets in the standby agreement with the IMF. As a result of the

1990-91 Persian Gulf crisis, petroleum prices increased and the Oil Price Stabilization

Fund put an additional strain on the budget. The sudden cessation of dollar remittances

from contract workers in Kuwait and Iraq and increased interest rates on domestic debt of

the government also contributed to the deficit.

Negotiations between the Aquino administration and Congress on the

administration's tax proposals fell through in October 1990, with the two sides agreeing

to focus on improved tax collections, faster privatization of government-owned and

government-controlled corporations, and the imposition of a temporary import levy. A

new standby agreement between the government and the IMF in early 1991 committed

the government to raise taxes and energy prices. Although the provisions of the

agreement were necessary in order to secure fresh loans, the action increased the

administration's already fractious relations with Congress.

Data as of June 1991

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Table 1. Government Expenditures, 1980, 1985, and 1989

(in millions of pesos)

1980 1985 1989

Economic services

Agriculture, forestry, and fishing 2,475 4,606 16,217

Industry, trade, labor, and tourism 1,424 1,915 1,343

Utilities and infrastructure 11,822 13,378 22,309

Other --- 11,474 4,885

Total economic services 15,721 31,373 44,754

Social services

Education 4,204 10,976 29,909

Health 1,333 3,220 7,353

Social security and welfare 442 1,875 3,720

Housing and community 1,371 5,505 374

development
Other 267 183 2,632

Total social services 7,617 21,759 43,988

Defense 4,760 7,123 20,770

General public services 6,528 9,986 18,989

Debt-service fund 3,562 22,269 100,439

TOTAL 38,188 92,510 228,940

---means negligible.

24
Source: Based on information from Philippines, National Economic and Development

Authority, 1989 Philippine Statistical Yearbook, Manila, 1989, Table 15.3.

Table 2. Government Revenues, 1980, 1985, and 1988

(in millions of pesos)*

1980 1985 1988
Tax revenue
Taxes on income and profit 8,761 18,655 27,409
Taxes on property 196 173 384
Taxes on goods and services 9,332 22,677 33,207
Taxes on international trade and transactions 9,904 17,444 25,580
Other 640 1,304 3,772
Total tax revenue 28,833 60,253 90,352
Nontax revenue
Nontax revenue proper 5,020 7,322 20,723
Capital revenue 2 3 11
Grants 222 380 1,775
Total non-tax revenue 5,244 7,705 22,509
TOTAL 34,077 67,958 112,861

Source: Based on information from Philippines, National Economic and Development

Authority, 1989 Philippine Statistical Yearbook, Manila, 1989, Table 15.2.

Table 3. Distribution of Government Expenditures, Selected Years, 1965-89

(in percentages)
1965 1972 1980 1985 1989
Economic services 16.7 33.8 41.2 33.9 19.5
Social services
Education 36.5 25.1 11.0 11.9 13.1
Other 7.7 6.5 8.9 11.6 6.1
Total social services 44.2 31.6 19.9 23.5 19.2
Defense 16.7 15.7 12.5 7.7 9.1

25
General public services 22.2 18.8 17.1 10.8 8.3
Debt-service fund n.a. n.a. 9.3 24.1 43.9
TOTAL* 100.0 100.0 100.0 100.0 100.0

n.a. --- not applicable.

*Figures may not add to total because of rounding.

Source: Based on information from Philippines, National Economic and Development

Authority, 1989 Philippine Statistical Yearbook, Manila, 1989, Table 15.3; and

Philippines, National Economic and Development Authority, 1981 Philippine Statistical

Yearbook, Manila, 1981, Table 16.5.

The Philippine Fiscal Crisis and the Neo-Colonial State

The fiscal crisis that the Philippine government is presently undergoing is the

worst ever in the history of the country, and is caused by its own doing. And yet the

government would pass the burden of solving this crisis to the people, with increases in

taxes and prices like those for electric power and petroleum. It has even put up a so-

called Bayanihan Fund so that ordinary citizens can contribute their shares for the

government to weather the storm.

It must be emphasized, however, that the fiscal crisis that the government is

experiencing was bound to happen based on its heavy indebtedness to foreign and

domestic creditors, the latter also affiliated with foreign capital like Citibank and the

Bank of America from which the government heavily borrows. The country’s external

debt alone as of September 2003, already stood at P1.5 trillion, of which 51% are direct

government debt from international financial institutions, like the IMF and World Bank,

26
and bilateral creditors, and 49% are from foreign bonds. By January, 2004, total

outstanding debts of the government already exceeded the P3 trillion mark, surging

particularly in the second half of 2003. It is Gloria Macapagal Arroyo who has borrowed

the most among all Philippine presidents, with her borrowing binge, mostly from the US,

from 2001 to 2003 “more than the combined borrowings of Presidents Ramos and

Estrada for eight years, 1992 to 2000.” The Arroyo administration has been

accumulating debts to the tune of P1.2 billion daily.

Chart 1. Outstanding National Government Debt

Source: Bureau of Treasury

The heavy debt of the government has thereby brought about its current huge

fiscal crisis, with budget deficit nearing P200 billion, since revenues from taxes and other

non-tax sources have been greatly left behind by its galloping debts to foreign and local

creditors.. Even with the heavy budget reduction for social services through the years,

mandated by memoranda of agreements with the IMF, to assure debt payments, the

27
continuous increase of the national debts, especially during the Arroyo administration,

has made all the cost-savings measures of the government meaningless but debilitating to

the Filipino people, who have to suffer poor government social services like in education

and health.

Table 4: Real Per Capita National Government Expenditures on Social Services,

1996 - 2004 (2000 Prices)

1996 1997 1998 1999 2000 2001 2002 2003 2004

Prel Pres
2,188 2,487 2,417 2,323 2,302 2,035 2,002 2,016 1,999

Total Social

Services
Education 1,534 1,789 1,761 1,675 1,608 1,515 1,505 1,455 1,415
Health 230 266 221 223 202 166 171 151 141
Soc. 317 392 387 364 376 331 327 392 418

Security,

Welfare, &

Employment

Housing & 107 39 48 61 115 22 19 19 29

Com. Devt.

28
Source: Rosario G. Manasan, Fiscal Reform Agenda: Getting Ready for the

The debt of the national government has already reached 78% of GDP at the end

of 2003. And if you add the debts of the government owned and controlled corporations,

(GOCC), the GFIs(government financial intermediaries), LGUs, projects under BOT,

and those of the SSS and GSIS, debts the government assumes, total consolidated public

debts at end of 2003 amount to P5.9 trillion or 137% of GDP! This indeed is alarming

and is creating grave apprehension to the country’s foreign creditors and potential

investors. In fact, Standard and Poor, an international credit rater for countries, has

downgraded the Philippine long-term currency rating by a notch to BBB-minus. The

Philippines has already surpassed all other countries in Asia in the size of its consolidated

public debts.

The Napocor Debt

But where does all the money go? A great portion of these foreign loans go to the

payment of the interest and principal of the national debt, for instance, 49%(33% interest,

16% principal) for the year 2004, and another big hunk is lost to corruption of bureaucrat

capitalists. Among such big cases of bureaucratic corruption is the sweetheart deal that

Napocor made with independent power producers (IPPs). Under Executive Order (EO)

215, the IPPs were funded by foreign loans secured by a government guarantee and most

contracts with the IPPs even included a “take or pay” onerous (but profitable to the

bureaucrat capitalists) provision, which required Napocor to pay for 70% to 100% of the

output of an IPP whether or not the electricity is actually used by the public. For 2004,

29
Napocor will pay to the IPPs P19 billion worth of power which is not yet consumed. On

the average, Napocor only utilized 20% to 40% of the power it buys from the IPPs. Such

shady going-ons of course enriched former President Ramos and his cohorts but Napocor

is now saddled with a $7.4 billion debt which the government through the so-called

Electric Power Industry Reform Law (EPIRA) has the gall to allow power distributors

like Meralco to pass on to the ordinary consumers. Meralco owes Napocor P13 billion

but was allowed by the Arroyo government to rescind its contract with Napocor and to

purchase power from its own IPPs. Thus, Meralco in order to defray its past obligations

to Napocor has been allowed by the government to pass theses debts to the consumers.

Notice the Purchased Power Cost Adjustment (PPA), the Fuel Cost Adjustment (FCA),

and other such euphemistic terms in your monthly electric bill.

All these nefarious deals within Napocor, including its infamous contract with

Westinghouse during the Marcos regime to build the now defunct Bataan Nuclear Power

Plant, which has not produced a single watt of electricity, has pushed its debts to $23.5

billion(P1.3 trillion) more than a third of the national debt of P3.32 trillion as of October

2003. And now the national government has the temerity to ask the people to practice

austerity and contribute their small pittance to the “Bayanihan” Fund, when all the fat

cats in the bureaucracy together with their foreign partners have already long

been feasting on the blood of the people. And when we consider other anomalies at other

government corporations, Public Estates Authority(Amari scam, Diosdado Macapagal

Boulevard scam, Expo Filipino scam) and the GSIS (BestWorld scam), no one will

wonder anymore where a great bulk of all the borrowings of the government are

disappearing to.

30
The Government and the Group of 11 UP Economic Professors’ Proposals to Solve

the Fiscal Crisis

To confront the magnitude of the fiscal crisis, the Arroyo government is again

resorting to transferring the burden of solving it to the people by introducing 8 new tax

measures to raise an additional P84 billion. As usual, these follow the receipts of the IMF

which is constantly worried that the Philippine government may not be able to pay its

foreign loans. Among these onerous tax measures which will hit the lower-income

classes more adversely are an increase of value-added-tax or sale taxes (note that it was

the IMF that imposed on the Philippines the adoption of VAT during the Aquino regime)

and an increase in petroleum taxes. Malacañang also would reduce the IRA for local

governments, but refuses to cut its huge pork barrel, the so-called presidential

discretionary fund, which amounts to a hefty P3 billion.

The government is especially alarmed of the current fiscal crisis because foreign

credit analysts have started downgrading the Philippines as an investment destination and

new foreign loans may not be forthcoming if government deficit keeps on increasing.

This may lead to a defaulting by the Arroyo administration of its foreign loans since new

loans are spent to pay for old loans in a vicious cycle which again hikes total loans. The

new taxes being vied for by the government have been referred to Congress for

legislations since members of Congress are also reluctant in giving up their pork barrels,

P70 million annually for each congressman and P200 million for each senator. Everyone

is ganging up on poor Juan de la Cruz, as most of the taxes being considered are

31
regressive in nature like the VAT and taxes on petroleum, the latter causing a chain

reaction of an increase of prices of basic commodities.

A group of 11 UP economics professors have also come out with their proposals

to hurdle the fiscal crisis of the government. In a paper entitled “The deepening crisis: the

real score on deficits and the public debt”, recognizing the unprecedented and the

seriousness of the fiscal crisis, they recommend that the government should increase its

surplus by 3.5% of GDP (using the nominal value of P4300 billion as of 2003) from its

present 0.6% to maintain current debts and support the budgets for vital infrastructure and

education. According to this group of professors, the government must also limit the

servicing of the off-budget liabilities (items not stated in the annual government budget

or the General Appropriation Allocation, called off-items, the most notable of which

are debts of the GOCCs) by 1.5% of GDP. But how to do these? This group of

professors(GP for short) advised measures which are mostly along the vein of the

government’s proposals and which reiterate the usual IMF policy recommendations for

the Philippines and other Third World countries to confront their debt problems. These

recommendations adopt the free-market framework (called neo-liberal reforms) under the

aegis of globalization or a policy of open economy, specially promoted by the US under

the Uruguay rounds of talks, which established the WTO, but which is not taken seriously

by even the US itself and the leading capitalist countries (members of the European

Union and Japan), who have become more protectionists in their economies starting in

the late 1990’s.

The GP’s policy recommendations include: privatization, especially of Napocor;

deregulation, or what the group calls the abolition of the “politicization of prices” (p.24);

32
and liberalization of tariffs. For liberalization of tariffs, the GP is particularly against

increasing the tariffs on oil imports, because, according to them, “international

commitments prevent significant tariff adjustments” (p.19), a shortcoming which is not,

however, “encountered when the tax is domestic.” (Ibid.) With this self-assurance, the GP

therefore recommends an additional two-peso domestic tax(called excise tax) on

petroleum, purportedly to control air pollution(!), a two percent increase in VAT and its

expansion to cover finally all professionals like lawyers and doctors, an increase of 10%

tax on new cars and an indexation(or continuous adjustment of taxes, which often go up)

on the so-called sin products like tobacco and alcohol, this latter tax along the

comprehensive tax reform program, first advocated by the IMF in the 1992 memorandum

of agreement of the Philippines with this institution. To reduce the servicing by the

government of its off-budget liabilities by 1.5 % of GDP, the GP advises price and fee-

adjustments (especially higher power rates for Napocor to pay off its debts) of

government corporations. Another measure backed by the GP which will hit the poor

mostly, is the reduction of IRA releases to 30% from its current 40%. Aware of the

corruption in the government, which the WB solely singles out as the main cause of the

Philippine fiscal deficit, the GP is also for plugging tax leakages and the reduction of the

salaries of management in government corporations.

