Issuu on Google+


Breaking

Away From

Reforming

The Fiscal

The Fiscal

System

Bind


Breaking Away From The Fmcal Brad Reforming

The Fmcal

System

Rosario G Manasan

pOs Philippine

Institute

for Development

Studies


Copyright Phfl,ppme

eD 1994 by the institute for Development

Printed in the Philippines and conclusions m this those of the Institute

Studies

All rights reserved The findings book are those of the author and

interpretations not necessarlly

This is Part II of a bigger study entitled 'PIDS Remew and Outlook of the Philippine Economy for 1993 1994 which was presented m a symposium jomtly sponsored by the PIDS with the Nat,onal Economic and Development Authority (NEDA) and the Congressional House Committee on Socloeco nomm Affairs on November 25 1993 at the Westm Philippine Plaza Please

address

all mqumes

to

Philippine institute for Development Studies 4th Floor NEDA sa Makatl Bldg 106 Amorsolo St Legaspl Village Makatl 1229 Metro Manila Philippines Fax No (632) 816 1091 Tel No (632) 893 5705 892 4059 ISBN RP

971 9

94

564 500

013

3


Contents

List of Tables

v11

List of Figures List of _xes Foreword

v111 vln IX

1

INTRODUCTION

1

2

rMPROVING GOVERNMENT REVENUE PERFORMANCE

5

Reformlnl

the Tax System

6

and eomposzhon

7

Trends

Tax structure

12

Taxes on income and profits Import dutles and taxes Excme taxes

12 14 18

Sales

21

tax and

hcenses

Tax euaszon

23

Evamon

of the mdlvldual income tax

23

Evamon

of the VAT

24

Sources

of evaslon

24

Reformzng tax admm_strahon Too much centrahzatlon Weak

systems

and

27 27

procedures

28

Low level of computenzatlon

28

Low compensatlon oftax collection _s_nt_l

31

Proposed

tax enhancement

Reformin I Local Government Exploring

the Potential

meat_U_i_ Taxation

of User Charges

User charges

zn government

User charges

zn LGUs

hosplta_s

.

31 34 4S 50 53


3

IMPROVING THE ALLOCATION OF PUBLIC SPENDING

SS

Trends and Patterns

SS

Aggregate

natlonal

Economlc

categories

government

expendztures

of natlonal

55

government

expendztures

56

Current Capital

expendltures outlays

Functlonal categones expendztures

56 71

of natlonal

government 72

General pubhc admmistratlon Social service sectors

72 72

Economic

75

sectors

Publ,c Sector Investments

and Growth

Composztzon of pubhc sector By level of government

77

znvestment

77 77

By sector

79

Trade off between Granger

current

causality

and capztal expendztures

between

public expenditures Results from macroeconometnc Impact of pubhc investment Subsidies

sector

investment

BOI incentz ues

4

product

and 82 85

simulation on pnuate

sector

88 90

Food Authority

Petroleum

growth

85

and Tax Expendltures

Natzonal

economic

82

pnclng

107 109

CONCLUSION

111

BIBLIOGRAPHY

1 13

THE AUTHOR

119


LIST

OF TABLES

1

RaUo of Na_onal

Government

2

Tax and Revenue

Effort m Selected Asmn Countries

3

RaUo to Tax Revenues

4

Buoyancy

5

Indlvldual Tax Rate and Corporate Income Tax Rate m Selected Aman Countries 1990

6

Coefficlent

Value of Imports

Tax Revenues

8 9

9

1975 1991

11 13

and Dutaes CoUected

Average EPR and Standard Exportables

8 10

of Major Tax Groups

and Average Effective Rates 7

to GNP 1975 1992

1980 1990

16

DewaUon by Major Groups

and Importables

17

Compara_ve Yield of Sales Tax and VAT 1987 1992 Potential Revenue from the Indlvldual Tax

22

and the Level of Tax Evamon

23

10 11

Potential Potential

25

12

of Indlwdual Distribution

13 14 15

and Assessment Personnel by Revenue Reglon General Government Expenditures General Government Revenues Revenue Structure of Local Governments 1980 1991

16

Assessors

Revenue from the VAT and the Level of Tax Evamon and Actual Number Income Taxpayers of Taxable Returns

Market Valuation

1985 1990 Fried m 1990

26 29 35 36 38

and Advertised Market Prices

for Selected Prlces of Property

1992

42

17 18

Buoyancy of Revenues of Local Governments CoUection Rate for Baslc Real Property Tax

1980 1990

19

Region 3 Cost Recovery Levels Income and Expenditures

20

Sapang

43 44 1987 1989

51

Palay D1st_nct Hospltal Level of Cost Recovery

from the Revolving Drugs Fund Comparison

1989 1990

Profitabfllty

Enterprises and Comparable Private Sector Run Facdlties 1988 National Government Expenditures by Economlc Classification

54

22 23

on an ObhgatJon Basls as a Percentage of GNP NaUonal Government Deficlts 1975 1992

60 62

24

National

Government

Expenditures

on an Obhgataon Basis 25

Pubhc Sector Investment as a Percentage

Between

52

21

of GNP

City Government

Operated

1975 1992

Pubhc

by Sectoral Clasmficatlon

as a Percentage

of GNP

1975 1992

73

by Level of Government 79


26 27

Pubhc Investment by Sector as a Percentage Relatlonahlp Between Economic Growth G and Government

28 29 30

Expenchtures

31

80

E

82

Reallocatlon of Expendlture from Current Revenue Foregone by Type of Incentives Factor Bias of BOI IncentJves of BOI Reglstered

of GNP

to Capital Outlays

84 90

Capital Labor RaUo

F_-rns 1986 1992

Scale Bias of BOI IncenUves per Firm of BOI Registered

93

Average Number of Workers Fn-ms 1986

1992

94

32

Economywlde

Average Number of Workers per Ylrrn 1986 1989

33

Location Bias of BOI Industries

34

m Total Number of Projects Employment and Project Cost Economyw_de D1st_nbution of Number of Estabhshments

1986 1991

Employment and Book Value of FLxed Assets of Large Estabhshments Across Reglons 1986 1989 35

Market Bias of BOI Incentives

95

Share of NCR and Reglons III and IV 96

99

Share of Export Actlwties

m Total Number of ProJects Project Cost and Employment ofBOI Reglstered Firms

1986 1992

102

36

Internal Rate of Return of a Hypothetical Firm Under Selected Incentlve Schemes m ASEAN Countries 1988

