Finance it

Nearly halfway through this year, the national budget is still being deliberated upon at the Senate. No one is really sure we will have a budget.

The past few years, the Philippine Congress failed to approve a new budget. As a consequence, the old budget was simply reenacted. The economy suffers because of this.

All the analysis I have read the past few weeks analyzing why the Philippines falls behind its neighboring countries point to government under-spending. That pattern of under-spending has caused us to be deficient in economic investments, particularly in infrastructure. The sad state of our infrastructure leads to poor domestic trade and discourages private investments. That, in turn, leads to stagnant productivity and widespread poverty.

There are many reasons why government has been under-spending on infrastructure.

For the last four decades, the Philippines has had one of the lowest tax efforts in the region. We are one of the least taxed economies in the world. This has produced a chronic budget deficit and a large appetite for borrowing that has begun to be corrected only recently.

Large public borrowing, in turn, crowds out private users of available capital. Most banks would rather lend to government by way of purchasing treasury bills rather than lend out to private enterprises that could help spur the economy and create jobs.

On top of that, we spend nearly 80 percent of the national budget on salaries for a bloated bureaucracy. Add maintenance and operating expenses to that and we are left with a very small percentage of the budget for capital expenditure.

If it is not bad enough that the public sector payroll eats up the bulk of the national expenditure outlay, many antiquated bureaucratic practices inflict adversely on private sector activity.

For instance, I know of one case where an enterprising Filipino businessman wanted to import raw fish from China, fillet and flavor them then sell them back. That would create value-added where there was none and thousands of jobs at home. The bureaucratic gatekeepers did not allow him to do that, citing existing rules meant to protect the market from imports.

An opportunity for creating several thousand jobs was lost there and then.

The small percentage of the budget left for investments in infrastructure is diminished further by inefficiency and corruption. Contractors normally overprice public works projects to take into account the cost of money due to delayed payment as well as to allow some margin for graft.

Every year, when the national budget is discussed, politicians make a great show of forcing government to be more prudent in its expenditure. They threaten to cut the entire allocation of agencies. Once a senator managed to reduce the allocation of the Economic Intelligence and Investigation Bureau to a peso.

Today, riding the media spin surrounding the arrest of five pro-Estrada organizers, we hear insane senatorial remarks about withholding the budget for the AFP. That sounds like a formula for finally bringing the army into open rebellion.

The motif for political grandstanding during budget deliberation time has always been: cutting the budget to the barest.

That motif is good for scoring political points. No one wins a landslide on the subsequent election after ranting and raging about how low we are taxed and about the need to tax us more. This will be a sure formula for political oblivion.

It’s always more politically profitable to rant and rage about how inefficiency wastes money, how corrupt officials siphon it off and, of course, how certain agencies (especially those dealing with enforcement or regulation) could lose their budgets if they do not do what the legislators please (often the promotion of some political protégé or the diversion of projects to a lawmaker’s constituency).

While the reason for the rant and rage of political grandstanders is not without basis, the entire motif is populist. It is therefore deleterious to the sustainable growth of the economy.

When the populists cut budgetary items, they do not focus on excess subsidies such as those accorded rice or irrigation or social welfare or state universities that do not have real faculties. When they cut, they normally target new projects that have not yet evolved firm constituencies.

No politician rants about the billions we burn at the NFA. None have demanded a substandard provincial college closed down. None have proposed we dispense with the pork barrel or divert the P6 billion budget the Senate gets for doing nothing.

The healthier alternative might be to build consensus on the infrastructure priorities our economy needs and decide to raise the public revenues to get them done. But large scale infrastructure projects normally have long gestation – too long for our short electoral cycles. And so our politicians would rather spread good public money building bus stops and basketball courts where their names can be prominently displayed. None adds to the improved efficiency of our national economy.

The past few days, given the deliberations on an unprecedented trillion-peso budget proposed by the administration, it is noticeable that some of our politicians have taken to browbeating our revenue agencies for not raising enough money. There is some validity to that, to be sure.

But that is not the whole picture.

I have it from good sources that some of the worst performers at the revenue generating agencies are precisely the people assigned to critical posts because of political pressure from (you guessed it!) the same politicians making the most noise about revenue shortfalls. Perhaps the Senate or the House could call an investigation, not on the over-all performance of the revenue agencies, but the specific performance of individual officials in these agencies well-known to have been pushed beyond their merits by their patrons.

From there, we could move on to examine existing proposals that will redesign our revenue agencies to better insulate them from politicization. That is a key concern, considering that chronic revenue under-performance is a key factor explaining our retarded development.