It must be noted that an IMF post program monitoring team visited the

Philippines in June, 2004 to find out how the Philippine government is abiding by its

commitments to balancing its budget. The team was particularly worried about the

growing budget deficit of the government and warned that it was in a “crucial juncture”

(Arroyo used the same term “crucial juncture” when she announced that the country is in

33
fiscal crisis last Aug. 23, 2004). The IMF team recommended among other things:

government assuming Napocor debts and fast tracking its privatization, increases in taxes

like that of VAT and on petroleum, and a more efficient tax administration. Soon

afterwards, Arroyo announced her 8 tax measures during her State of the Nation Address

and the GP came out with their position paper. Notice the pattern.

It could be seen that the main brunt of the GP’s proposals to solve the fiscal crisis

is anti-people. It is primarily concerned with restoring investor’s confidence, with an eye

for a favorable foreign credit rating as an investment destination for the Philippines, in

the country’s capacity to pay off its foreign loans and to become an attractive place for

good profits. The GP is also worried of the eroding competitiveness of the Philippines in

the world market and an increase in interest rates for credits extended to the country due

to an escalating budget deficit. Though the GP also recommends a cut in the pork barrel

of Congress by one half and the reduction of the pay of management in government

corporations, most of its policy proposals would cut deeply on the livelihood of the

ordinary people like the introduction of new taxes and the increase of prices. The GP

claims that there should be an equitable share of meeting the fiscal crisis both from the

government side and the people, and that the government must be “first in the line of

fire”. However, its proposals would squeeze the meager money of the people more

thoroughly, following the regular medicines of the IMF-WB in demanding greater

stringent measures from its client governments when they get into a fiscal rut.

However, it has been proven time and time again that abiding by the malodorous

receipts of the IMF-WB to cure its patient only makes the patient sicker. A study by the

UNICEF of 56 countries (26 from Africa, 19 from Latin America, 8 from Asia, including

34
the Philippines, and 3 developing countries in Europe), which had undergone so-called

stabilization programs and structural adjustment programs of the IMF-World bank from

1980 to 1985 to hurdle their budget and trade deficits, found that the poverty situations of

these countries have only worsened through the application of the IMF-World Bank

programs. The UNICEF study concludes that: “The urgency of finding new solutions is

especially pressing when considering the poverty-inducing effects that the current

approach (the IMF-WB programs) tends to have, and the direct negative effects that some

macro-economic policies have on the health and nutritional status of the poorest, and of

children in particular….” In the 1990’s one can only remember the economic crises that

wracked the former USSR, Brazil, Mexico, Argentina and Indonesia , which have been

likewise victims of the policies of privatization, deregulation and liberalization peddled

by the Big money-baggers of the world and their local subalterns in the Philippines,

including the group of professors at the UP school of economics. It can be said that dire

lessons in history are not learned by those who benefit from them.

Liberalization, Privatization and Deregulation

In the Philippines with the introduction of more aggressive liberalization policies

in 1995 through the entry of the country into the WTO (closely synchronizing its policies

with the IMF-WB), thousands of farmers became bankrupt because of the influx of

agricultural goods, particularly from the United States, into our economy. Around 25,000

farmers became deprived of their livelihoods at the second quarter of 1995, and

thousands more are continuously being thrown into the streets, many migrating to the

cities and hawking for any jobs available. Also during the third quarter of 1995, the

35
Philippines suffered a rice shortage with the price of one ganta of rice increasing from

P10 to P20.22 as a result of the closing down of many small farms, aggravated by the

lowering of the farm gate price of rice paid to the small farmers by the NFA. The

reduction of the farm gate price of rice by the NFA is part of the conditions of WTO for

governments to gradually remove subsidies to farmers. A direct effect of the

liberalization policy on the budget deficit is that the foregone revenues of the Bureau of

Customs due to various tariff rates reductions amount to P100 billion annually from 1994

to 2001.

The policy of privatization of government corporations, also a condition of the

IMF for new loans from it and its consortia of banks, has affected thousands of

government workers and the quality of service formerly offered by the government.

Thousands of government employees have lost their jobs when this policy was first

started in 1989 after the implementation of the MOEFA of the Aquino government with

the IMF. At the PNB 3,500 workers lost their jobs and at the MWSS, 3000 more suffered

the same fate. And as part of the cost-saving measures by the Arroyo government to meet

its present fiscal crisis, it is also planning to reduce government personnel by another

30%.

The quality of service of government GOCCs does not improve at all after

privatization; as a matter of fact, it even worsened at Maynilad, the privatized west

portion of MWSS controlled by the Lopez group because it could not maintain good

services and with its debts accumulating, Maynilad appealed to the government to bail it

out from its $180 million loan, which the latter agreed to do. In the first place, Maynilad

should be taking care of its own and providing quality service at affordable price of water

36
to the public. But instead Maynilad together with Manila Water (the east portion of the

privatized MWSS and majority-owned by the Ayala family) reneged on their contracts

with the government not to raise the price of water within a period of 5 years and the

former now has the audacity to ask for government assistance, which was duly given.

Talk about the alliance of the bureaucrat capitalists and the comprador bourgeoisie, in

which latter category the Lopez family belongs to (the Lopez family is likewise the

majority-owner of Meralco, another favorite cow of the government).With regards to the

deregulation of prices, as also advocated intensely by the GP, need we say anything more

concerning its debilitating effects on the populace? The almost weekly increase in the

price of petroleum products, which the GP will aggravate with their proposal of a P2

petroleum tax, is testimony enough to this kind of callous policy to solve the fiscal crisis

of the government proposed by the IMF-WB and its local cohorts.

The Fiscal Crisis and the Economic Crisis

When one understands the difference between a fiscal crisis and an economic

crisis one will realize the magnitude of the callousness of the government to the plight of

the people. A fiscal crisis is characterized by an unmanageable budget deficit, with

government spending more than its revenues, which in the case of the Philippines is due

to its heavy debt servicing. An economic crisis, on the other hand, is the growing

impoverishment of the majority of the people. Philippine society has long been suffering

from a worsening economic crisis from the year 1975 up to the present. Filipinos living

below the poverty line have increased from 57% of total Filipino families in 1975 to 70%

37
in 1998 then to 85% in 2003. The purchasing power of the peso has dropped to P.56 in

2004, with 1994 as the base year. The minimum wage has been pegged at P250/day but

the income required to enable a family of six (the average size of a Filipino family) in

2004 to live on a subsistence level (poverty level) is P479.06 per day. Unemployment has

also grown from 8.1% in 1990 to its highest ever at 13.7% in the first quarter of 2004.

But in spite of the deteriorating conditions of the majority of the people, the budget for

social services continues to be cut by the government through the years to accommodate

the payment of foreign debts.

Chart 2. Purchasing Power of the Peso

Source: Yearbook, National Statistics Office

38
Chart 3. Unemployment and Underemployment Rates

Source: Yearbook, National Statistics Office & Current Labor Statistics, Bureau of Labor

Statistics

The implication of the government defaulting its debts because of the fiscal crisis

is horrendous for the upper class of Philippine society to contemplate. Government

treasury bills (TBs) and bonds held by local banks, corporations and rich individuals may

become worthless and this situation may force many banks to declare a holiday (hold the

withdrawals of deposits). With the unavailability of new dollars, which have been the

oxygen tank of our dependent economy, from local and external sources, factories and

other business concerns may not able to finance their imports of capital goods and other

inputs. Since the Philippines is unable to produce its own heavy machines and other vital

facilities for industrialization and is forced to rely on imports, a scarcity of dollars to buy

these imports will deal a heavy blow to the life of our economy. Government guarantees

39
of new dollar loans to the private sectors will likewise not be honored anymore by

foreign creditors, if especially the IMF-WB brands the Philippines as a risk for the

extending of loans from its consortia of banks under the Paris Club and the London Club.

During the year 1983, when new loans from the IMF( $630 million) to the

Marcos regime was not granted, Philippine industrial production went down by 40%,

average interest rate shoot up to 31% and inflation rate by 60%. Such a scenario is most

feared by the local bourgeoisie and this is the reason why they are one in asking the

people to help the government in solving the fiscal crisis with some of them even doling

out P1 million (including the billionaire Lucio Tan, who has a pending charge of tax

evasion of P24 billion) to the “Bayanihan” Fund. Like the IMF-WB, which salvage the

big TNBs when they get into financial trouble by imposing more austerity measures on a

people, the comprador bourgeoisie have also no compunction in appealing to the people

to bail out the government from the latter’s own self-made fiasco.

The Neo-Colonial State and the Semi-Feudal Agricultural Economy

The root of the present fiscal crisis and the economic crisis of our society is the

neo-colonial status of the Philippine state. A neo-colonial state, though it is not directly

governed by another country like the Philippines under direct American rule from 1899

to 1946, is, however, dependent on external sources for its economy to function.. In the

Philippine case, the country is dependent on loans and investments supported by US

monopoly capitalism or imperialism, for its economy to survive. It is a situation where

the subservient economy is forced to abide by agreements and other treaties in favor of

40
foreign business allied with imperialism. For instance, the conditional ties of the IMF-

WB-WTO are made to be religiously followed by the Philippine state in order for the

latter to be assured of new loans. But as we have seen, since the people can only produce

so much, even including the remittances of OFWs to the Philippines, which have

precariously propped up the Philippine GNP for many years, and that corruption of the

bureaucrat capitalists also eats up a substantial amount of government money, the deficit

of the government continues to grow at the consternation of its foreign creditors. Thus,

the government is constantly sinking in its own neo-colonial quagmire and its profit-

seeking foreign creditors may altogether halt granting new loans unless the government

squeezes more sweat and blood from the toiling masses. For whom else will it squeeze if

not the hapless and often unknowing masses. While the government is quick to

deregulate prices of the leading TNCs in the Philippines, particularly in the oil industry, it

refuses to increase the wages and salaries of government employees and legislate an

increase of a measly P125 of the minimum daily wage, due to the dictates of the IMF.

Ever since the Philippines became an American colony in 1899, the Philippine

government has always placed first its obligations to US business rather than its social

responsibility to the Filipino people. This is presently especially exemplified in the

notorious Presidential Decree 1177, formulated during the martial law regime of Marcos

and re-enacted as Executive Order 292 by President Aquino, which requires the

government to pay for its foreign debts before any other expenditures. In principle, the

annual budget allocations for all other operations of the government, most particularly for

social services, can become zero if nothing is left after meeting the country’s debt

obligations, specially now with our ever burgeoning debts. Such a law is unique in the

41
Philippines, and has been called a classic example of an exploitative neo-colonial policy.

While many oppressive laws enacted by the dictator Marcos through presidential decrees

(note that monarchs once issued laws known as monarchical decrees) have been

rescinded, PD 1177 has been retained under the pressure of the IMF-WB by the Aquino

government and all other successive Philippine administrations.

PD 1177 is just an extreme manifestation of neo-colonial laws vis-à-vis the US

that our supposedly independent government has been forced to abide by since

1946(when the Philippine state became a member of the IMF-WB). Another example of

an unabashed US neo-colonialism policy in the Philippines was the threat of not granting

to the latter a $430 million loan in 1946 for war damages incurred during the Second

World War (it was US planes and guns that actually wrought extensive damage in the

Philippines), if the Philippine government does not amend its 1935 constitution with the

incorporation of Parity Rights for US business in the Islands. Parity Rights would extend

the same privileges to exploit the natural resources of the Philippines to US business as

enjoyed by Filipino nationals. Though Parity Rights was gradually phased out in 1974, it

was nevertheless substituted by equally liberal investment laws during the Marcos era.

Other neo-colonial laws enacted in the Philippines are: the Bell Trade(free trade) law in

1949, the 1962 decontrol law(which devalued the peso for the first time) of Diosdado

Macapagal, and the various very liberal investments laws of Marcos(Investment

Incentive Act of 1967, Export Incentive Act of 1970, PD 1034, the latter allowing

offshore banking units in the Philippines, etc.) , all compiled under the Omnibus

Investment Act, the Labor Code of 1974(disallowing strikes in so-called vital industries)

and the laws under various structural adjustment programs of liberalization, privatization

42
and deregulation, implemented by the Aquino up to the Arroyo regimes. Most of these

laws since 1949 have been commitments under various letters of intent with the IMF,

now called Memorandum of Economic Agreement. Such agreements are made to appear

as if they embody reforms formulated by the Philippine government itself, though they

are in fact based on recommendations from various studies conducted by IMF-WB

survey missions before such economic reforms are adopted by the Philippine

government. Thus, there were the industrial reforms of 1956 and 1979, financial reforms

of 1972 and 1980, agricultural reforms of 1980 and 1996 and educational reforms of

1982, 1997 and 2001 implemented in the Philippines following the proposals of sundry

IMF-WB survey missions, from the Bell mission, Ranis mission and others.

Neo-colonial laws are easily enacted in the Philippines due to the fact that

Congress is dominated by the upper classes of our society, composed mostly of the

landlord class and the comprador bourgeoisie or their representatives. The comprador

class basically favors a dependent trade relationship with the US since their business in

cash crop exports, like sugar, coconut, hemp, etc., benefit from this relationship. Thus

free trade arrangements like the Bell Trade Act and export incentive laws are to the great

advantage of the Philippine landed gentry. This is the reason why this class supported the

US policy of not dismantling the semi-feudal structure of Philippine agriculture when the

country became an American colony in 1899. A study of the US Bureau of Labor in the

first decade of the century recommended to the US government that the feudal

relationship of tenant to landlord already entrenched during the Spanish regime must not

be disturbed. Soon after, the US passed the Payne-Aldrich Act (or the first free trade law

in the Philippines) in 1909. The retention of semi-feudalism in the Philippines, semi since

43
a great part of the Philippine agricultural produce are exported, would reduce the

production costs of the comprador bourgeoisie in the countryside to their advantage as

well as their trading partners, since tenants and cicadas (seasonal workers in haciendas

many of which are tenants) incur for the comprador lower payments for labor and thus

cheaper export goods. The comprador bourgeoisie have also maintained the backward

state of technology in their haciendas since manual labor in the countryside is plentiful

and the acquisition of machineries in their farms will just increase their cost of

production. Thus, throughout the years even with various land reforms, which are always

diluted by a landlord-dominated Congress, the tenancy and the cicada systems persist in

the countryside. In 1980 tenancy still existed in 26% of total farms in the Philippines and

this further increased to 35% of all farms by 1996.