106

37

NFALosses

108

38

Cost of Dehvermg NFA Submdy

1986 to 1991

LIST

1991

109

OF FIGURES

i

National Government

Tax and Non Tax revenues

2

NaUonal Government

Expenditures

3

Per Capita National Government m Real Terms 1975 1992

4

Pubhc Sector Investment as a Percentage

1992 of GNP 1975 1992

5 57

Expenchtures 58

by Level of Government

of GNP

78 LIST

1 2 3

as a Percentage

OF BOXES

Increased Pubhc Investments Financed Use of HCV for Import Valuatlon Pricing Access to Forest Lands

by Domestlc Borrowing

2 19 47

4

Mopping Up of Excess laqulchty

63

5

Dynamlcs

67

of Domestlc

Debt


Foreword

In November 1993 the Phfllppme Institute Studms (PIDS) launched the PIDS Review_and

for Development Outlook of the

Philippine Economy (PROPE) as part of Its continuing analysm of the mtua_on and outlook of the Phlhppme economy For its maugu ral presentahon the PIDS focused on the country s fiscal cnsls as the special theme of the report ldenUfymg It to be the period s most crmeal concern and the one posing the biggest challenge to the country s economic performance and prospects Thin present volume deals with the specml topic of the inaugural PROPE report on the Philippines fiscal poslhon SpecLfically it analyzes the roots and effects of the current fiscal bmd provides estimates on the magmtude of leakages from the revenue system and offers opportumtles and measures that can help release the fiscal brad that ties the hands of government fiscal planners and decls_onmakers By pnntmg this part or special theme of the PROPE report as a stand alone pubhcatlon thereby expanding its circular_ton to m clude sectors outside the formal pohcymakmg circle the PIDS hopes to impress to a larger audience the enormity and urgency of the problem -- that if left unattended and understated it may stymie all other efforts to improve and sustmn the economy Hopefully by explaining the msue m more detanl more people wall come to understand and advocate measures that will help resolve the sltu atlon It m with this hope that the PIDS is pleased to present volume

this

PONCIANO S INTAL JR Presldent September

1994


1 Introductlon

The

past

pubhc

two years

sector

economlc

hmlted

sustain

More

to pump

prlme

the

projects

It m possible

mmulatlon

P5 bllhon

and

where

turns

negatlve Clearly

of _reconcflmg Fiscal balance

the government

overemphamzed

Thus

and

deficits

pre

infrastructure step

toward

the economy A counterfac

were increased

by

revealed

that

e m the first two years

that

the

it

(Box 1) fiscal

challenge

in the medlum

cot tnbuted

the Importance

to sustmnable

rnents

with growth

crises

revlval

m the Immediate

to respc nd to the

undemably

s

restraints

_orrowlng

poslt_

of

as a first

to the fifth vear has

of_payment/economlc glves rise

lnveo

domestlc

lower fiscal deficits

deal wlth m the past which

sector

program government

de D1os (1992) proposed

the ec nomy

remmns

from the thlrd

mlsmanagement

power

be relaxed

through

The strln

economic

fiscal

and monetary restraints run large fis al deficlts

public

whale the effect on output

and Thus

to ]umpstart

financed

stimulate

of the

to support

poverty

restricted

financing

targets

term by slackening fiscal cannot afford to contmually tual

and

monetary

from

posltlon

the st-_bdmatlon

(IMF)

for long term growth

that monetary and fiscal rewwng the economy While

under

the economy

government

needed

fiscal

and allevmte

Fund

excessive

present

open to the government

growth

Monetary

_mportanfly

vented

the

and fiscal celhngs

International

ability

that

the optlons

recovery

gent monetary the

showed

to the country

term

series has

of

had

to

of a prudent

fiscal pohey

m the long run

cannot

be


:2

ROSARIOG MANASAN

BOX 1 Increased Publ,c Investments Financed by Domestm Borrowing The effects of _ncreastng capital outlays by P5 bilhon in current prices

which is financed by increased domestic borrowing

was

stmulated ustng an extension and update of the PIDS NEDA Macroe conometnc Model The shock or change in the baseline scenario is apphed =n1986 (period 1) and the effects are monitored up to the year 1990 (penod 5) A five year s_mulatlon period _srequtred m order to account for dynamic adjustments and medium term _mphcations of the pohcy change Specifically

domestic borrowing entails interest

and amorttzat_on payments which affect the economy after the loan proceeds are spent From the results (Table A) tt is evident that private expenditures are crowded out by domestm debt financing primarily through the r=se in the interest rate Comsumpt_on spending manages to post a gain _nthe first penod but dechnes thereafter Output expands _nthe first year Because of the short term nature of domesttc debt the bonds are assumed to be redeemable atthe end of the penod Thus upward pressure =smaintained on the interest rate up to the second period and this results in further cuts m prtvate investment

The need

to meet _nterest obhgatlons causes a reduction in producbve spend Lng(as mdmated by a drop In government comsumphon expenditure CG) and the double cr-,wdwng out effect leads to a drop m output beginning _nthe th rd pertod wNch lasts untd the end of the simulation pertod


BREAKING

AWAY FROM

THE FISCAL BIiND

3

Table A Scenario 3 Deflctt Financing by Domest=cBorrowmg Variable

Period 1

2

3

4

5

Percentagedewatsonfrom thebaseline GDP GNP CPI TBILL

0437 0 449 0 616 7 675

0 085 0 081 0 319 2 459

0 063 0 066 0 102 0 864

0 111 0 113 0 016 0 475

0 126 0 126 0 020 0 175

CP CG CONSPR IDER

0 012 0 596 0 966 0 912

0 045 0 409 1 132 0 615

0 091 0 063 1 064 0 492

0 105 0 023 0 855 0 394

0 098 0 023 0 789 0 361

GOCF XD MD

3498 0 144 0 483

0520 0 046 0 051

0219 0 067 0 196

0354 0 100 0 191

0368 0 103 0 162

31 834

17 239

2 045

1 235

0 688

9 006 9 946

8 759 9 690

DEFNG

Devfatlonfrom baselineOnmllhonUS$) TRABAL BOP

17 839 19331

5 543 5 813

10 645 11 581

Variable definitions

Source

GDP GNP CPI

Gross Domeshc Product Gross National Product Consumer Price Index

TBILL CP CG CONSPR IDER GDCF XD MD DEFNG TRABAL BOP

Treasury Bdl Rate Personal Consumphon Expenditure Government Consumption Expendtture Total Private Construchon Investment _n Durable Equipment Gross Domestic Capital FormatLon Dollar Exports (million) Dollar Imports (million) Nahonal Government Deficit Trade Balance (mtlhon $) Balance of Payments (mJlhon $)

