Malacañang has started implementing a six-year fiscal rehabilitation and recovery strategy that includes a crucial P166-billion "pain package" consisting of new taxes, power rate hikes and spending cuts that the country is expected to endure for at least three years to wipe out the deficit and balance the budget.
The plan is contained in Albay Rep. Joey Salceda’s 30-page "Roadmap to Fiscal Rehabilitation" which he submitted to President Arroyo last week.
Some of the components of the strategy have already been implemented by Malacañang as early as last month.
Salceda, chairman of the House committee on economic affairs and senior vice chairman of the committee on appropriations, said the fiscal plan is a choice between "pain now or more pain later."
A member of Mrs. Arroyo’s economic monitoring group, Salceda said the total package is estimated at P215 billion consisting of P166-billion "pain package" from new taxes, tariff hikes and spending cuts; P30 billion from tax efficiency measures; and P30 billion interest savings from the National Power Corp. (Napocor).
"Businesses and individuals can choose to pay higher taxes now or pay higher interest rates together with the consequent volatile disruptions in demand and supply later," Salceda said. "While pork cuts and IRA (Internal Revenue Allotment) freeze would hurt our poorer districts by starving them of vital infrastructure, a fiscal crisis will hurt them more."
"The whole country, whether districts or provinces, towns or cities, producers or consumers, workers or employers, will be worse off if the fiscal crisis breaks out into a financial crisis," he said.
Palace sources said the President has given her go-signal to the plan and warned that her declaration of a fiscal crisis and the painful measures to address this should not be used as an excuse for mediocre performance of government agencies.
The President also gave caution for every government official and worker to be able to justify every peso of the budget and make it work for the public’s benefit.
Salceda’s P166-billion pain package consists of:
• P64 billion in new tax measures (P14 billion from sin taxes in
2005 and P50 billion from value-added taxes and petroleum tax in 2006).
• Spending cuts through a two-year freeze on IRA of local government units (LGUs) that would yield P10 billion in 2005 and P16 billion in 2006.
• Napocor tariff adjustments of P1 per kilowatt-hour in 2005, P.045 in 2006, and P.040 in 2007.
• Reductions in pork barrel allocations of Congress and the executive branch for the next three years that would result in savings of P10 billion annually.
• Mandatory contribution of at least P5 billion from national government agencies and government-owned and controlled corporations (GOCCs).
• Other "aggregate cuts" in discretionary funds of national government agencies, special privileges of GOCCs, and intelligence and social funds of the Office of the President.
Other components of the strategy include the Arroyo administration securing credit upgrades within 18 months, producing concrete results of the government’s six-point anti-poverty program in three years, making the budget work to create more jobs, and the privatization of Napocor.
Salceda said the P166-billion pain package should deliver the "credibility shock" needed to secure credit upgrades for the country within the next 12 months that would easily convince foreign creditors to refinance maturing obligations and gradually reduce interest rates over the six-year period.
He said the plan was carefully crafted in such a way that "in asking the people for sacrifice, pain must be carefully imposed on those who can afford it and that the gain will be skillfully targeted (to) those who need it more."
That is why, he said, the government is making deep financial cuts on itself to play "a catalytic role in the total solution by rebuilding public confidence and expanding people’s forbearance for pain."
He said while the government cuts are in itself not enough to fill the deficit gap, it will greatly help rebuild confidence from the business community and the people.
"This is the basis for burden-sharing," Salceda said, noting the current Philippine fiscal situation is already untenable with the country in "advanced stage of fiscal metastasis as shown by the rapid spiral in debt service and debt stock."
He said the success of the fiscal strategy is underpinned by the public’s forbearance for the pain of increased taxes and reduced government services, business confidence in the political leadership, and good government credibility.
A safety net program would also be set in place to anticipate and countervail the unhealthy and unintended side effects of the plan on the poor, he said.
Investments will be prioritized to poorer LGUs and other districts affected by the cuts during the recovery period in 2007, he said.
Salceda said the initial fiscal roadmap targets a balanced budget by 2008 and a modest surplus by 2009, and to do this, P133 billion of the P166 billion painful measures must be in place in the first two years.
He, however, warned that the plan may be derailed if the government and public’s capacity to endure the painful measures and the administration’s political will to pursue reforms would weaken once the incremental improvements are beginning to be felt.
He said abandoning the plan would again bring the country to another fiscal crisis in just a few years.
Another risk in the strategy, Salceda said, is that the current austerity program of government "could provide the stubborn bureaucracy with the pretext for inefficiency and worse, failure of meeting even minimum targets."
He said the debt and deficit are a manifestation of the country’s bad habits and are the collected consequence of flawed policies, bad judgment calls and poor political choices.
"The public debt stock is no more than a repository of our many dysfunctional values — lack of work ethic, crab mentality, lack of sense of national interest, lack of rule of law, lack of political will, bahala na mentality and mañana habit (procastrination)," Salceda said.
"We must slay the two-headed monster of debt and deficit — this presents us one single and simple cause that we can rally around and that could evoke our long dormant positive aspects and harness them for nation building," he said.