The IMF Post Program Monitoring Team

Yearly, the IMF sends survey missions to the Philippines to monitor closely

whether the Philippine state is faithfully following its various commitments under its

programs with the Fund(the term commonly used to refer to the IMF), especially with

regards to debt servicing. An IMF survey mission conducted a so-called post program

monitoring (PPM) from June to July, 2004, on how the Philippine government is

managing its deficit as we have already discussed above. The Philippine government last

entered into a stand-by agreement (under a credit line called by the Fund as a

precautionary agreement) during the Estrada administration, which secured a $1.3 billion

from the Fund. The IMF survey team last June made sure that all the commitments under

44
this precautionary stand-by agreement are being complied with. The Arroyo

administration is contemplating to borrow under another new stand-by agreement with

the IMF to meet the current fiscal crisis. With the entry of WTO in 1995 to supervise

more stringently the observance of the trade liberalization policy (a continuing

commitment with the IMF) of the Philippines, the country has been more closely

integrated to serve the business agenda of the TNCs in the name of so-called

globalization.

With the Philippine state deeply mired in foreign debts, which even forebodes a

closing of its government within the next two years, its foreign creditors through the IMF

can bring it down to its knees and imposes such deadly requirements for the economy

that its people will bleed white. Such a situation will bring ruin to all, including the banks

and the business of the comprador bourgeoisie, ever faithful but dispensable partners of

US imperialism. But the majority of the people have long been ruined, forced to a hand

to mouth existence, millions robbed of their human dignity, subsisting on morsels thrown

by the government and the rich and living in squalid places only fit for animals. The

masses have seen one Philippine president after another come and go without the least

improvement in their lives even in times of government budget surplus and supposed

economic growths of GDP and GNP. In fact, the plight of the masses has worsened

through the years as we have seen. Thus, one fiscal crisis after another, and there had

been several in the past, though the present is the most severe, have become of no

concern anymore to the long enduring and suffering masses.

45
What can be done?

The Philippines must first and foremost re-negotiate all foreign loans, since a

great part of these are odious loans, particularly those incurred during the Marcos regime,

when our external loans ballooned from $599.5 million in 1965 before Marcos to $28.2

billion after he was ousted in 1986.Thus, Marcos incurred a total of $27.8 billion loan

during his regime, including the scandalous $2.3 billion for the defunct Bataan Nuclear

Power Plant and other loans to his cronies. The Philippine government still continues to

pay for the interests and principals of many of the Marcos loans, which formed part of the

total current $56.3 billion foreign debt of the country. And there are other questionable

foreign debts like those incurred by Napocor from the Ramos up to the Arroyo regimes

that a tough and determined government mission can negotiate with the country’s foreign

creditors. Other countries like Peru, Bolivia, Ecuador, Cuba, Ivory Coast, Nigeria,

Tanzania and Zaire have at one time or another unilaterally suspended or repudiated part

or all of their debt servicing. Even the United States repudiated some of its debts, such as

those which she incurred from British financiers in building railroad networks in the

1800s. Several of the American allies also never paid back debts to the US acquired

during World War I.

When Corazon Aquino succeeded the dictator Marcos after EDSA I, she had all

the moral ascendancy at that time to repudiate Marcos’ debts of dishonor since world

opinion was behind the people’s movement that toppled the dictatorship. But Aquino

instead promptly went to deliver a speech before the US Congress as an invited special

guest to assure all the Philippine foreign creditors that the country will pay for all its

46
external debts, including the loot that Marcos has stashed away in foreign banks, mostly

in Switzerland, which is estimated to be around $10 billion to $13 billion. Indeed, this

subservience and cowardice of Aquino is one of the major factors why we are in our

present crisis.

The solution to our fiscal crisis is not for the people to carry its burden since they

had not been responsible for it in the first place. In fact, the masses have long been

subjected to the effects of the constant scrimping of the national budget, mostly affecting

the appropriations for social services, in order to defray government debts. The solution

is not to increase all kinds of taxes, like what the government and the 11 UP professors

are clamoring for, which will just exacerbate the miseries of the people, but for the

government to have a strong political will to renegotiate all debts, specially foreign.

Another way out from the fiscal crisis is to likewise to renegotiate the Philippines’

commitments under various trade agreements to lower down and eventually eliminate its

tariffs for all sorts of products, particularly agricultural, which ridiculously include

products that the country has in abundance like vegetables. Revenues foregone from

custom dues, which are estimated at P100 billion annually, for the entry of diverse

products into the Philippines, have contributed greatly to the escalation of the

government deficit. Still another alternative to confront this particular diminution of

government revenues is for the Philippines to withdraw from WTO as a member. Instead

the Philippines can enter into various bilateral trade agreements with countries, whose

products we need. Countries like Taiwan and Vietnam are not members of WTO and yet

they get along very well with their foreign trade, compared to the Philippines with its

richer natural resources.

47
 The drain of around 30% from the annual national budget due to graft, patronage

and tax evasion must also be eliminated. This massive leakage from the national budget

has been the focus of the mainstream media as the supposed primary cause of the fiscal

crisis. In an effort to divert public attention from the need to renegotiate the huge

Philippine foreign debts, Malacanang has been announcing vociferously complete with

moral indignation for publicity sake that the fat cats in the GOCCs and congressmen

should trim their big salaries and reduce their pork barrels. But this is like wishing that

the tiger shed off its spots since Malacanang is the leading scrounger of the money of the

people with its huge presidential discretionary fund of P3 billion which Arroyo refuses to

cut.

The road we are opening may be too demanding and risky for the present

government. We know that it will require great courage and the support of the masses to

enter this road, and the government does not have both these strengths. In the final

analysis, it is a true government of the people who will traverse this road which can lead

to the emancipation of the majority of the people and prosperity for our country. Saving

from foreign debts, increases in government revenues from tariffs, and the final

elimination of bureaucrat capitalism, can generate funds to launch a genuine land reform

program, which will not this time be defeated by a landlord-dominated Congress. An

effective and successful land reform program will lead to an effective national

industrialization program for the Philippines, one that is not geared towards the needs of

foreign countries but to provide for the welfare of the Filipino people. Higher revenues

for the government can also subsidize substantially social services like education, health

for the people, housing, transportation, etc. Greater capital outlay from the national

48
budget can support infrastructures for development, all planned for the advancement of

the greater good. We as an organized people must act immediately to travel the road that

we are showing for the time is fast ticking away before our national wealth may be

completely dissipated and the country brought into great economic chaos.

The Philippines: September 1999

Policy reforms pursued by the Philippines over an extended period have resulted

in a more open, competitive economy which was able to withstand relatively unscathed

the Asian financial crisis. A new WTO report on the trade policies of the Philippines

concludes that this provides a generally good example of the advantages of structural

reform in overcoming macroeconomic shocks. The report also suggests that the

Philippines could derive further benefits, including for its consumers, from more outward

oriented, as opposed to an export-oriented trade and investment regimes.

Continuing liberalization helps the Philippine economy become more competitive

and resilient

Policy reforms pursued by the Philippines over an extended period have resulted

in a more open, competitive economy which was able to withstand relatively unscathed

the Asian financial crisis. A new WTO report on the trade policies of the Philippines

concludes that this provides a generally good example of the advantages of structural

reform in overcoming macroeconomic shocks. The report also suggests that the

Philippines could derive further benefits, including for its consumers, from more outward

oriented, as opposed to an export-oriented trade and investment regimes.

49
 The new WTO Secretariat report, along with a policy statement by the Philippine

Government, will serve as a basis for the Trade Policy Review of the Philippines which

will be conducted by the Trade Policy Review Body of the WTO on 27 and 29

September.

Electronics, automotive products and garments together account for more than 70% of

Philippines' exports, the report says. Between 1993 and 1997, the share of manufactured

products in Philippine exports has grown from 79% to 86%. By contrast, the direction of

trade remains largely unchanged. Main export markets are the United States, with about

35% of total merchandise exports in 1997, and the European Union and Japan with about

16% each. These three are also the Philippines' main source of imports.

The report notes that tariffication and reduction in tariff rates over the past six

years have significantly opened the economy. Applied tariffs were more than halved

between 1992 and 1999 - from 26% to just over 10%. The report notes however that in

some sectors tariffs escalation persists and tariff dispersion has increased.

The Philippines has removed most of its non-tariff barriers, the report also notes.

With the notable exception of rice, which remains traded exclusively by a State agency,

the Philippines has abolished most of its quantitative restrictions. And since 1994 only

five anti-dumping cases have resulted in the imposition of definitive duties.

However, the report also states that remnants of the earlier import-substitution policies

persist, pushing up exporters' costs through competition from protected import-competing

sectors. In part to offset this bias against exports, the Philippines has introduced measures

in support of export-oriented activities, including various tax exemptions on imported and

locally supplied inputs.

50
 Although a number of activities are yet to be fully open to foreign investment, the

report states that more liberal investment policies and a privatization programme have

widened the choice of sector for domestic and foreign private investors and thus

contributed to export growth. Foreign investment has also been attracted by sound

macroeconomic policies, a stable business environment, skilled labour force and a

comprehensive system of fiscal incentives. The report notes, however, that these

incentives have become complex and burdensome to administer, that they may be fiscally

expensive, and may divert investment from efficient uses.

The report notes that progress in the privatization of state corporations has

reduced the degree of state intervention in the economy. In the services sector, for

example, privatization and liberalization have made significant headway in raising the

competitiveness of domestic producers. However, the Philippine economy is still

characterized by a high degree of market concentration, with significant state

involvement in some sectors, such as banking and air transport. There is no

comprehensive law, nor central government agency overseeing the implementation of

competition policy, and the report suggests that a comprehensive competition law would

help ensure that limited market competition does not dampen the full benefits of

investment liberalization and privatization.

The Philippines is not a party to the WTO Agreement on Government

Procurement. In its procurement, the Philippine Government generally favors the

purchase of domestically produced goods and services and applies certain foreign

ownership limitations to suppliers. Government procurement also favors suppliers from

ASEAN members and the United States.

51
 The report states that current Philippine policies tend to favor agriculture and

related processing industries over most other activities. Support for agriculture relies

predominantly on border protection, relying on very high out-of-quota duties

administered through a complex system to protect sensitive products like rice or corn.

The report also notes that though legal provisions were introduced in 1997 to enhance

food production and lower prices, the domestic price of some agricultural commodities

exceeds world prices by a wide margin.

In the manufacturing sector, electronics has become a major export activity; many

electronics manufactures benefit from duty-free status in the special economic zones,

where investment has been growing, and the report states. . Motor vehicles and parts, in

contrast, remains one of the most protected sectors of the Philippines economy,

maintaining trade-related investment measures. Likewise, tariff increases in 1999 to

protected industries such as textiles, clothing and steel appear to run counter to

Philippines' drive towards greater neutrality of sector protection.

Today’s Economy

Since the end of World War II, the Philippine economy has been on an

unfortunate trajectory, going from one of the richest countries in Asia (following Japan)

to one of the poorest. Growth immediately after the war was rapid, but slowed over time.

Years of economic mismanagement and political volatility during the Marcos regime

contributed to economic stagnation and resulted in macroeconomic instability. A severe

recession from 1984 through 1985 saw the economy shrink by more than 10%, and

perceptions of political instability during the Aquino administration further dampened

52
economic activity.

During the 1990s, the Philippine Government introduced a broad range of economic

reforms designed to spur business growth and foreign investment. As a result, the

Philippines saw a period of higher growth, although the Asian financial crisis in 1997

slowed Philippine economic development once again.

Despite occasional challenges to her presidency and resistance to pro-liberalization

reforms by vested interests, President Arroyo made considerable progress in restoring

macroeconomic stability with the help of a well-regarded economic team. Nonetheless,

long-term economic growth remains threatened by crumbling infrastructure and

education systems, and trade and investment barriers. International competitiveness

rankings have slipped.

The service sector contributes more than half of overall Philippine economic

output, followed by industry (about a third), and agriculture (less than 20%). Important

industries include food processing; textiles and garments; electronics and automobile

parts; and business process outsourcing. Most industries are concentrated in the urban

areas around metropolitan Manila. Mining also has great potential in the Philippines,

which possesses significant reserves of chromate, nickel, and copper. Significant natural

gas finds off the islands of Palawan have added to the country's substantial geothermal,

hydro, and coal energy reserves.

The Philippine economy seems comparatively well-equipped to weather the global

financial crisis in the short term, partly as a result of the efforts over the past few years to

control the fiscal deficit, bring down debt ratios, and adopt internationally-accepted

banking sector capital adequacy standards. The Philippine banking sector--which

53
comprises 80% of total financial system resources--has limited direct exposure to

distressed financial institutions overseas (i.e., $2 billion, less than 2% of aggregate

banking system assets). Conservative regulatory policies, including the prohibition of

investments in structured products, shielded the insurance sector from exposure to

distressed financial firms. While direct financial exposure to problematic investments and

financial institutions is limited, the impact of external shocks to economic growth,

poverty alleviation, employment, remittances, credit availability, and overall investment

prospects is a concern.