Josef T Yap and Ceha M Reyes Phd_ppmes

1993

F_scal Pohcy Alternahves

_nthe


4

ROSARIO G MANASAN Good

fiscal

buffeted ment

management

by competing

spending

mg need

items

had

government

expendlture

recent

Today

stock

and

country serwces

adjustment

All these

mclous are

ther

reduce

cycle

taken

government

some

items

spending

expenditure

cuts

extremely

prove budgetary

m the

mstltuted

Thus

limited

hlgh

with

the

stablhzatmn take

the sustained

place

pursult

to reduce

govern

may be trapped

fiscal

revenue

government

from the former

the fiscal adjustments

and

m

capital

deficlts

unless

performance

budget

and

fur allocate

more efficiently

and less spending

gains

comes

m expected

government

m

constrain

that w111inevltably

program

cuts

has to expand social to protect the most

imply that the government

of low growth

is a press program

severely

that

m

govern

of government

the government safety nets

burden

sector

of the severe

stablhzatlon

At the same tlme

to _mprove

More revenues the potentml

of the

fiscal

increasing

investments

maintenance

processes

adjustment

revenues

steps

are

the

Is to be sustained

of the structural m the

from

the

the brunt

of bamc infrastructure

groups

structural

If growth ment

as part

s growth potentlal Yet and provlde adequate

vulnerable and

and capltal

to absorb

inadequate

a shortage

since

On the one hand

on maintenance

These

years

is not easy

clalms

in recent

opportumtles Nonetheless

allocation

w111both be needed will far exceed years

because

were dominated

for incremental there

However

the latter

are ways

budget to further

by cuts im


2 Improving Revenue

Government

Government

revenues

Taxes

the government

remain

mg for 86

percent

of the

percent

of the gross

non

revenues

tax

from public program percent

sector

account

may

come natmnal

national

which

from

s pnnclpal

conmst

year

and

source

non

proceeds

of total (Fig

tax

ofmcome

user

sources account

revenues

(GNP) m 1992

of grants

and

for 14 percent

of GNP) m the same

tax

government

product

enterprises

Performance

or 15 2

In contrast

charges

income

from the pnvat_atmn

government

revenues

(2 5

1)

NonTax Revenues14/

Tax Revenues86 /

Figure 1 Nat=onalGovernment Tax and Non Tax Revenues 1992


6

ROSARIO G MANASAN

Whde capltal rece:pts from the sales of government accounted for a slgnlficant portion of non tax revenues the potentml

income

pnvatlzatlon

program

from thls source unwinds

m the next

run however add:tlonal revenues tlzatlon program were accelerated foreign

grants

essenhally

of the US base

few years

the government

in the 1990s

asslstance

facdltles

In examining

as the

In the

short

s control

wlth the general

(ODA) worldwlde

from the country

the scope

to dwindle

could be generated If the pnva Moreover the contrlbuhon of

fall outslde

will hkely follow a downtrend m officlal development

Is expected

corporations since 1987

and

dechne

and the removal

m 1992

for increasing

and

restructunng

pubhc

revenues th_s chapter therefore focuses on taxes and user charges alone The first two sectlons address Issues related to central and local government of user charges

taxes whde the thlrd section assesses as a source of government revenues Reformsng

the potential

The Tax System

In 1986 the government restructured the tax system extenslvely Whde prewous efforts to change tax pohcy were p_ecemeal m nature and

generally

measures of the

concerned

represented country

measures

s tax

that

with

revenue

the first attempt system

comprlse

In hne

the Tax

following

major

art:culated Package

revenues weight

components

the

make

up

the

holding

2) increase of spouses

tax rate on interest

tax

reform pohcy

were

Equity

Package 1) a shlft from the schedular to a more global taxing redly:dual income from compensation business exercise of professlon rate income taxation

1986

at a comprehenslve with

Reform

dlctated by the need for government objectlves also recelved conslderable The

generation

the

not

solely

and efficiency Tax

Reform

approach m trade and

m personal exemptions 3) sepa 4} an increase m the final with

income

(17 5 percent)

and

royalties

(15

percent) to a umform rate of 20 percent 5) the phase ou_ of the final withholding tax prevlously lewed on dlvldends 6) the unlficatlon of the earlier

dual tax rate

to 35 percent place

of the

(of 25 and 35 percent)

7) the mtroductlon sales/turnover

tax

on corporate

of the value and

a host

added

of other

income

tax (VAT} m taxes

8) the


BREAKINGAWAYFROMTHE FISCAL BIND convermon rates

ofumt

9) the abolition

general rewslon and 11) further In the changes vlew

rates

used

of export

taxes

for exclse taxes except

those

in the valuation of real property reduction in tariff rates 1

last

six years

primarily

of a series

conslstent

formerly

7

government

to respond of fiscal

with the

had

to the need

of the

reform

i0) the

for tax purposes

to raise

programs

1986

on logs

to introduce

adjustment

spirit

to ad valorem

more

tax

more revenues

in

But not package

all were

Some

the Import levy Imposed m 1991 were put in place because were admimstratxvely and pohtically convement But they generally

seen

on long term The

as hlghly

dlstortIonary

subsectlons

sigmficant

gains

be done

They

hlghhght

also

for increasing even as certain revenue

that

while

a perverse

effect

show

In the last six years the fact that

tax

moblhzatlon

still more

the

biggest

remain

to

opportunity

tax revenues at present lies in tax administration structural changes have been identified Many of the

changes Impact

on the basts

having

growth

foUowmg

achleved

proposed

and

like they were

in tax

structure

Thzs makes

were

st doubly

of adminlstratlve

shown

important

to bear

negative

to increase

revenue

mnouat_ons

Trends and composstson The 1986 Tax Reform

Package

together

wlth the other

tax measures

put in place in the ensuing years resulted m a slgnificant improve ment in the tax effort 2 Thus the ratlo of total tax revenues to GNP chmbed

from

an

average

of 11 3 percent

in

1975

1985

to 15 2

percent in 1992 (Table 1) This development allowed the Phihppmes to somewhat catch up with the tax effort of other Aslan countries Despite behind Thailand

thls

improvement

the performance

however of Indonesla

the

country

Malaysia

contmues South

Korea

to lag and

(Table 2) a

1 This last item xs not usually wewed as part of the Tax Reform Package but as the mare element m the Tariff Reform Program 2 Tax effort xs defined as the ratao of tax revenues to GNP 3 Singapore s tax to GNP ratao is low because a conslderable portaon of thelr revenues comes from government capltal investments i e non tax revenue


