Undermanned

A number of investor advisories I have seen, although generally upbeat about the Philippine economy, warn of serious underinvestment by the public sector. The concern about underinvestment is heightened by the failure of our Congress, for several years now, to pass a national budget.

Excessive politicking, it seems, shortens our planning horizon even more. It increases concern over government’s ability to pass a budget properly tailored to our development needs.

Last month, we listened to the President as she outlined an ambitious plan for closing our infrastructure gap. That plan calls for large scale mobilization of public funds as well as the creative deployment of those funds so that they draw in private investments on a larger scale.

The Finance Secretary, however, cautions that even if government might be able to raise the financing required to take that infra program off the ground, the bureaucracy might be quite ready to do it. Executing a comprehensive plan requires a high quality managerial capacity – the sort we seem to have lost ever since we began starving our public agencies and forcing a crippling exodus of talent.

Several things conspire to prevent our public agencies from attracting the talent required to govern in a modern way. The pay is unattractive except for the truly unemployable and those willing to devote part of their productive lives to the public service. But even if talented managers might be able to take to income cuts government service requires, they are not quite ready to deal with the politicians who constantly interfere with the work of the professional bureaucracy on the excuse of exercising oversight functions. And then there is the undying propensity to appoint people – regardless of their professional competence – to the public agencies to repay political debts.

The same problems that inhibit the public agencies from executing a national plan well also inhibit the capacity of those agencies tasked with raising the revenues to fund the ambitious spending program.

Again the malaise of excessive politicking makes things more challenging on the side of revenue generation.

The same politicians who inflicted their protégés on our vital revenue agencies have also made it their business to complain regularly whenever those agencies miss their monthly targets.

We will likely hear them again soon because it is expected that the BIR’s July collections fell about 4 percent off the target. Several things conspire to cause that – not the least being that a collections increase of 31 percent year-on-year is unrealistic to begin with.

There are other reasons as well. About two billion in expected revenues from the sale of treasury bills did not materialize – simply because the national treasury did not sell bills during the period. That is beyond the revenue agency’s control.

The effect of government’s populist concession of scrapping withheld taxes on minimum wage earners needs to be accounted for here. As much the fact that major corporate taxpayers clear their liabilities on a quarterly basis, making July a historically weak collection month. Because of new revalidation requirements, there has been a dramatic increase last month in the use of tax credit certificates by major corporate taxpayers.

It might be difficult to imagine, given our deficit record, that there could be such a thing as fiscal over-performance. Our actual budget deficits are way below the targets set, thereby reducing government’s need to issue treasury bills to the public. One investment analyst estimates that should present spending trends continue, we could tally up only two-thirds of the targeted public sector deficit.

The fiscal over-performance, if we can consider that good given concerns over public under-spending, is due to a large extent on Congress’ failure to pass a new budget for this year. That budget is heftier than the re-enacted spending bill we have to contend with. It contains large infra outlays and improvement in public sector pay.

In the new regime of fiscal discipline, there is immense pressure on the revenue agencies to sustain much heftier collection levels. But the revenue agencies’ institutional capacities have not been upgraded. The law covering the re-engineering of the BIR remains trapped in the shelves of Congress – because politicians are afraid such a modernization measure will harm their protégés in the revenue agency.

When the magnitude of collections were much lower, the BIR as presently organized, might be adequate to do its job. Now, expected to produce a much higher level of collections, that old organization will be direly in need of re-engineering and new talent.

By analogy, it is as if we want the old family sedan to run in an F1 race.

Or, to use another analogy: using a teacup might have been sufficient if we wanted to transfer water from one bucket to another. Using that same teacup to transfer water from one swimming pool to the next might be unduly optimistic.

I have it on good sources that the level of public spending is set by government according to its best lights. The tolerable deficit level is determined by multilateral institutions and credit rating agencies according to their best lights. Whatever gap there is must be filled up by the revenue agencies – no matter what their existing institutional capacities might be.

Therefore, the revenue targets are set not by the revenue agencies in accordance with what their institutional capacities could reasonably be expected to deliver. The great pressure put on the revenue agencies is now stretching the limits of their institutional capacities and causing much strain.

This is not the best example of good management. There is, in the last analysis, very little that an inferior institutional instrument can do in meeting demands of a magnitude it was not designed for in the first place.

If we want more robust and sustained revenue levels, we must be ready to invest in re-engineering our revenue agencies. That is a task that is about as urgent as the level of collections we expect delivered.

That is true for any private enterprise. That is no less true for public agencies.