GDP grew by 7.3% in 2007, the fastest annual pace of growth in over three

decades--fueled by increased government and private construction expenditures; a robust

information communications technology industry; improved post-drought agricultural

harvests; and strong private consumption, spurred in part by $14.4 billion in remittances

from overseas workers (equivalent to about 10% of GDP). However, real year-on-year

GDP growth slowed to 3.8% during 2008, reflecting the impact of high food and fuel

prices and global financial uncertainties on the domestic economy. Overseas workers’

remittances--which increased 13.7% year-on-year in 2008 to a new $16.4 billion record--

helped cushion the impact of external shocks on economic growth, but began to slow

during 2008’s fourth quarter. Remittances are expected to grow 3%-4% in 2009 despite

the global financial crisis, helping the economy avoid recession and supporting the

balance of payments and international reserves. Most independent forecasts also currently

see Philippine GDP growing within the government’s 0.8%-1.8% targeted range for

2009. It will take a higher, sustained economic growth path to make more appreciable

progress in poverty alleviation given the Philippines' annual population growth rate of

54
2.04%, one of the highest in Asia. The portion of the population living below the national

poverty line increased from 30% to 33% between 2003 and 2006, equivalent to an

additional 3.8 million poor Filipinos. Slower economic growth here and abroad, a soft

domestic labor market, and uncertainties over overseas employment opportunities

threaten to push more Filipinos into poverty.

Business process outsourcing (BPO) has been the fastest-growing segment of the

Philippine economy and has been relatively resilient amid the global financial turmoil,

totaling an estimated 10% of the global outsourcing market and generating more than $6

billion in revenues in 2008 (up 26% and equivalent to about 3.6% of Philippine GDP).

Although revenue growth has slowed from 40% during 2006 and 2007, industry officials

expect the BPO sector to post double-digit revenue growth of between 20%-30%, and to

generate about 100,000 new jobs, during 2009. The balance of payments surplus--which

hit a record $8.6 billion in 2007 from higher overseas worker remittances, tourism

receipts, BPO-related revenues, portfolio investments, and official development

assistance funds--narrowed to $18 million during 2008. Merchandise exports--which rely

heavily on electronics shipments for about two-thirds of sales--declined by nearly 3%

year-on-year during 2008, pulled down by a 23% year-on-year decline in fourth-quarter

revenues. Although there has been some improvement over the years, the local value

added of electronics exports remains relatively low at about 30%. Net foreign direct

investment (FDI) inflows dropped by 48% from 2007, to $1.5 billion; and net foreign

portfolio capital reversed from a $3.8 billion net inflow in 2007 to a $3.6 billion net

outflow in 2008. Import growth slowed but nevertheless increased by more than 2%,

mainly because of spikes in international prices of fuel, rice, and petroleum-based

55
agricultural inputs. Foreign tourist arrivals sputtered to 1.5% growth and tourism-related

revenues weakened. The United States remains the Philippines' largest trading partner

with $17 billion in two-way trade during 2008, and is among the largest investors with $6

billion in total direct investments. Although showing signs of bottoming out, merchandise

exports slumped further in 2009 (with January-August 2009 exports down 30.3% year-

on-year). However, the merchandise import bill has also declined (31.2% as of August

2009), combining with the continued expansion in overseas remittances and BPO

revenues, and improving net foreign direct and portfolio investment flows to produce a

wider balance of payments surplus (estimated at $2.8 billion as of August 2009).

The Philippine stock market index--which closed 2008 down more than 48%

year-on-year--closed mid-October 2009 more than 57% higher from end-2008. The

Philippine peso, which closed 2008 15% weaker from end-2007, has appreciated by 2.5%

since the beginning of the year. Gross international reserves ($37.6 billion as of end-

2008) have risen further to a new record high of nearly $42.3 billion as of end-September

2009, adequate for close to 8 months of goods and services imports and equivalent to 3.6

times foreign debts maturing over the next 12 months.

Efforts in recent years to reduce the fiscal deficit by raising new taxes have helped reduce

high debt ratios, create additional fiscal space to increase spending on vital social services

and infrastructure after years of tight budgets, and improve confidence. December 2004

legislation provided for biennial adjustments to the excise tax rates for tobacco and liquor

products until 2011; the government began implementing an amended value added tax

(VAT) law in November 2005 that expanded VAT coverage and increased the VAT rate

56
from 10% to 12%; and a law signed in January 2005 seeks to institute a performance-

based rewards system in the government's revenue collection agencies. Although still

high by regional and emerging country standards, the debt of the national government has

declined to about 56% of GDP; and that of the consolidated public sector to about 64% of

GDP. Major credit rating agencies raised their rating outlook from “negative” to “stable”

in recognition of fiscal progress and more manageable debt ratios.

The national government worked to reduce its fiscal deficits for five consecutive

years to 0.2% of GDP in 2007 and had hoped to balance the budget in 2008. The Arroyo

administration no longer targets leaving office in 2010 with a balanced budget, opting

instead for measured deficit spending to help stimulate the economy and temper the

adverse impact of global external shocks on the already high number of Filipinos

struggling with poverty. The national government ended 2008 with a deficit equivalent to

0.9% of GDP and has programmed a higher deficit for 2009 equivalent to 3.2% of GDP.

Looking forward, further reforms are needed to ease fiscal pressures from large losses

being sustained by a number of government-owned firms and to control and manage

contingent liabilities. Despite recent improvements, challenges remain to the long-term

viability of state-run pension funds. The national government's tax-to-GDP ratio

increased from 13% in 2005 to 14.3% in 2006 after new tax measures went into effect;

however, it declined and stagnated at 14% in 2007 and 2008, has declined further in 2009

(to 13.5% during the first semester), and remains low relative to historical performance

(i.e., 1997’s 17% peak ratio) and vis-à-vis regional standards. The government has

intermittently relied on heftier privatization receipts to make up for the shortfall in

targeted tax collections but this is not a sustainable revenue source. Legislation passed in

57
2008 providing tax relief for minimum wage earners and individual taxpayers, a cut in

the corporate income tax rate from 35% to 30% starting 2009, and no further adjustments

to liquor and tobacco excise taxes after 2011 will erode government revenues further.

The Philippine Congress enacted an anti-money laundering law in September 2001

and followed through with amendments in March 2003 to address legal concerns posed

by the Organization for Economic Cooperation and Development (OECD) Financial

Action Task Force (FATF). The FATF removed the Philippines from its list of Non-

Cooperating Countries and Territories in February 2005, noting the significant progress

made to remedy concerns and deficiencies identified by the FATF to improve

implementation. The Egmont Group, the international network of financial intelligence

units, admitted the Philippines to its membership in June 2005. The FATF Asia Pacific

Group conducted a comprehensive peer review of the Philippines in September 2008.

Some of the more important concerns include the exclusion of casinos from the list of

covered institutions and 2008 court rulings that inhibit and complicate investigations of

fraud and corruption by prohibiting ex-parte inquiries regarding suspicious accounts. The

Philippines’ financial intelligence unit is pushing for amendments to the anti-money

laundering law to address these concerns.

Eight years after the Arroyo administration enacted legislation to rationalize the

electric power sector and privatize the government's debt-saddled National Power

Corporation (NPC), significant progress was made only in 2007, with the privatization of

the state-owned transmission company (Transco) and sales of 68% of total generating

assets in Luzon and the Visayas. The Arroyo government is confident it will complete its

privatization targets in 2009.

58
 The U.S. Trade Representative removed the Philippines from its Special 301

Priority Watch List in 2006, reflecting improvement in its enforcement of intellectual

property rights (IPR) protection. It has maintained the Philippines on the Special 301

Watch List through 2009. However, sustained effort and continuing progress on key IPR

issues will be essential to maintain this status.

Despite a number of policy reforms, the Philippines continues to face important

challenges and must sustain the reform momentum to achieve and sustain the strong post-

crisis recovery needed to spur investments, achieve higher growth, generate employment,

and alleviate poverty for a rapidly expanding population. Absent new revenue measures,

sustained fiscal stability will require more aggressive tax collection efficiency to address

the severe under-spending in infrastructure and social services after years of tight

budgets. Continuing efforts to fast-track power sector privatization remain critical to the

long-term stability of public sector finances, ensuring reliable electricity supply, and

bringing down the cost of power. Climate change is an emerging threat to agriculture and

overall growth, and also could further complicate fiscal consolidation efforts.

Potential foreign investors, as well as tourists, remain concerned about law and

order, inadequate infrastructure, policy and regulatory instability, and governance issues.

While trade liberalization presents significant opportunities, intensifying global

competition and the emergence of low-wage export economies also pose challenges.

Competition from other Southeast Asian countries and from China for investment

underlines the need for sustained progress on structural reforms to remove bottlenecks to

growth, to lower costs of doing business, and to promote good public and private sector

governance. The government has been working to reinvigorate its anti-corruption drive,

59
and the Office of the Ombudsman has reported improved conviction rates. Nevertheless,

the Philippines’ efforts are lagging and more needs to be done to improve international

perception of its anti-corruption campaign--an effort that will require strong political will

and significantly greater financial and human resources.

Agriculture and Forestry

Arable farmland comprises more than 40% of the total land area. Although the

Philippines is rich in agricultural potential, inadequate infrastructure, lack of financing,

and government policies have limited productivity gains. Philippine farms produce food

crops for domestic consumption and cash crops for export. The agricultural sector

employs more than one-third of the work force but provides less than a fifth of GDP.

Decades of uncontrolled logging and slash-and-burn agriculture in marginal

upland areas have stripped forests, with critical implications for the ecological balance.

Although the government has instituted conservation programs, deforestation remains a

severe problem.

With its 7,107 islands, the Philippines has a very diverse range of fishing areas.

Notwithstanding good prospects for marine fisheries, the industry continues to face a

difficult future due to destructive fishing methods, a lack of funds, and inadequate

government support.

Agriculture generally suffers from low productivity, low economies of scale, and

inadequate infrastructure support. Despite the adverse effects of successive strong

typhoons in the last four months of 2006, the overall agricultural output expanded by

3.8% during that year. In 2007, the sector grew by 4.7%, led by gains in the fisheries

60
subsector. The sector registered slower growth in 2008 at 3.9%, due mainly to negative

growth in the livestock sector and lesser output in the crops and fisheries subsector, and

growth is expected to slow further to fewer than 2% in 2009 due to adverse weather

conditions.

Industry

Industrial production is centered on the processing and assembly operations of the

following: food, beverages, tobacco, rubber products, textiles, clothing and footwear,

pharmaceuticals, paints, wood and wood products, paper and paper products, printing and

publishing, furniture and fixtures, small appliances, and electronics. Heavier industries

are dominated by the production of cement, glass, industrial chemicals, fertilizers, iron

and steel, mineral products, and refined petroleum products. Newer industries,

particularly production of semiconductors and other intermediate goods for incorporation

into consumer electronics are important components of Philippine exports and are located

in special export processing zones.

The industrial sector is concentrated in urban areas, especially in the metropolitan

Manila region, and has only weak linkages to the rural economy. Inadequate

infrastructure, transportation, and communication have so far inhibited faster industrial

growth, although significant strides have been made in addressing the last of these

elements.

Mining

The Philippines is one of the world's most highly mineralized countries, with

61
untapped mineral wealth estimated at more than $840 billion. Philippine copper, gold,

and chromate deposits are among the largest in the world. Other important minerals

include nickel, silver, coal, gypsum, and sulfur. The Philippines also has significant

deposits of clay, limestone, marble, silica, and phosphate. The discovery of natural gas

reserves off Palawan has been brought on-line to generate electricity.

Despite its rich mineral deposits, the Philippine mining industry is just a fraction of

what it was in the 1970s and 1980s when the country ranked among the ten leading gold

and copper producers worldwide. Low metal prices, high production costs, and lack of

investment in infrastructure have contributed to the industry's overall decline. A

December 2004 Supreme Court decision upheld the constitutionality of the 1995 Mining

Act, thereby allowing up to 100% foreign-owned companies to invest in large-scale

exploration, development, and utilization of minerals, oil, and gas.

GDP (2008): $166.9 billion.

Annual GDP growth rate (2008): 3.8% at constant prices.

GDP per capita (2008): $1,841.

Natural resources: Copper, nickel, iron, cobalt, silver, gold.

Agriculture: Products--rice, coconut products, sugar, corn, pork, bananas, pineapple

products, aquaculture, mangoes, eggs.

Industry: Types--textiles and garments, pharmaceuticals, chemicals, wood products,

food processing, electronics and semiconductor assembly, petroleum refining, fishing,

business process outsourcing services.

Trade (2008): Exports--$49.0 billion. Imports--$56.6 billion

62
Taxpayers To Pay Marcos Debt Until 2025

When Marcos assumed presidency in 1966, the foreign debt of the Philippines

stood below $1 billion. When he fled Malacañang in February 1986 during the first

People Power, the country had a foreign debt of $28 billion. Following our loan schedule,

Filipino taxpayers will pay for the foreign debts of Marcos until 2025 - 59 years after he

assumed office and 39 years after he was kicked out. The current fiscal crisis challenges

our policy makers to bring more meaning to the country’s observance this year of the

32nd anniversary of the Martial Law declaration. Aside from the countless victims of

human rights violations during this dark period of our recent history, the Marcos

dictatorship also had another notorious ‘legacy’-- the debt burden. Even as the Arroyo

administration urges the people to have their share of the burden through new taxes and

other oppressive measures, Filipinos continue to shoulder the burden of servicing the

debts of the late strongman Ferdinand Marcos, including his so-called illegitimate debts.