Table 1 Ratio of Nabonal Government Tax Revenues to GNP 1975 1992

=

(In percent) t97585 197582 198385 198692

Taxrevenues

11 26

11 87

1059

1356

1 Bureauof InternalRevenue

6 94

7 20

6 65

9 05

a Incomeand profits

2 85

2 90

2 79

Corporatetncometax

1 10

0 76

1988

t098

1987

1988

1989

1990

1991

1992

1276

tl 36

1340

14 10

1445

1523

7 85

8 71

8 01

8 97

9 66

9 21

9 77

4 29

3 21

3 24

3 45

4 11

4 61

4 84

5 12

1 48

1 85

1 44

1 82

1 63

1 67

1 77

1 98

2 24

Indlvtdualincometax

0 83

0 70

0 97

1 38

1 O0

1 08

1 O0

1 20

1 51

1 64

1 67

Others

0 17

0 02

0 35

1 06

0 78

0 33

0 82

1 24

1 34

1 22

1 21

b Excisetax

2 02

1 94

2 12

2 47

2 75

3 36

2 46

2 72

2 68

2 01

2 02

c Sa_estaxandhcenses

1 48

1 61

1 34

1 83

1 55

1 80

1 55

1 72

1 94

1 92

2 03

d Otherdomesttctaxes

0 59

0 75

0 40

0 46

0 34

0 30

0 55

0 42

0 43

0 44

0 61

3 82

4 07

353

4 34

2 93

386

3 15

4 20

4 27

5 10

532

a Importdutiesandtaxes

3 6I

3 86

3 32

4 33

2 83

386

3 15

420

4 27

5 10

532

b Exporttaxes

0 21

0 21

0 21

0 01

0 ll

0 002

0 0004

0 51

0 60

0 41

0 '_7

0 20

0 20

0 20

2 Bureauof Customs

3 OtheroEces

Source ofbasic data Bureau ofTreasury andOepartrnent ofFinance

_" 0 23

0 16

0 13

0 14

o >_


BREAKINGAWAYFROMTHE FISCAL BIND

9

Table 2 Tax and Revenue Effort m Selected Asian Countries (In percent of GNP) Country

Tax Effort

RevenueEffort

Indonesia(1990)

1981

20 93

Malaysia(1989)

1745

26 45

Phdlpplnes(1992)

15 23

1772

Singapore(1989)

13 79

23 18

Thailand(1990)

1900

20 28

SouthKorea(1990)

1654

1827

Source Asian Development Bank Hand in hand system a notable

with the improved revenue change in the composition

taxes

took place

in recent

direct

taxes

proportion comprise

to total

and

taxes

The marked

constitutes

rise

a positive

m the

share

development

of The

contributed by taxes on income and profits (which close to 95 percent of aggregate dlrect taxes) expanded

dramatically percent fraction

years

performance of the tax of national government

from an average

in 1992 Conversely of total taxes between

licenses

of 24 4 percent

in 1975

1982

to 33 6

excise taxes accounted for a dechnmg 1987 and 1992 Meanwhile sales tax

as well as import

duties

and

taxes

maintained

their

share through the years (Table 3) Despite the increasing share of direct taxes In 1986 1992 the bulk of natlonal government taxes continues to come from indirect taxes More significant different relative

tax

the

revenues percentage

are

changes

Taxes

of GNP

losses

in their and

by almost

importance

levels

profits

when

when

two percentage

of the

measured

measured points

as a

in 1986

in the three percent level in 1976 1985 Import internal revenue taxes also recovered In 1986 they

from import points

in the relative

on income

rose

1992 after hovering duties and Indlrect 1991

changes

groups

to GNP

proportlon

than

suffered duties

to reach

in 1981

became

1985

striking

5 3 percent

The

resurgence

as it increased of GNP

m

1992

of

by two even


Table 3 Rat,o to Tax Revenues (In percent) 197_85 1975-82 t983 85 198692

Taxrevenues

1986

1987

1988

1989

1990

199t

1992

10000

10000

10000

10000

10000

10000

10000

10000

10000

10000

10000

1 Bureauof IntematRevenue

61 60

60 64

62 81

66 74

7t 47

68 20

70 53

66 96

68 55

63 78

64 16

a Incomeand profits

25 27

24 40

26 35

3t 62

29 24

25 37

30 34

30 70

32 70

33 49

33 60

Corporate_ncometax Indlvldualincometax

9 77 7 33

641 5 87

13 94 9 15

1363 1014

t3 10 9 07

14 27 8 49

14 37 8 80

1243 8 98

1253 1068

1368 11 38

14 69 1095

Others

1 55

0 16

3 26

7 84

7 07

2 61

7 17

928

949

843

797

b Excisetax

I795

1632

1999

1824

2502

2635

21 69

2030

1903

1394

1324

c Salestax and licenses

13 18

1361

12 66

1348

'_412

14 12

1368

1281

13 73

1328

1332

5 20

6 32

3 81

3 41

3 10

2 36

4 82

3 16

3 08

3 07

4 O0

3389 32 02

3432 32 53

3337 31 38

31 99 31 91

2672 25 74

3025 30 23

2769 27 68

31 34 31 34

3029 30 29

3533 35 33

3492 34 92

1 87

1 79

1 98

0 07

0 97

0 02

0 0033

4 50

5 05

3 83

1 27

1 82

t 55

1 79

1 70

1 18

0 89

0 93

d Otherdomestictaxes 2 Bureauof Customs a Importdut=esandtaxes b Exporttaxes 3 Otheroffices

Souroe ofbasK: datB Bureau (YTreasury andDepadment ofF_nance

m_

I_

i


BREAKING AWAY FROMTHE FISCALBIND

11

surpassing its peak of 4 5 percent m 1983 (Table 1) One observes that the increased dependence on direct taxes m 1976 1992 did not result from the replacement of redirect taxes by direct taxes Rather it followed the marked rme m the overall direct tax effort without an accompanying reductlon m the overall mdzrect tax effort In short the yield of redirect taxes measured agmnst GNP did not dnmmsh while that of direct taxes increased slgmficantly Concomitant with thin progress the buoyancy of the tax system with respect to GNP rose from 088 m 1976 1985 to 134 m 1986 1991 {Table 4) 4 The improved tax buoyancy has been such that _ts 1986 1991 level did not only rise above the 1981 1985 level (0 92) but also surpassed the 1976 1980 level (1 09) Table4 Buoyancy Coefficientof MajorTaxGroups 19751991 19761985