Martial Law and fiscal crisis

As of the latest Bangko Sentral ng Pilipinas (BSP) data, the country’s foreign debt

is now pegged at $56.7 billion. Among the last five administrations, the Marcos regime

amassed the largest foreign debt at more than $25 billion during its 20-year rule (1966-

1985) or an annual accumulation of almost $1.3 billion.

The largest increases in the country’s foreign debt happened during the Martial

Law period. Between 1973 and 1982, the indebtedness of the Philippines grew by 27

percent per year. From 1976 to 1982, BSP data show that the foreign debt was swelling

63
by an annual average of $2.8 billion. In 1982, due to automatic debt service, payments

reached $3.5 billion, almost the same level of total foreign borrowing for that year and

larger than the total foreign debt before Martial Law was declared.

The debt level became unmanageable, forcing the Marcos government to declare a

moratorium on debt payments in 1983. The Philippines never recovered from its fiscal

woes ever since, in spite of painful restructuring under the tutelage of the International

Monetary Fund (IMF) in exchange for the moratorium and additional funding. With

drastically shrinking revenues due to the implementation of globalization policies

especially in the 1990s, the debt and budget problems exploded into a full-blown fiscal

crisis we are confronted with today.

Corruption and debt burden

Worst, many of the debts of Marcos did not go to infrastructure development

projects or social programs of government. Based on one estimate, Marcos pocketed

around 33 percent of the country’s total borrowings during his term. This amount

translates to more than $8 billion.

According to the findings of the Presidential Commission on Good Government

(PCGG), Marcos’s loot reached between $5 billion to $10 billion. Later, former Solicitor

General Frank Chavez claimed that Marcos and his family have $13.4 billion deposited in

Swiss banks. Comparing the two estimates, a significant portion of Marcos’s ill-gotten

wealth may have come from foreign loans.

The country continues to shoulder the burden of these debts. Based on the data of

the Bureau of Treasury Debt Monitoring Analysis Division, the outstanding balance of

64
Marcos’s foreign debts, 18 years after he was ousted, stood at almost $1.2 billion or more

than P67 billion (at an exchange rate of $1:P56). The country is projected to pay more

than $183 million in principal of these debts this year, and another $45.3 million in

interest and other charges.

Most expensive white elephant

The single largest foreign debt (and most expensive white elephant) of the country

was also contracted by Marcos-- the $2.3 billion Bataan Nuclear Power Plant (BNPP).

This lone project comprised 9 percent of the total foreign debt of the country when it was

completed in 1984. Subsequent investigations showed that the BNPP was overpriced by

$600 million, and that Marcos and his crony Herminio Desini, who facilitated the project,

were bribed with $80 million by the project contractor US-based Westinghouse

Corporation.

The BNPP was mothballed by the Aquino administration after it found that the

plant sits on a major fault line. It never got to produce a single kilowatt of electricity, but

all the Aquino government can do was to accept a $188-million settlement with

Westinghouse.

Thus, Filipino taxpayers were left with a huge debt to settle. Starting this year until

2018, the country still has to pay around $118.3 million to the banks that financed the

BNPP which include the US Export-Import Bank, Union Bank of Switzerland (among

the Swiss banks where Marcos allegedly put his ill-gotten wealth), Bank of Tokyo, and

Mitsui & Co.

65
Private debt, public burden

The BNPP is only one of the numerous public loans contracted during the

Marcos regime that benefited the private interests of Marcos and his cronies. Among the

conditions of the Marcos regime’s 1984 standby arrangement with the IMF was that the

national government would assume private loans to ensure their repayment. Many of

these private loans belonged to the cronies of Marcos. In fact, 10 of Marcos’s close pals

already accounted for $3.3 billion of these government-assumed loans. A huge portion of

government assumed loans went to the National Power Corporation (Napocor) and

enriched Desini who facilitated these anomalous loans. In a 1989 study, it was estimated

that government-assumed loans of Napocor, which involved Desini, reached $795

million. The country may still be paying for these debts considering that the outstanding

balance of Napocor’s debt contracted by the Marcos government is still pegged at $260

million as of end-2003.

Illegitimate debts

Various international initiatives and movements campaigning for debt cancellation

have tried to define what are illegitimate debts. Broadly, illegitimate debts fall on any or

all of the following categories:

1. Debts incurred by a despotic power not for the needs or interests of the state but to

strengthen its despotic regime or to repress the population that fights against it. It

also includes loans made by members of government or persons or groups

associated with government for personal rather than state purposes. Such debts are

also called “odious debts.”

66
 2. Debts incurred under onerous terms such as usurious interest rates and private

loans converted to public debt in order to bail out lenders.

3. Debts used for projects or programs that did not happen or did not benefit the

people as originally intended, or harmed the community or its environment.

4. Debts incurred through wrong policy advice or debts with conditional ties that

harmed the people of the borrowing countries.

5. Debts that cannot be serviced without causing harm to people or communities.

Proposals

Clearly, many of Marcos’s debts are illegitimate-- they harmed the Filipino

people while enriching Marcos and his cronies. Worse, we are forced to bear the

responsibility of repaying these debts at the cost of being denied our right to access basic

social services. Instead of implementing new and higher taxes and other anti-people

measures to deal with the fiscal crisis, we strongly encourage the Arroyo administration

to instead pursue measures that would uphold the general welfare and public interest. One

such measure is to reform its debt management policies and reduce government debt. It

can start by reviewing the debts incurred by the Marcos dictatorship to determine which

debts are illegitimate and therefore not the obligation of the current government and the

people.

The Arroyo government may consider the following:

1. Establish a Marcos Debt Review Task Force composed of the Department of

Finance (DoF), the Presidential Commission on Good Government (PCGG),

67
 Department of Justice (DoJ), concerned members of Congress, and

representatives from concerned non-government organizations (NGOs).

2. At the minimum, the Task Force should determine how much of the outstanding

balance of Marcos’s foreign debts of $1.2 billion are considered illegitimate and

recommend the immediate suspension of servicing these loans.

3. At the maximum, the Task Force should determine how much of these

illegitimate debts have already been repaid. The Arroyo administration should

then negotiate with concerned creditors and seek appropriate reduction in current

outstanding balance on grounds that past loans serviced by government are

illegitimate and therefore payments should be refunded (e.g. through reduction in

present debts).

4. The Task Force should investigate all past and present government officials,

institutions, companies, and other entities or individuals involved in fraudulent

loan transactions during the Marcos dictatorship and prosecute those who are

found guilty.

The hardest part, of course, is negotiating with creditors and this is where the

political will of the Arroyo administration will be put to a test. But the concept of

illegitimate debt and its cancellation is now a campaign that creditors and First World

governments are forced to recognize due to international pressure. The IMF, for instance,

has already recognized the unpayability and insolvency of some of the debts of poor

countries. It is also now looking into the issue of ‘illegitimacy’ of debt. Reviewing

Marcos’s debts should form part of overall efforts to reform the country’s debt

management, which indispensably includes repealing PD 1177 of Marcos and EO 292 of

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Aquino. At a time of fiscal crisis, it is more necessary to impose a cap on borrowings and

payments (instead of automatic debt servicing) so government can have more flexibility

in managing the people’s money and protecting the people’s welfare.

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Compliance Ratings

Fiscal transparency 2006 2005 2004 2003

2006 2005 2004 2003

Clarity of roles ••• ••• ••• •••
Availability of •••• •••• •••• ••••
information
Budget •••• •••• •••• ••••
preparation
Accountability •••• •••• •••• •••

Score 3.75 3.75 3.75 3.50

Outlook and Commentary

In 2006, fiscal policy transparency in the Philippines faced some setbacks,

particularly in the budgetary process. As no budget was approved for 2006, the 2005

budget was re-enacted.

As a result, funds earmarked for specific projects in 2005 were not given a clear

allocation in 2006. The president issued an Executive Order -- which was watered down

in November 2006 in the face of opposition -- to reinstate directed credit programmers by

government agencies, but set out no clear rules or regulations for such spending.

However, improved government procedures have resulted in a more transparent

procurement process. The government is also preparing a three-year rolling budget

framework. Efforts to compile government finance statistics in accordance with the

IMF’s

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 Government Finance Statistics Manual (GFSM) 2001 has continued, and the

Department of Finance has set up a dedicated unit for this purpose.

A number of bills are pending in Congress which, if passed, would enhance fiscal

transparency. These include a fiscal incentives bill that could eventually eliminate tax

holidays. A Fiscal Responsibility Bill would rationalize the tax system further, and limit

government obligations to Government Owned and Controlled Companies.

EXECUTIVE SUMMARY

3.75 Compliance in progress

In 2006, fiscal transparency in the Philippines has worsened on a number of

counts, despite a few positive developments. In 2005, Congress did not approve a budget

for 2006. Instead, the 2005 budget was re-enacted this year, and commentators expressed

their concern about the complete lack of transparency in 2006 spending. Funds that were

earmarked for specific projects in 2005 were used for other purposes this year. The

government provided no guidelines as to how the funds should have been used.

Executive Order (E.O.) 558 of September 2006 authorized non-financial

government agencies and Government Owned and Controlled Corporations (GOCCs) to

extend credit without clear and transparent rules and regulations for implementation.

Continuing opposition from the Department of Finance (DoF) and the international

financial community resulted in an amended E.O. 558-A of November 2006, which

limited the scope of these loans.

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 There have been concerns over the privatization of assets, particularly in the

electricity generation and transmission sectors. Rules and regulations governing the

privatization process in these sectors were not completely transparent, the bidding

strategy changed during the process, and not all potential bidders were granted access to

the necessary documents.

In 2006, the President attempted to amend the 1987 Constitution, but it is not

clear whether a viable route to constitutional reform can be found. The thrust of the

reform calls for adopting a unicameral parliamentary system in place of the existing

bicameral legislature in a presidential republic. The change to a unicameral legislature

might resolve the existing gridlock between the lower house and the Senate, which has

delayed the passage of key legislation.

Procurement processes have been improving, owing to a number of reforms in

government procurement procedures. In addition, performance monitoring of GOCCs has

improved, and there are plans to adopt performance contracts for GOCCs. There have

also been discussions about including some off-budget subsidies to GOCCs in the budget.

The draft Medium Term Philippine Development Plan (MTPDP) for 2004-10

originally aimed to achieve a balanced budget by 2010, but the government is currently

aiming to attain this target by 2008. In order to align multiyear budgeting with the

MTPDP, the government is developing a Medium-Term Expenditure Framework, i.e. a

three-year rolling budget that will allow the tracking of the funding requirements of

ongoing agency programmes and projects for the next three years. The government is

also making progress in compiling government finance statistics in accordance with the

72
Government Finance Statistics Manual (GFSM) 2001 framework. A dedicated unit in the

Department of Finance has been set up for this purpose.

Legislation to rationalize fiscal incentives, for example by withdrawing inefficient

and duplicate special investment incentives, is awaiting passage in Congress. This could

form the basis for the eventual elimination of tax holidays.

A Fiscal Responsibility Bill and legislation aimed at introducing a system of

simplified net income taxation for the self-employed are also pending in Congress.

Among other things, the Fiscal Responsibility Bill would -- in view of the already

plentiful and complex tax legislation -- limit the number of tax bills to be issued. The

Bill, if enacted, would also end the government’s automatic guarantee of obligations

incurred by GOCCs. The Philippines’ overall score is unchanged from 2005.

1. CLARITY OF ROLES, RESPONSIBILITIES AND OBJECTIVES

··· Enacted

The government sector should be distinguished from the rest of the public sector

and from the rest of the economy, and policy and management roles within the public

sector should be clear and publicly disclosed Structure, functions, and responsibilities of

government. The structure, functions and responsibilities of the different branches of

government are clearly set out in the Constitution of the Republic of the Philippines and

the Administrative Code of 1987. Under the 1987 constitution, the Philippines is a

presidential republic with a bicameral legislature.

The Philippines has a degree of fiscal federalism based on a two-tiered structure

of government that includes the national government and local government units (LGUs).

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The national or central government operates through some twenty departments or

agencies. LGUs generally include provinces, municipalities and component cities, and

barangays, but there are also some independent or highly urbanized cities, as well as the

Autonomous Region of Muslim Mindanao (ARMM). In addition to the national

government and the LGUs, the public sector comprises GOCCs, the Bangko Sentral ng

Pilipinas (BSP, the central bank), the Central Bank Board of Liquidators, two social

security agencies and a health insurance company.

In 1989-91, the Philippines launched a programme of substantial decentralization,

transferring powers, resources and expenditure responsibility to the LGUs. National

government expenditure accounts for around 50-60% of total government spending, with

the LGUs spending the remainder.

The national government has adopted a number of laws to establish clear fiscal

relations with the LGUs, including the Local Government Code (Republic Act 7160) of

1991, Executive Order 507, and the Organic Act for Muslim Mindanao (R.A. 6734) of

1989. R.A. 6734 grants the government of the ARMM the automatic retention of national

internal revenue collected in the region, as well as significant discretion in regional

development planning and primacy for the regional government in delivering services

and exploiting natural resources. R.A. 7160 – which regulates non-ARMM LGUs --

explicitly defines the functions of local governments in Section 17(b). However, R.A.