19801985

19861991

Alltaxes

088

0 92

1 34

Income/profit Indlwdual Income tax

094

1 12 0 44

1 62 1 08 1 20 3 20 1 26

Corporate incometax Passive Sales/l_cense tax

095

1 18 5 05 0 69

SalesNAT + otherpercentage tax Exc_se tax Otherdomestic tax

102 0 77

0 83 138 187

149 0 58 141

Import dutiesandtaxes

076

0 49

1 66

Source

Author'sestJmates

4 Buoyancy refers to the ratao of the percentage change m tax revenue to the percentage change m aggregate income GNP w_th the revenue changes mclus_ve of the increments m revenues brought about by thscre_onary tax measures It measures the responsiveness of tax y_elds to changes m economm ac_wty


12

ROSARIOG MANASAN

Tax structure

Taxes gate

on income

tax on income

almost

equal

tax yield income 1)

andprofits and

increases

profits

Revenues

from

taxes

on income

rate dunng from taxes

rate of growth

(9.3 4 percent

the mdlwdual

income

revenues percent

m the

tax

the

corporate

profits

registered

(Table above

Compared with other direct Income exhibited the fastest

annually)

in 1986

tax (21 3 percent income

to the

in the last SL_years

and

the period on passive

from the corporate

due

on the average)

Income

income

of the aggre

improved

points

of the mdwldual

and the tax on passive

average growth taxes revenues

performance

dramatically

{0 6 percentage

to GNP ratio tax

The revenue

1992

Revenues

yearly) followed

from

In contrast

tax grew at a slower

pace

(19 3

yearly)

The tax rate

hikes

on interest

income

well as the high Interest

rate regime

cancelled

revenue

the

dlmdends

negative

The

schedular

pomtive

to a global

particularly

effect

revenue

system

the expanded

and

royalties

m 1986

m the last six years of ehminatmg

impact

of the

and the reforms

coverage

as

completely the

switch

tax from

on the

m tax administration

of the withholding

system

also

blunted the antmlpated revenue loss from the following 1) lowered mdlmdual income tax rate on business and professional income 2) Increased personal separate computation ductlon

of the tax holiday

bus Investment

(such

loan transactions

the corporate

and 3) the newly tax habihty However

as an investment

incentive

Code of 1987 and the existence

m the tax structure back

exemptions of spouses

as those

to reduce

income

tax take

where

their

promslon

separately

allowing

equalized

spouses

effectively

in the Omm

of certmn

firms

enter

tax habflity)

loopholes

into back

sermusly

to

eroded

5

On the whole the prowsmns of the 1986 also promoted efficleney and equity Manasan the

introduced the mtro

to compute the

marginal

Tax Reform Package (1990) showed that their tax

tax

rates

liabilities on the

pn

5 Firms have an mcentave to engage m tax arbitrage by takang out loans and mvestang the proceeds m high 3neldmgq_reasury bills In thas arrangement interest income is taxed at a rate of 20 percent while corporate income net of the interest expense is taxed at 35 percent


BREAKINGAWAY FROM THE FISCAL BIND mary

and

stracting

secondary

earner

from evasion

a more more

the

neutral

progressive

the corporate profitable income

tax

and

inherent

structure

she argued

Table

is roughly

rate

S shows

comparable

ab

resulted

earners

and

that

the blas against

in the dual

Finally

that

system

non wage

Moreover

tax rate removes

in place

countries

also demonstrated

to the global

of wage

tax structure

income

enterprises

prevlously

She

the switch

treatment

13

m m a

umfymg

large and/or

structure

that

that

the

with

those

was

Phlhpplne of other

In the region Table 5 Indw,dual Income Tax Rate and Corporate Income Tax Rate In Selected Asian Countries 1990 (In percent)

Countnes

MaximumMarginalRate Ind,wdualIncomeTax

CorporateIncome Tax Rate

Indonesia

35

35

Malaysia

40

40

Ph=hppmes

35

35

Singapore SouthKorea

33 50

33 30

Thailand

55

35

Source Manasan (1990) forcorporate income taxrates

In 1992 Republic Act 7497 was passed permitting mamed mdlvlduals to claim personal exemptions equal to P18 000 each prowded

both spouses

If compared

wlth

the cost

the P9 000 personal this

provlsmn

It reverted

of hying

exemptlon

While this amount mdlcators

allowed

led to a substantml

P2 bilhon) wlthout The S1mphfied 1992

were working

the ]ndlvidual

it is out of hne wlth

for single indwlduals

loss m revenue

any clear efficiency Net Income Taxation income

is not large

(equal

Thus to about

gains (SNITS) was also enacted tax to the schedular

system

m


14

ROSARIOG MANASAN

It reduced

the tax rate on business

trade

and professlonal

income

to 3 30 percent in contrast to the 0 35 percent rate for compensa tlon income However SNITS restricted allowable deductions against gross income to seven types employees raw materials and supphes

of direct business

cost salaries of rental teleeom

mumcatlon and utilities expenditures depreclatlon interest ments and contributions to government accredlted orgamzatlons

Expendltures

advertmements

are

on transportatmn

no longer

pay relief

representatmn

tax deductlble

and

as prevlously

prac

tlced However _t replaced the provmion for a 10 percent optmnal deductmn w_th one that allows 40 percent optlonal deductmn SNITS clearly sought to plug the leakages m the system arising from overstatmg tax deductmns particularly those related to trans portatmn

representatlon

tance of Imposing But at this point remains unclear

and

advertmmg

expenditures

The tmpor

celhngs on deductlons cannot be overemphamzed the dlrectlon of net revenue gain from the SNITS Some anecdotal ewdences mdlcate that the SNITS

may result in a lower tax take than antlclpated Some also pointed out that the 40 percent optmnal deductmn may be too liberal for certmn groups of taxpayers Income sphttlng for mlxed income earners and the reduced tax rate also work to lower the effective tax rate Moreover the return

to the schedular

of efficlency Import on

problems duties

_mports

are

system

assocmted

and taxes the

most

once again Implies

with that system

Of all indirect Important

taxes

in terms

the recurrence

as noted duties

earher and

of revenue

taxes yield

Although their proportion to total taxes dechned from an average of 32 5 percent in 1975 1982 to 31 4 percent m 1983 1985 the share of import

revenues

again

chmbed

to about 35 percent m 1991/1992 dutles and taxes combined proved of all the major tax types Measured imports 1980

relatlve

regained 1985

Thus

to GNP

m 1986 Import

m the succeeding

years

(Table 3) In those years to be the blggest revenue

import earner

national

1992 duties

upwards

the and

government two percentage taxes

stood

revenues points

from lost m

at 5 3 percent

of

GNP m 1992 from a low 2 8 percent m 1985/1986 (Table 1) Thin m even greater than its peak level of 4 6 percent of GNP m 1980


BREAKINGAWAYFROMTHE FISCAL BIND Moreover

tariffs

and

taxes

15

on imports

combined

surpassed

all

other types of taxes m terms of growth rate m 1985 1991 wlth an average annual rate of increase of 26 4 percent during the period Imtlally m tariff

thls development was surprising given the overall reduction rates under the Tariff Reform Program started m 1981 A

number

of factors

program

on tariff

moderated revenues

effect m 1983/1985 balance of payments

the

expected

First

negative

an import

dutlable

however Third

imports

the share the

Scheme

to total

of non

mtroductlon (CISS)

efficlency

m

of the

1987

On the whole

imports

dutlable

began

Comprehensive

somewhat

to capltal Impor the likely drop m in the proportion 1988

In 1988

to inch up again

Import

improved

the changes

took

m response to a Second the wlth

m 1986

imports

of the

surcharge/levy

and then again m 1991/1992 {BOP) cnms in those years

drawal of the privilege of government corporations tatlon free of tax and duty in 1984/1985 blunted revenues from thls source Table 6 shows a dechne of non

impact

Superwmon

customs

m the tariff

collection

rates

and

m the

coverage of exemptions appear to have largely cancelled each other out as suggested by the fairly even estimates of effectlve tariff rates on total imports total

imports

m 1980

tapered

when the import m tariff revenues from the robust

1987

Although

off in 1987

the effectlve

1990

a trend

levy took effect in 1991 Finally m the last SLXyears resulted growth

m Imports

during

tariff rate on

reversal

occurred

the rapld to a large

growth extent

the period

EO 470 which hopes to further cut down tariff rates and restructure the tariff system over a five year pemod took effect in 1991

While

the revenue

effect of EO 470 is expected

its posltlve effects on overall competltlveness ductlon In the level and variation in effectlve well documented

{Table 7)

An outstanding to the use of the

Issue on the tariff system home consumption value

to be negatlve

through protectlon

further rates

re are

still emsts Thls relates (HCV) as the basls for

computang tariff To date the Phfllpplnes m the only country in the world which does not use either the Brussels Definitlon of Value (BDV] whlch and value

freight Some

is essentaally or the sectors

based

GATT system argued

that

on the export whlch since

price plus insurance

m based

on transactions

the HCV is generally

higher


Table 6 Value of Imports and Duties Collected and Average Effectwe Rates 1980

1990

(In b,ll,on pesos)

Total_mports Dutiableprnporls Non-dubabte _mports /otototal Totalimportdubesandtaxescollected

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

48.080

54030

64120

82.220

99710

92060

98697

124108

137206

225240

290082

37850

42780

54280

44270

61760

54370

70701

101153

103114

148013

187202

10230 2128 11453

11250 2082 10603

9 840 1535 12141

379,50 4616 15839

37950 3806 17329

37690 4094 16590

27998 2837 16965

22955 1850 25627

34092 2485 24866

77227 3420 38231

102880 3547 46514

7867

7 38t

8 551

12088

14199

13497

13013

1801t

17614

28197

33692

2478

2237

3578

2806

3051

24CO

2533

24 12

2583

2485

2078

1725

1575

2731

2299

2482

1841

1781

1708

1905

1800

2382

1962

1893

1926

1738

1802

1719

2065

1812

1697

1603

1636

1366

1334

1470

1424

1466

1318

1451

1284

1252

1161

TotaldutJes collected EffecWe tariffrates

Totaltrnport dubes andtaxescodlectec_ totaldurable_rnports 30 26 Effectrve tariffrates To_aldutP_,s collected/ totaldurable=reports Effecbve tanffrates Totaltmport dubes andtaxes collected/total =mports Effective tanffrates TotaldutJes collected/_al tmports Source ofba_cdata

Bureau ofCustoms

_> ,._

I_


== Table 7 Average EPR and Standard Deviation by Major Groups Exportables and Importables (Using pnce comparison) Sector

1979

1985

SD

1986

SD

1988

SD

1990

SD

1995

SD

Group 03 96

03 22

AIlsectors

06470 04904 11655 03937 07564 03649 07084 02539

Exportables

00690 0069t

lmportables

11756 10226 14507 08072 09053

07514 08806 04810 04904 03806 02620

01229 00900 03737 00503 02616

00521 02632 00353 02365 00265 02094

00414 00327

Agnculture fishery and foresb'y

28-96

00594 00411 00325

0384 02002 02642

Exportables

NA 0 0849 0 0967 0 0570 0 0967 -0 0570 0 0967

Importables

NA 07962 02088 04833 02702 04928 02627 03527 01152 03109 00414

Manufactunng

09330 07335

15895 06017 10604 05549

Exportabtes

00445 00455 01113 00119 00989 00128 00994

Importables

02710 10727 18010 08693

11724 08024

10080 03582 04925 02804 03446

11194 05055 04787 03927 03221

Source Medalla Erl_ndaM AnAssessment ofTrade andlndustnal Polcy1986-1958 PIDSWo_ngPaperNo 90-07and Medalla Erlinda M "Tanff Reform Assessment presented att_ePhitlpp_ne Economic Sooety Annual Mee_ng onDecember 131991

,..:j

>_ :Z E_


18

ROSARIO G MANASAN

than the BDV or transactions raises the tariff on Phihpplne competmveness

value tmports

of local products

its continued use effectively and reduces the international

Medalla

et al (1993)

shows

that

while the wedge between the HCV and the mvome value is not very high on the average inter industry variation is quite substantial As such the dlstortlonary impact of the use of the HCV may be more slgmfieant than what the average HCV to lnvome value ratio lnd_ cates Moreover estimates suggest Excise goods

the revenue (Box 2)

taxes

and

impact

Of all the major

servmes

excise

IS not

mdlrect

taxes

as

taxes

large

as

earher

lemed on domestic

on alcohohc

products

tobacco

products petroleum products fireworks clnematographm automobiles and certain product goods classified as non

films essentml

goods provide

the most

m terms

of their

in total tax revenues

share

slgmficant

revenue

yield

Measured

of the national

government

and

their raze relative to the GNP excise taxes are also larger than any of the tax components on income and profits The traditional role of excise taxes

has been maintained

m recent

years

despite

its sluggish

growth (10 8 percent) m 1986 1991 other tax categories (average growth

compared with the growth of rate of all tax revenues m the

same

and

period

settled

at 19 1 percent)

its own growth

periods (18 0 percent m 1976 1982 and 32 9 percent The share of exc_se taxes in the total tax revenues government