7160 Sections 17(c) and (f) allow the central government, or a higher local authority, to

continue devolving functions to LGUs. Section 17(f) allows elected politicians to

introduce ‘pork barrel’ funds earmarked for their electorates by inserting new provisions

in the General Appropriations Act (GAA). Central government agencies use Sections

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17(c) and (f) to transfer unfunded mandates, such as implementation of the salary

standard law and budgetary support, to certain central government agencies (e.g. police,

law courts, fire rescue services) operating at the local level.

R.A. 7160 details the taxes to be collected by the central government only and

explicitly authorizes each LGU level to collect certain others. For example, provinces and

independent cities are empowered to collect real property tax and to share this revenue

with lower LGU levels, while municipalities and component cities can collect community

tax and local business tax. In addition to self-raised taxes, non-ARMM LGUs are

recipients of two types of intergovernmental transfers. The first one is based on a formula

for internal revenue allotments (IRA), such that a set proportion of revenue is transferred

to each LGU level (e.g. 23% to provinces) and then transferred to individual local

authorities within that level according to population (50%), land area (25%), and equal

sharing (25%). The second kind of transfers consists of categorical grants made

according to a specific project item in the central government’s budget, an item in the

budget of an individual national government agency, or as part of the Priority

Development Assistance Fund (PDAF) allocation in the central government’s budget.

The PDAF is made up of funds appropriated in the GAA to help individual

legislators fund projects that voters will be identify with them personally. In the last few

years, each congressman representing an electoral district has been allotted 65 million

pesos (1.3 million US dollars) in PDAF, while party list congressmen have received 35

million pesos (700,000 US dollars) and senators 200 million pesos (4 million US dollars)

each. Commentators argue that these PDAF practices allow legislators to collect bribes

and commissions from the contractors of the PDAF-funded projects. The Department of

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Budget and Management (DBM) says it has worked to rationalize and tighten the PDAF

procedures during the Macapagal-Arroyo administration.

In recent years, the central government introduced a uniform computerized

accounting system for LGUs. The Bureau of Local Government Finance (BLGF), within

the Department of Finance (DoF), guides and assists LGUs by drafting manuals of

standard procedures, and granting loans on soft terms for computerizing their business

tax and licensing procedures, as well as real property assessment and collection. The

BLGF has established a financial performance monitoring system for LGUs.

In 2006, a popular initiative supported by the President attempted to amend the

1987 Constitution. The amendment called for the adoption of a unicameral parliamentary

system of government in place of the existing presidential system and bicameral

legislature, and aimed to resolve the existing gridlock between the lower house and the

Senate, which has delayed the passage of key legislation. However, the Supreme Court

declared the attempt null and void.

Subsequently, President Gloria Macapagal-Arroyo indicated that she would

convene the houses of congress into a constituent assembly to amend the constitution.

Coordination and management of budgetary activities

Mechanisms for the coordination and management of budgetary activities are well

established within the Development Budget Coordinating Committee (DBCC), a cabinet-

level interagency committee. The DBCC consists of a representative of the Office of the

President and the heads of the chief economic agencies of government: the DBM, the

76
National Economic and Development Authority (NEDA), the DoF and the BSP. The

head of the DBM acts as chairperson, and the head of NEDA as co-chair.

The DoF has primary responsibility for managing the financial resources of the

government, its subdivisions and associated agencies. It is responsible for formulating

fiscal policy, generating and managing government resources, supervising the revenue

operations of all LGUs, managing all public sector debt and contingent liabilities and

privatizing government corporations and assets. The DBM is tasked with formulating and

efficiently implementing the national budget -- including budget programming -- and

monitoring agency accountability. The NEDA coordinates social and economic

development planning and monitors major projects.

Relations between the government and public sector agencies

The relationship between the government and the central bank is clearly

established in the New Central Bank Act of 1993, which grants operational autonomy to

the BSP. The BSP does not regularly extend credit to the national government, but it can

make provisional advances for expenditures authorized in the annual budget for a

maximum period of six months.

Other public sector agencies include government financial institutions,

government corporate entities, and nonfinancial government corporations, many of which

have their own subsidiaries, all of which in turn are classified as GOCCs and number in

excess of 140. They are directly attached to individual government departments, and are

required by law to submit annual audited financial statements to the secretary of the

77
department under whose jurisdiction they fall. Their balance sheets, cash flow statements

and income statements are only included in the budget documentation when the

government has provided a cash disbursement in a particular year. In 2003, the IMF

expressed concern that government loans to one large GOCC, the National Power

Corporation (NPC), were presented inconsistently in the national accounts as a below-

the-line item, while other net lending to GOCCs was shown above the line. As with other

companies, financial information on the GOCCs is available through the Securities and

Exchange Commission (SEC).

The financial results of 14 GOCCs are included in the Consolidated Public Sector

Financial Position (CPSFP). The combined balance of these 14 GOCCs has been in

deficit in recent years -- significantly undermining the government’s efforts at fiscal

consolidation -- and the government believes that these GOCCs, including the NPC and

the National Food Authority (NFA), present the greatest fiscal risk. In 2005, the deficit of

the 14 monitored GOCCs amounted to 23 billion pesos (466 million US dollars), only

about half of what had been expected; the deficits of these 14 GOCCs for 2006 and 2007

are expected to be higher. A Fiscal Responsibility Bill to end the government’s automatic

guarantee of obligations incurred by GOCCs has not yet been enacted.

In 2006, commentators said the performance monitoring of the 14 GOCCs had

delivered positive results – confirmed by statistics which showed a reduction in the

GOCCs’ deficit -- but they noted that the basic conflict between commercial operations

and social obligations mandated by government remained. In previous years,

commentators had expressed concerns over the misuse of special funds allocated by the

government to GOCCs, including the high profile case of the Fertilizer Fund, for which

78
the auditing conclusions of the CoA were not satisfactory. In 2006, commentators said

the government was trying to include increasingly common off-budget subsidies and

funding to GOCCs such as the National Food Authority (NFA) in the budget, thereby

increasing budget clarity and transparency.

According to the IMF, the authorities intend to establish performance contracts

for GOCCs beginning with the NFA. This may pave the way for setting up monitorable

targets for the larger public enterprises. In 2006, the government passed E.O. 558, which

authorized non-financial government agencies and GOCCs to extend loans, including

micro-finance loans. E.O. 558 undid E.O. 138 of 1999, which mandated the transfer of

directed credit programmes implemented by government non-financial agencies to

government financial institutions.

Commentators noted that continuing opposition from the DoF and the

international financial community resulted in an amended executive order, E.O. 558-A of

November 2006, which limited the scope of loans, thus reducing fiscal risks and the

competition with private sector micro-financiers. Commentators also noted that a trend

has emerged to re-issue amended E.O.s in the face of opposition, and this raises questions

about consultation and decision making processes.

In principle, privatization is conducted in an open manner, and its proceeds are

recorded and reported within the budget and annual accounts. Specifically, privatization

proceeds derived from the sale of government equity, sales of government assets, and

sales of assets held or managed by the Privatization and Management Office, or

sequestered by the Presidential Commission on Good Government, are recorded in the

national accounts. The bidding process

79
is open to competition and inspection.

However, commentators continue to express concerns over the privatization of

assets in the power generation and transmission sectors. Rules and regulations governing

privatization in these sectors were not as transparent as they should have been, the

bidding strategy changed during the process, and not all potential bidders were granted

access to the necessary documents.

Government involvement in the private sector

Several laws and policies guide government involvement in the private sector.

These include the requirement to publish all regulations issued by administrative agencies

in a newspaper of general circulation; Memorandum Order No. 266 (1989), which

provides guidelines on government minority investments and joint ventures with private

entities; Executive Order No. 40 (2001), Republic Act No. 9184 (2003) and Executive

Order No. 109A, which outline good governance principles with respect to government

contracts awarded to private entities; and the Build Operate and Transfer Law (1994)

which provides a regulatory framework for infrastructure investments. The mandates and

economic objectives of GOCCs that operate alongside the private sector are stated in the

corresponding Republic Act that established each GOCC.

Two public social security funds, the Social Security System (SSS) and the

Government Service Insurance System (GSIS) -- and a health insurance company, the

Philippine Health Insurance Company (Philhealth) -- created in 1998 after transfers of

funds and employees from the GSIS and SSS are owned by the government. The SSS and

GSIS were under significant political pressure during the Estrada administration, and

80
made improper investments in the private sector. Both social security funds are now

subject to greater scrutiny, in order to avoid repeating past problems. For example, the

CoA makes available the annual audits on the two public social security funds.

In 2005-06, the SSS was in surplus for the first time in seven years, with member

contributions exceeding benefit payments. The actuarial life of the SSS is reviewed every

four years; the most recent review, for the year 2003, suggested that positive net revenue

can be expected until 2021 and that the reserve fund would not be depleted until 2031.

This financial viability reverses a trend, identified earlier by the IMF and other

commentators, in which SSS deficits had undermined the government’s fiscal

consolidation efforts.

There should be a clear legal and administrative framework for fiscal management

Legal framework for budgetary activities

Comprehensive budget laws and publicly available administrative rules govern

the disbursement of public funds in the Philippines. The president is required by the

constitution to submit an annual budget proposal to Congress each fiscal year. A line-

item veto over the GAA and other bills is retained by the president, who is allowed to

deny provisions inserted by legislators. A Development Budget Coordination Committee

(DBCC) -- comprised of the DBM, the DoF, NEDA, the Office of the President (OP) and

the BSP -- determines the desirable level of expenditure and debt for the president’s

budget submission, in the context of the medium-term fiscal plan, whose formulation is

mandated by E.O. 292.

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 Government funds are allocated to individual departments on the basis of budget

estimates that each head of department, government agency and public corporation must

submit to the DBM. These estimates set out the principal costs of submitted projects,

current operating expenditures, capital outlays, sources of revenues, and contingent

liabilities, such as government guarantees of GOCC obligations and other transfers to

GOCCs. The estimates are submitted to Congress as the president’s budget, in the form

of the National Expenditure Programme (NEP) and the Budget of Expenditures and

Sources of Financing (BESF).

Based on the NEP, Congress approves the GAA. The DBM uses the GAA as the

basis for a cash budget programme for the upcoming calendar year -- drawn up in

coordination with the spending agencies, the Bureau of the Treasury and the DoF -- and

disburses authorized funds to individual departments on a quarterly basis. The Bureau of

the Treasury ensures that disbursements authorized by the DBM are fully backed by

revenues.

Commentators said the exercise of the president’s special line veto powers has

historically been sparing, but not insignificant, and has included changes to planned

budgetary expenditures. Furthermore, under the General Appropriations Act, two

specific sections safeguard against impoundment of appropriations as well as

unauthorized disbursement of funds.

In 2005, congress did not approve a budget for 2006, and the 2005 budget was re-

enacted this year. Commentators expressed strong concerns about the lack of

transparency in 2006 spending, especially regarding funds of around 30 billion pesos

(600 million US dollars) that were earmarked in 2005 for particular projects.

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Commentators also pointed out their suspicion that the administration was taking

advantage of the 2006 budget situation to delay expenditure until nearer to the next

election. However, in late 2006, the process of developing and enacting a 2007 budget

was well advanced.

At the start of each administration, the government adopts a fiscal plan and a set

of revenue, expenditure and deficit targets as part of a Medium Term Philippine

Development Plan (MTPDP). The draft MTPDP for 2004-10 originally aimed to achieve

a balanced budget by 2010, but the government is currently aiming to achieve this target

by 2008. However, it has had difficulty attaining fiscal consolidation in the short term.

Legal framework for taxation

An explicit legal basis for all taxes is provided in the constitution and in the

National Internal Revenue Code. The latter was restated, with amendments and

corrections, in the Tax Reform Act of 1997 and further amended by the reform of excise

tax on tobacco and alcohol and the reform of the value-added tax. The Code tasks the

Bureau of Internal Revenue (BIR) with the collection of taxes. It gives wide-ranging

authority to the head of the organization, including the power to interpret tax laws, decide

disputed cases, obtain additional information on tax returns, and summon individuals for

tax inquiries. Taxation laws, regulations and rulings are available on the website of the

BIR.

Taxpayers may refer disputes to the Appellate Division of the BIR, to the Court of

Tax Appeals, and, if still unsatisfied, to the Supreme Court. The government launched a

Comprehensive Tax Reform Programme (CTRP) in 1998 to lower the chronically high

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tax-evasion rates and improve the country’s tax administration by stamping out

corruption in the BIR. After a successful start to the RATE (Run after Tax Evaders)

Programme, initiated in March 2005 and supervised by the DoF, the lack of high-profile

cases or significant enforcement measures against well-known tax evaders has left the

programme with little credibility. The fragile condition of public finances has encouraged

the government to further review and correct deficiencies in the tax system, including

through proposals to remove tax exemptions, attempts to enhance the operational

capabilities of the BIR and the Bureau of Customs (BOC), and efforts to impose new

streamlined taxes on buoyant economic sectors while keeping the neutrality of fiscal

incentives. As part of the efforts to improve adjudication of tax cases, the Court of Tax

Appeals was reorganized through Republic Act No. 9282 -- approved on 20 March 2004

-- which expanded the court’s jurisdiction to cover criminal offences relating to taxation,

and elevated its rank to the level of a collegiate court with special jurisdiction. It also

enlarged its membership from three to six judges.