rose

from an average

20 percent

in 1983

1985

contribution continuously 3) It exhibited a mmllar

of 16 3 percent

After peaking

m earher

m 1983 1985) of the national m 1976

at 26 4 percent

1982

to

m 1987

its

dropped to 13 2 percent m 1992 (Table trend when measured relative to GNP

Excise taxes remained steady at about an average of two percent of GNP between 1976 1985 Rising from 1985 onwards it peaked at 3 3 percent of GNP in 1987 From then on it took a downtrend and stood

at two percent

The poor from a number

of GNP in 1992

performance of factors

of excise F_rst

(Table taxes

the excise

1) in recent

years

tax on petroleum

resulted products

diminished when the excise tax on fuel oll was abohshed m August 1987 and the effective tax rates on other items were reduced m 1990 Second

some

cigarette

manufacturers

avoided

or evaded

paying

the


BREAKING AWAY FROM THE FISCAL BIND

19

BOX 2 Use of HCV for Import Valuat=on Since the Jnactment of the Ph_hpp_neTanff Act of 1990 the dutiable value of imported articles depends on the price at which the good ts freely offered for sale in the usual wholesale quantities _nthe domestic market of the exporting country at the time of exportation Th_s price is also referred to as the Home Consumption Value (HCV) The actual determination of the HCV was rather spotty over the years because of the hmlted resources that the Bureau of Customs (BOC) was able to allocate to verify the HCV) Since the Society Generale de Surveillance (SGS) was engaged to inspect and value imports the use of the HCV for import valuation has been raised Importers have complained that the use of HCV for tariff assessment tend to overvalue imports and effectively _ncrease the cost of doing business _n the country w_th d_re _mphcatlons on the international competitiveness of Phdlppme exports and the country s ability to attract foreign investors The results of Medalla et al (1993) demonstrate that the HCV valuation system indeed raises the dutiable of imports and thus further d_storts the protection structure Table B shows that the weighted average ratio of HCV to invoice value (IV) is equal to 1 11 after the globahzatlon of the CISS The study also noted that inter industry vanatlon Jn the HCV IV ratJo Is qu_te substantial w_ththe ratio varying from 0 95 for mrscellaneous manufacturers to 1 18 for machinery and transport equipment The antra industry dtspersion in the HCV IV ratio as measured by the standard deviation Jsalso uneven The study concludes that the wedge between the HCV and the IV translates into an additional tanff on imports

The unevenness

_n the HCV IV ratio

across and within industries imphes that the use of the HCV produces a highly arbitrary impact on the protection structure Consequently the use of the HCV introduces additional distortions that are not fully predictable from the nominal tariff rates Note that Medalla s numbers tend to underestimate

the true Increment

_nthe cost of _mported goods because _tdoes not take transactions cost _nto account SGS officials md=cated that the number of appeals submitted to the BOC SGS Import Valuation and Class=ficatlon Committee increased _n recent months The appeals process _s not costless to firms and consider able amount of resources has been expended on th_s The use of the HCV also deters the flow of foreign _nvestments It does so not only because _traises the cost of doing bus_ness _nthe Ph_hppmes but also because _tmakes doing business In the country more cumbersome


4 20

ROSAPIO

G MANASAN

Note that the Phthppmes_sthe only country _nthe world that has not adopted the Brussels D_fit itlon of Value (BDV) or the General Agreement on Tariff and Trade system which is based on transactions value Thus foreign investors who are more familiar w_ththese systems find that they need to acquaint themselves to a new system when they enter the Phfl=ppmemarket At the very least they vLewedthis as an _rksomeand burdensome process From the policy perspective tt _sthus tmperabvefor the Philippinesto shift away from the use of the HCV VVhdethe country s economic managers agree on the disadvantages of the continued use of the HCV they are very concerned about the negative impact on government revenues that such a move wdl entail In this regard it is important to point out that the reduction intariff revenues estimated by Medalla ranges from 3 9 percent (P2 8 billion based on 1992 revenues) to 6 5 percent (P4 7 bdhon) depending on whether the elastlctty of demand for imports _sNgh or zero These numbers are lower than official estimates Table B Average HCVIIV by Commod=tyGroup March 16 December 31 1992 Stmple Ave SITC

Description

Std

Weighted Ave Std

HCVIIV Dev

HCVIIV* Dev

0

Food

1095

0328

0947

0042

1 2 3

Beveragesand tobacco Crudematprlals=ned=ble Mineralfuels

1 208 1 292 1 186

0 394 0 685 0 426

1 054 1 130 1 120

0 044 0 013 0 008

4 5 6 7

Anlmaland veg oils and fats Chemicalsand products Mftdgoodsby matenal Machineryand transport

1 341 1 381 1 609 1 191

0841 0 755 0 925 0 440

1 118 1 063 1 044 1 183

0012 0 062 0 122 0 031

8

equtpment Misc manufactures

1 361

0 873

1 076

0 004

CommodltlesNEC M_xed

1 355 1348

0661 0712

1 126 1 166

0033 0006

All commod=tlesexceptSITC9

1 291

0713

1 110

0033

9

Value ofimports isusedasweght Source Medalla etal 1993 Notes BOCBureau ofCustoms NECnotelsewhere clasared SITCSlandard IntemaIional Trade Classification


BREAKINGAWAYFROMTHE FISCAL BIND correct

taxes

brands

through

Some

bllhon

transfer

analysts

behind

GNP m terms the

present

exert a negahve revenues In June

1993)

Congress

mlsclasslficatlon

revenue

loss

the tax base

Thxs last point

tax rates

on

and

the

Th:rd

of growth excise

impact

1993

pricing

estimated

per year {Monsod

whether

21

are

demand enacted

at about

generally

rinses

too high

and

the

such

P3

lagged msue

that

consequently

a law revaslng

of

of

they

on

tax

the exeme tax on

clgarettes following acnmomous debate and intense lobbying from various interest groups Unfortunately much of the debate centered on the relative real problem ease

merits

of specific

hes m the system

m reducing

tax hablhty

and

ad valorem

s loopholes through

taxation

whlch

transfer

cigarette manufacturer and wholesalers/traders ficat:on of brands While the mlsclasslficatlon

when

permltted

pricing

the

relative

between

the

and the mmclassl issue appears to have

been adequately resolved the use of marketing frms to avold paying the correct taxes is only i_artlally addressed by the mtroductlon of the floor tax 6 Moreover the new law continues to wolate GATT rules by maintaining their

the higher

domest:cally Sales

tax and hcenses

fastest

growing

growth

rate

increase

tax revenues

from

1992 (Table 3) Similarly 1 4 percent

ofGNP

level m the last

18 years

relative

to

12 5 percent revenues

annual rate of

a big shift from its

sales tax and hcenses

m 1982

1985

tax

hcenses

and

m 1985

from sales

m 1985 to two percent (Table

the thlrd

wlth an average

Thls marked

sluggnsh

became

wlth a 19 1 percent

tax groupings

on a yearly average the share of sales

expanded

clgarettes

hcenses

1991

compared

to be one of the most

revenues

tax and

m 1985

Of the major

only 15 8 percent Consequently

from

Sales

tax category

for aggregate

on imported

counterpart

of 20 3 percent

past performance proved

rates

produced

expanding

by

to total

tax

to 13 3 percent

m

tax and hcenses m 1992

rose

its highest

1)