One of the current administration’s key efforts to revamp the tax and customs

administration is the Lateral Attrition System, which institutionalizes a system of

incentives for revenue-collecting officials who meet or exceed targets and of sanctions

for those who fail. All procedures are in place, and 2006 was the first year during which

performance was assessed in both bureaus. Legislation to rationalize fiscal incentives,

including the withdrawal of inefficient and duplicate special investment incentives, is

awaiting passage in Congress. This could form the basis for eventually eliminating tax

holidays.

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 Nevertheless, the list of special incentives remains long, and tax concessions are

widely applied and not time-bound. In addition, the authorities are now facing pressure to

grant income-tax incentives to the bio-fuels industry.

Commentators said the complexity of the tax system and the weaknesses of the

revenue-collecting institutions were among the several reasons why taxpayers were

unwilling to pay taxes. The government has sent drafts of eight new laws to Congress to

remedy deficiencies in the tax structure, widen the tax base, introduce performance-based

incentives for revenue-collecting agencies, and institutionalize additional controls to

ensure fiscal sustainability. The ‘Sin Tax’, otherwise known as ‘Reform on the Excise on

Alcohol and Tobacco Products’, was signed in December 2004 and increased the excise

tax rates on these products. The Lateral

Attrition System, which was signed into law in January 2005, institutionalizes a system

of incentives for revenue collecting officials: 2006 was the first year in which the

performances of officers in relevant bureaus were appraised.

The VAT Reform was enacted in May 2005, and the additional revenue collected

in 2006 was a positive addition to fiscal consolidation efforts. The Fiscal Responsibility

Bill and legislation to introduce a system of simplified net income

taxation for the self-employed are still pending in Congress. One of the components of

the Fiscal

Responsibility Bill would limit the number of tax bills to be issued, in view of the already

plentiful and complex tax legislation.

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Ethical standards for public servants

Ethical behaviour of civil servants is promoted by laws and regulations, measures

to ensure compliance with those laws, and agencies responsible for anti-corruption

activities. The code of conduct for government officials is clear and well publicized by

the government. Article XI of the 1987 Constitution, the Ombudsman Act (R.A. 6770) of

1989, the Code of Conduct and Ethical Standards (R.A. 6713) of 1989, and the Anti-

Graft and Corrupt Practices Act (R.A. 3019) of 1960 provide the legal framework and

guidelines for public office, as well as specific procedures for tackling misconduct and

other violations. The issue remains a primary concern for the Macapagal-Arroyo

administration. The current administration has established clear procedures for exposing

wrong-doing, including a Presidential Anti-Graft Commission to investigate allegations

against presidential appointees and a Revenue Integrity Protection Service (RIPS) to

investigate allegations of corruption and to conduct lifestyle checks of DoF’s and its

agencies’ employees. Media reporting of anti-corruption activities is common -- almost a

daily affair.

There are continuing concerns that anti-corruption measures might have proven

inadequate to ensure compliance with the code of conduct. More seriously, commentators

say that highly publicized cases of corruption involving well-connected officials,

including presidential appointees, have not been pursued, thereby weakening the

perception of the government’s commitment to fight corruption.

Although commentators in 2006 said they had recently seen big improvements in

efforts to stop corruption in the health sector, in 2005, a highly respected ombudsman,

86
whose office is responsible for investigating and prosecuting graft cases, resigned.

Commentators said last year that the Office of the Ombudsman lacked sufficient funds

and personnel to contribute to a successful anti-graft campaign and expressed their

concern over his resignation, particularly in the midst of his efforts to promote lifestyle

checks assessments. In 2006, commentators expressed little confidence that the current

ombudsman would provide the necessary strong leadership to pursue, independent of top

politicians, anti-corruption checks of well-connected individuals.

2. PUBLIC AVAILABILITY OF INFORMATION

The public should be provided with full information on the past, current and

projected fiscal activity of government

Full public disclosure of all state transactions that concern the public interest is

required by the constitution.

Central government operations

Data on central government operations are disseminated on a monthly basis and

within three weeks of the end of the reference month. Data cover budgetary and extra-

budgetary activities, and are presented on a consolidated basis, with transactions between

the budgetary and extra-budgetary elements having been eliminated. Data are

disseminated on revenue, expenditure, the balance (deficit/surplus), and financing,

disaggregated into foreign and domestic.

An advance release calendar that gives one-quarter ahead notice of the precise

release dates is posted on the National Statistical Coordination Board (NSCB) website.

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Data are preliminary when first released, and are subject to revision for five weeks after

the end of the reference month. NEDA provides a web service -- Economic Indicators

Online -- that monitors fiscal performance and government borrowing on a monthly basis

with a three-month lag; the two data series started in the 1990s. The NSCB employs a

similarly refined web service to publish a set of national economic and financial data,

which conform to the IMF Special Data Dissemination Standard (SDDS).

Public sector operations

The DoF is in charge of compiling data on the Consolidated Public Sector

Financial Position (CPSFP). These data are disseminated on a quarterly basis, and within

six months of the end of the reference period. Data cover the operations of the central

government, including budgetary and extra-budgetary activities, the impact of central

bank restructuring (which began in 1993), the operations of the 14 monitored GOCCs,

the social security accounts, the BSP net income account, the three government financial

institutions and all LGUs. Data are preliminary when first released and may be revised

annually for up to three years.

The DoF disseminates the full public resource budget, both consolidated and

sectoral, for each of the years 2003- 2005. Financial statements for all local government

units and GOCCs are also included.64 The Development Budget Coordination

Committee (DBCC) issues six-year fiscal projections as part of a comprehensive

government effort to develop multi-year planning and budgeting. The DBCC

recommends six-year fiscal projections to the NEDA board, headed by the president,

88
which are published in the Medium Term Philippine Development Plan (MTPDP) as well

as the Medium Term Public Investment Programme (MTPIP).

Government agencies and corporations are required to include the flows of

contingent liabilities in their annual budget estimates, and to report periodically to the

secretary of finance on the status of their government-guaranteed obligations. The CPSFP

includes all quasi-fiscal operations and extra-budgetary contingent liabilities: the Budget

of Expenditures and Sources of Financing reports the accrued debt and contingent

liabilities stemming from the liabilities assumed by the national government.

Determining the precise level of obligations associated with the insurance scheme for

bank deposits, unfunded liabilities of the public pension schemes, guarantees on risks

connected with Build-Operate-Transfer (BOT) contracts, and loan guarantees extended to

GOCCs and government financial institutions (GFIs) is a difficult task. However, the

DoF aims to capture all sources of contingent liabilities in order to include their present

value in budget calculations.

Commentators have raised concerns over the level of debt guaranteed by GOCCs.

The proposed, but not enacted, 2006 Budget allocated 8.3 billion pesos (145 million US

dollars) to government corporations, of which 57.2% would have gone to net lending.

The Congressional Planning and Budget Department, which acts as a think-tank for

Congress, has raised the importance of closely monitoring the performance of GOCCs

with regard to excessive spending on, for example, salaries and allowances.

A commitment should be made to the timely publication of fiscal information

Debt reporting

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 Data are disseminated on the total outstanding and contingent debt of the central

government -- including budgetary and extra-budgetary sources -- on a monthly basis,

according to the IMF SDDS template. Data comprise all liabilities of the central

government, including debt liabilities for government securities such as Treasury bills

and Treasury bonds, and re-lent loans to government corporations. Total outstanding debt

is broken down by maturity into short, medium and long term. Data are also disseminated

on debt guaranteed by government. Debt is broken down into foreign or domestic, based

on the residency of the debt holder. All the above debt data are released within ten weeks

of the end of the reference month.

Debt data identifying the entity that incurred debt now assumed by government

are also available separately, on a monthly and annual basis. The monthly data series

cover the preceding calendar year and the months of the current calendar year. The

government also discloses monthly information on its cash operations, broken down into

tax revenues from the BIR and the BOC and non-tax revenues, such as fees, charges and

cash earned from privatization, as well as the major disaggregation of disbursements,

borrowings and changes in the Treasury cash balances. A comparison of annual outturns

of the main fiscal aggregates is available for 1999-2004, together with monthly data for

the current calendar year. Monthly data are released within three weeks of the end of the

reference month; the annual cash operations report data are released within twelve

working days of the reference period. The Investor Relations Office, a joint venture by

the major economic agencies of government, provides a single source for the

disseminated data on the cash operations, outstanding debt, debt service, debt indicators

and fiscal position of the government.

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3. OPEN BUDGET PREPARATION, EXECUTION, AND REPORTING

Fiscal policy objectives, macroeconomic framework, and risks

Fiscal policy objectives

Annual budget proposals submitted by the president to Congress must include a

statement setting forth the government’s main budgetary focus for the year, the expected

impact of the budget on development goals, and on monetary and fiscal objectives. The

budget proposals of the Macapagal-Arroyo administration have been made within the

broader development framework of MTPDPs. The MTPDP 2004-10 sets out ten basic

tasks for the administration organized around five themes: economic growth and job

creation, energy, social justice and basic needs, education and youth opportunity, and

anti-corruption and good governance. To align multiyear budgeting with the MTPDP,

the government is developing a three-year rolling budget – Medium Term Expenditure

Framework, MTEF -- where annual baseline budgets are formulated and only new

spending proposals are reviewed during the budget drafting process. The MTEF is

anchored on the MTPDP and has two components, the medium-term fiscal plan on the

resource side and the medium-term public investment programme, along with

performance indicators and reviews of agency effectiveness and performance, on the

investment side. The MTEF includes a results framework for performance budgeting and

uses two instruments to improve allocation efficiency of scarce public resources -- Sector

Effectiveness and Efficiency Reviews (SEERs) and the Organizational Performance

Indicator Framework (OPIF). The SEERs and OPIF are expected to enhance

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accountability for results, and improve service delivery in exchange for access to

budgetary resources.

As part of the MTEF, the DBM and NEDA have conducted sector effectiveness

and efficiency reviews of government agencies’ expenditure proposals, testing the latter

for consistency with government priorities. Fifteen agencies have started pilot

programmes of the OPIF. The MTEF and the OPIF are components of the Public

Expenditure Management reform put in place five years ago. The OPIF focuses on the

linkages between inputs, outputs, outcomes and impacts on social goals. The DBM has

conducted agency performance reviews for all departments/agencies under the executive

branch of government.

Macroeconomic framework

Annual budget submissions are prepared and presented within the broad

macroeconomic framework of the government, represented by the MTPDP. The MTPDP

2004-10 includes integrated macroeconomic and fiscal forecasts for the term of the plan.

Broad macroeconomic assumptions for future years are contained in the Budget of

Expenditures and Sources of Financing (BESF) for the relevant fiscal year. The

quantitative models used for budget calculations are not publicly available, but DoF and

DBM officials have said in the past that their models are made available upon request.

Fiscal risks

A number of government departments carry out internal calculations/analysis of

fiscal risks, but these are not explicitly identified in the budget documentation. The

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government prepares a sensitivity analysis of variations to itskey macroeconomic

assumptions underlying budget proposals. The sensitivity analysis is incorporated in a

document that accompanies the budget submission to Congress.

Several reform measures are included in the Fiscal Responsibility Bill. They

include the removal of the automatic guarantee provisions for certain GOCCs, a cap on

debt as a percentage of GDP to be met by 2009, a provision stating that no new

expenditures shall be enacted without accompanying new revenue measures, the

formulation of a three-year Executive-Legislative Medium Fiscal Accord between the

executive and the legislature, and measures to increase tax collection. As in 2005, The

National Expenditure Programme (NEP) for 2006 provides for a number of special-

purpose funds to cope with unforeseen circumstances, including the Calamity Fund, the

Contingent Fund, and the Unprogrammed Fund.

In 2006, commentators noted that LGUs such as Marikina City and Naga City

have established a record of excellence in fiscal matters, but other LGUs still lag behind.

Commentators also noted that the DoF continues to encourage LGUs to adopt best

practices of fiscal management, with the result that large LGU deficits have become less

likely, even in election years. Commentators flagged the impending reclassification of up

to 20 existing municipalities and component cities to independent cities as a potential

fiscal risk because of the associated increase in IRA.

Fiscal sustainability

Government analysis of fiscal sustainability is mandatory. The DBM and NEDA

are conducting spending efficiency reviews of government programmes and projects, as

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part of the MTEF, to increase discipline of public expenditures. The CoA requires

agencies to report expenditures quarterly; it identifies any expenditure in excess of an

agency’s appropriation and reports half-yearly. The ADB is providing technical

assistance to the DoF to improve its debt and risk management abilities. According to the

ADB, considerable progress has been made in debt management in recent years,

particularly in lengthening the average maturity of national government debt and in

maintaining a diverse portfolio of obligations. However, the growing stock of debt

outside the national government’s borrowing programme, such as GOCC and GFI debt,

and the challenging issues in accurately quantifying and assessing the level of contingent

liabilities, pose risks.81 Formal fiscal sustainability analysis is not available.

Budget presentation

Data reporting

The Philippines subscribes to the SDDS, and meets its requirements for

periodicity, coverage and timeliness. Data on central government operations are

presented on a consolidated basis, distinguishing revenue, expenditure, balance and

financing. Expenditure is classified by economic, functional, and administrative

categories. Data on central government debt comprise all liabilities of the national

government and are broken down by maturity, the residency

of the debt holder (domestic and foreign), and the issuer of the debt (such as government

agencies and GOCCs whose loans the government guarantees). Data on public sector

operations are presented on a consolidated basis (CPSFP), distinguishing revenue,

expenditure, balance and financing. Data on financing are disseminated for the public

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sector as a whole and for the central government and major government corporations

separately, broken down into domestic and external sources of financing. The CPSFP

presents the most accurate picture of the fiscal activity of the Philippine public sector,

and accuracy has been improved through the quantification and inclusion of many

government contingent liabilities in the balance. The IMF has pointed out that one

important problem is that the budget is presented on an obligations basis, while the deficit

is reported on a cash basis, complicating comparisons of budgets and outcomes.

The government is making significant progress -- with technical assistance from

the World Bank -- on a shift towards performance-based budgeting. In September 2002,

the DBM conducted the first agency performance review to assess mid-year agency

performance and accomplishments. Performance targets are part of the requirements of

agencies’ submissions during the budget preparation, and the results of the agency

performance reviews are considered while arranging the budget draft.

Budget execution and monitoring

Recognizing the need for an integrated financial management information system,

the government is taking several steps -- one of which is the implementation of the

Internet-based e-Budget System -- to strengthen the DBM’s expenditure management

capability, streamline budget-release procedures and improve front-line service, improve

budget administration and accountability, update budget analysis and decision making

and minimize the fabrication of documents and the opportunities for ‘fixers’ promising to

arrange funds for agencies. From October 2005, the e-Budget System has been used by

the DBM Central Office to release budget documents.

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Accounting basis

The New Government Accounting System (NGAS) -- introduced in January 2002

by the CoA, the supreme audit authority of the Philippines -- is designed to simplify

government accounting, improve the efficiency of monitoring public sector performance,

and increase the transparency of government audits through civil society involvement.

More importantly, the new framework shifts from cash- to accrual-based

accounting and introduces modifications to the obligation-accounting techniques. It also

mandates the introduction of valuation accounting for receivables and fixed assets, and

envisages the full computerization of government accounting, as well as the development

of viable internal control systems within government agencies over the medium term.

The modified accrual-based NGAS has been progressively rolled out, first in manual and

then electronic versions, to the national government agencies and LGUs. Conversion

from manual to electronic form was scheduled in batches from 2003 to 2008. The first

batch replaced manual NGAS with e-NGAS starting in October 2003. An additional 40

government agencies, including 15 COA regional offices are converting from manual

NGAS to e-NGAS with the help of teams from the COA. Both manual and electronic

versions of NGAS use the modified accrual accounting.

Procurement and employment

The Philippine government has achieved substantial improvements in

procurement methods and standards. In January 2003, the Government Procurement

Reform Act (GPRA, R.A. 9184) was ratified.87 The GPRA established governing

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principles for transparent and competitive procurement, mandated government

procurement via electronic means (Government Electronic Procurement System or G-

EPS), and detailed the processes to be followed. The GPRA also made permanent

changes to the manual procurement procedures that were put in place in the previous

three years to make them more competitive and transparent. The reform has also created

the Government Procurement Policy Board (GPPB), charged with protecting the national

interest in all matters affecting public procurement and formulating rules and guidelines

on government procurement. Furthermore, the GPPB also oversees the implementation of

the whole procurement reform process, including recommending changes to the GPRA, if

necessary.

In 2003, government agencies and GOCCs were trained and introduced to G-EPS.

In 2004, G-EPS became operational, with additional development scheduled. Again in

2004, the focus shifted to LGUs, including the barangay level. Additional functions,

including online bidding and an electronic payment system, were also developed.

The G-EPS has led to clear efficiency gains, savings through competition and

reduced costs, and has reduced the scope for corruption. The GPPB established its

website in April 2005, providing immediately accessible information on the latest

developments and policies concerning government procurement. Commentators noted

that procurement had improved even before the adoption of G-EPS, owing to the

aggressive approach taken by individual secretaries of certain government agencies. They

agree that reformed government procurement procedures, which include non-government

organizations as observers, have made significant advances in avoiding waste and

corruption and in improving transparency. Procurement in the health and education

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sectors was highlighted as especially improved, but commentators were doubtful that

defense procurement had made any gains in transparency, or was less corrupt than before.

The Organization, Position Classification and Compensation Bureau of the DBM

issues circulars that specify standard employment regulations for government employees,

accessible to all interested parties. The Compensation and Position Classification Act of

1989 (R.A. 6758) regulates the remuneration of Philippine civil servants, as well as

GOCCs, rank and file employees of the central bank. In 2004, the Civil Service

Commission reviewed the salary standardization law to streamline position classifications

and introduce a more performance-based and market-based compensation system.

Fiscal reporting

The government submits regular, quarterly reports on the ongoing implementation

of the national budget to Congress. The GAA for each fiscal year requires each

government department and agency to submit a quarterly financial and narrative

accomplishment report to the House Committee on Appropriations and the Senate

Committee on Finance, with copies sent to the DBM, CoA, and the appropriate

committee chairperson of Congress. The financial reports must include cumulative

allotments, obligations incurred or liquidated, total disbursements, unspent balances, and

the results of expended appropriations. In addition, the DBM must submit a quarterly

report to the above two committees on any disbursements made from the special purpose

fund, and on supplementary expenditures. In addition, the government reports its fiscal

position regularly to the public, disseminating data on the website of the Investor

Relations Office and briefing the business community and the media.

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4. ACCOUNTABILITY AND ASSURANCES OF INTEGRIT

Data quality standards

In the past, revenue forecasts prepared by the DoF proved overly optimistic and

marred the credibility of the government’s fiscal deficit targets. However, this year

revenue collection is broadly on target.

Government departments, such as the National Statistical Coordination Board

(NSCB), NEDA and the DBM, have improved the quality and amount of data available,

both for historical series and forecasts.

An inter-agency committee on Public Finance Statistics chaired by the DoF was

organized to implement the IMF’s recommendations on specific statistics issues and to

coordinate the implementation of the migration plan to the GFSM 2001 methodology. A

dedicated unit in the DoF has been created to compile government finance statistics in

accordance with the GFSM 2001 framework.95 An IMF mission took place in March-

April 2006 to assist the authorities in compiling and disseminating government finance

statistics in accordance with GFSM 2001. A technical working group composed of

representatives from the Commission on Audit and the Bureau of Local Government

Finance (BLGF) was created to harmonize data on the local government sector generated

by the CoA and the BLGF.

Data on central government operations and debt are compiled in accordance with

the rules of the CoA contained in the 1992 Government Accounting and Auditing

Manual. The NGAS establishes additional provisions for accounting methods and

standards for LGUs and national government agencies.

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 The Philippines subscribes to the SDDS, a signal of its commitment to improving

the quality of fiscal data. Previous weaknesses and time delays in data reporting are being

addressed. In particular, the government has made progress in correcting the analytical

deficiencies of national accounts data.

Independent scrutiny of fiscal information

Independent audit

Under the Administrative Code, the CoA is given the authority to examine, audit

and settle all accounts relating to the receipt of revenues and expenditure of funds by the

government, its subdivisions and agencies, including government corporations. Where

the internal control system of the audited agencies is deemed inadequate, the CoA may

adopt measures -- such as temporary and pre-audits -- that it judges necessary to remedy

these deficiencies. Article IX of the constitution specifies that the CoA, and the other

constitutional commissions, shall be independent and enjoy fiscal autonomy. Under

Article IX-D of the constitution, the president appoints the chairperson and

commissioners of the CoA, each for a term of seven years. The length of their terms, in

contrast to the six-year term to which a president is limited by the constitution, and the

asynchronous nature of their terms give the chairperson and commissioners a measure of

independence from the executive.

Article IX-D mandates that the CoA has exclusive authority to define the scope

and techniques of its audit and examination. The CoA is required by Article IX-D of the

constitution to submit an annual report to the president and Congress on the financial

condition and operation of the government, its subdivisions and agencies, and

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instrumentalities including the GOCCs. The annual report highlights the variance

between original targets and actual outturns for different fiscal aggregates. Within two

months of receiving this document, government departments, agencies and public

corporations are required to submit a status report to the CoA on the actions they have

taken to comply with the audit findings and recommendations. Additional copies of the

status report are sent to the DBM, the House Committee on Appropriations, and the

Senate Committee on Finance.

The CoA is changing to an audit team approach, using a team of roving auditors

to carry out audits, to replace resident auditors. Teams are being reshuffled to improve

objectivity and eliminate the corruption that characterized the resident auditing regime.

The CoA has also adopted a Participatory Audit Programme that works with civil society

organizations to improve the transparency of the government auditing process.

National Statistics Agency

The NSCB is the highest policy-making and coordinating body of the

decentralized Philippine statistical system. It is the country’s independent economic

development and planning agency.

The NSCB does not collect data directly. The government agency responsible for

collecting, compiling and disseminating general-purpose statistics is the National

Statistics Office, which is required to assist the NSCB in formulating a comprehensive

statistical programme for the government.

The 1987 executive order creating the NSCB does not explicitly guarantee the

organization’s institutional independence, but it stipulates that NSCB decisions on

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statistical matters are final. The executive order does, however, embrace the need for a

statistical system characterized by independence, objectivity and integrity. A 1996

executive order grants the NSCB technical independence and control over the NSCB’s

system of designated statistics. The NCSB maintains the most sophisticated website of all

Philippine government agencies. Commentators said that the NCSB operates

independently of the executive arm of government and, in 2004, praised the timeliness

and accuracy of its macroeconomic statistics.

However, in 2006, commentators expressed strong reservations about economic

statistics, repeating concerns rose in 2005. A change in the definition of unemployment,

leading to a new series of unemployment statistics, was a new concern; commentators

argued that the only way to ensure transparency was to continue both series of

unemployment statistics. Commentators especially questioned the validity, reliability,

accuracy and completeness of statistics on revenue collection, inflation, investment and

GDP. They acknowledged that there were constraints on resources in the NSO, but

believed that other issues were involved and noted that they had been unsuccessful when

seeking explanations for cases of revisions.

ECONOMIC HIGHLIGHTS

In 2007, the Philippine economy withstood the threat of soaring oil prices, a

lackluster US economy, and a host of domestic challenges. In fact, the country’s gross

national product (GNP) accelerated by 7.8 percent while gross domestic product (GDP)

expanded by 7.3 percent, the highest growth in 31 years.

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 A more aggressive infrastructure program and increased spending brought about

by a stronger budget in 2007 boosted economic activities during the year. After having

been constrained by the re-enacted budget in 2006, government consumption

expenditures and fixed capital investment gained 10.0 percent and 9.5 percent,

respectively, in 2007.

Filipinos working overseas continued to bring in their substantial contribution to

national growth. Their remittances for 2007 stood at US$14.4 billion. Meanwhile, a

strong peso adversely affected the competitiveness of the country’s export sector which

decelerated to 6.1 percent growth from 14.8 percent in 2006. Export receipts for 2007

stood at US$50.0 billion.

On the production side, growth remained broad-based as the fast expanding

services sector posted 8.1 percent growth, followed by the industry sector at 7.4 percent,

while agriculture, fishery and forestry gained 4.8 percent.

Notwithstanding soaring oil prices, the government contained inflation at a

manageable level of 2.8 percent, down from 6.2 percent in 2006. Low inflation and

prudent financing policy of the government also helped keep interest rates at low levels.

The benchmark 91-day Treasury Bill rate averaged 3.4 percent for 2007, from 5.3 percent

in 2006.

The Philippine peso maintained its strength at an average of P46.15 to the US

dollar in 2007, an appreciation of about 10.1 percent from the 2006 average of P51.31.

Meanwhile, the country’s gross international reserves at yearend 2007 stood at

P33.7 billion, 19.3 percent higher than the 2006 level. This was equivalent to 6.1 months

of imports of goods and services. The mounting reserves were sustained even as the

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Bangko Sentral ng Pilipinas (BSP), the country’s central bank, occasionally intervened

by purchasing dollars in the foreign exchange market to moderate sharp appreciations of

the peso during the year.

Activities in the Philippine stock exchange remained robust in 2007 as reflected

by the 11.3 percent growth in capitalization which was equivalent to 189.8 percent of the

country’s GDP. The composite index trended up to 3,621.6, up by 21.4 percent from the

2006 level of 2,982.5. It was also in 2007 that total turnover breached the trillion peso-

marks and registered at P1.34 trillion, compared to a mere P572.6 billion turnover in

2006.

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 REFERENCE

• http://www.dof.gov.ph/
• http://www.photius.com/countries/philippines/economy/philippines_economy_fis
cal_policy.html
• http://lcweb2.loc.gov/frd/cs/philippines/ph_appen.html#table4
• http://en.wikipedia.org/wiki/Fiscal_policy
• http://www.investopedia.com/articles/04/051904.asp
• http://www.bized.co.uk/virtual/economy/policy/advisors/fiscal.htm
• http://www.economicshelp.org/macroeconomics/fiscal-
policy/fiscal_policy_criticism.html
• http://www.yonip.com/main/articles/fiscalcrisis.html
• http://www.bulatlat.com/news/4-33/4-33-marcosdebt.html
• The Cambridge Encyclopedia Fourth Edition Edited by David Crystal
• http://www.econlib.org/library/Enc/FiscalPolicy.html
• www.calpers.ca.gov/eip-
docs/investments/assets/equities/international/permissible-2007/philippines-fiscal-
report-2006.pdf

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