6 Abstracting from the floortax and the classdicatton msue the provasxonthat apphes a 20 percent mark up to the reglstered manufacturer s price to arnve at the construc tive pnce effectively raxses the revenue by 20 percent However _t tends to penahze firms that used to pay the correct taxes relative to those that avoided doing so


22

ROSARIOG MANASAN The VAT s mtroductlon

m 1988 largely accounts

for the credltable

performance of sales tax and hcenses The first two years of _ts Implementatmn were problematm The ratm of revenues from sales tax/VAT and other percentage taxes to GNP dropped from 1 4 percent m 1987 to 1 2 percent m 1988 and 1 37 percent m 1989 But it has recovered

since

emerging

then

reaching

to be a better

revenue

1 6 percent earner

than

m

1992

It Is slowly

the sales tax (Table 8)

Table 8 Comparatwe Yield of Sales Tax and VAT 1987 1992 (In mdhon pesos) 1987

1988

1989

1990

1991

1992

VAT

59312

71467

101345

130793

150957

181129

OPT

34734

21449

24136

28143

35077

37171

Total

9 404 6

9 291 6

12 548 1

15 893 6

18 6034

21 830 0

140

1 17

1 37

1 48

1 47

1 59

% to GNP

Other percentage taxes areincluded inthisanalysis because theVATreplaced some ofthese taxes Manasan Improved

(1990)

showed

efficmncy

ETR (t e the sum from the successive outputs

taxes

that the introduction

by reducing

on inputs

into inputs

as well as the variation

percent

to a range

taxed

an average estabhshed inputs percent

under

Thus

(whmh

tax it replaced

of the ETRs

be achieved

rates

the dmtorttons

the

present

rates

current

14 4 percent

The difference

measures

arising

or

that

she

some

the

inputs

are

was halved

noted

gains

exempted

proposals

of 1 3 34 6

from

of 3 3 percent Manasan also more progresswe than the

VAT stall accounts of goods

to 6 5

between

the extent

therefrom)

However

mdmatmg

if the number

thin supports

tax

m the ETRs from a range

of 7 2 percent to an average that the VAT m shghtly

sales/turnover

effectwe

etc ) from

of 0 4 13 3 percent

the nominal

mdmatmg

average

of direct and indirect taxes on output resulting layers of taxes on output taxes on inputs mto

percent

ETRs and

the

of the VAT greatly

that

taxes

on

for more

than

50

m efficmncy

could

from VAT is reduced

to further

refine

the VAT


BREAKINGAWAYFROMTHE FISCAL BIND Meanwhile tribute

the gross

to the hlgher

today

(Lamberte

gross

recelpts

recelpts

23

tax on banks

cost of financlal

1990)

Because

was

mtermedlatlon

of thls

found

to con

m the country

it is recommended

that

the

tax be abohshed

Tax evasion The previous

section

of the tax system greatly evaslon

indicates

that

changes

and its admlmstratmn

tmpose

more revenues new

weakens

taxes

w_thout

It should

the progressltnty

the structure

m the last half of the 1980s

improved revenue performance zn recent years zndzcate that

collecting

in both

However estzmates of tax vast opportunzt_es exzst for

the need

to razse tax

also be emphasized

rates

that tax

of even the best designed

or to

evaszon

tax systems

Evaszon and updated

of the mdwldual zncome tax Table 9 presents revised estimates of the potentml revenue from the mdw1dual

income

The

tax

somewhat m 1985

spotty

numbers

suggest

occurred

to 34 percent

that

some

m its collectlon

improvement

rate

albelt

from 26 9 percent

m 1991

Table 9 Potent,al Revenue from the Indw,dual Tax and the Level of Tax Evasion Collect,on

Potent,al

Actual

Rate

Revenue

Revenue

Difference

Evas,on Rate (%)

(%)

Year

(PM)

(PM)

(PM)

26 9

1985

21 949 60

5 912 0

16 037 6

73 1

383

1988

1550474

59400

95647

61 7

28 5

1988

27 887 30

7 947 0

19940 3

71 5

35 1

1990

46 20030

16 2060

29 994 3

64 9

340

1991

61 11210

207446

403675

660

Source Potent,al revenue author's est,mates Actual revenue Bureau ofInternal Revenue


24

ROSARIOG MANASAN Despite

the progress

rate of the mdlmdual

achieved

income

to date

m reducing

tax Table 9 also shows

to increase the government tax collection machinery Uncollected

the evamon

the big potentlal

take by improving further revenue from the mdlwdual

come tax amounted to some P40 4 bflhon (or 22 2 percent government tax revenues) in 1991 Evaszon tax/VAT

o/the

mdlcate

31 7 percent

VAT Potential

revenue

that

collectmn

while

the

in 1985 to 27 8 percent

estlmates rate

in 1989

ofnatlonal

from the sales deteriorated

in 1992 (Table 10) Undeniably were problematlc However

seems

Improved

that

It has

from

it has recovered

1990 to reach 38 4 percent years of VAT implementatlon to show

the m

considerably

since

the early emdence

in the last

three

years Again

the gains

VAT system

to be had

continue

is P47 2 bflhon or 3 5 percent only

P18 1 bflhon

amount

of evasion

P29 1 billion m 1992

ts being

revenue

of GDP while actual

collectlon

other

tax evamon

measured

observable

and

of GDP

leakages

estlmates

year

government

is hldden

cannot

of the

m 1992 reached

Implies

that

the

amounted

to

tax revenues)

are not preclse

whmh

errors

Thls

in that

of national

Is something

measurement

reform

VAT s potential

or 1 3 percent

(or 13 9 percent

Admlttedly

from an admmlstratlve

to be large

Because and

be assumed

what

not

directly

away

Thus

the estimated evamon levels are at best approximate However the magnitude of tax evasmn levels are so huge that even If one allows a margin of error as large as 50 percent the tax system remains substantial Sources usually

takes

of" evasmn

7 Manasan

the followmg forms

non

(1988)

the estlmated

noted

that

flhng of tax returns

leakage

tax

m

evasion

overstated

deductions and non reporting and/or understated income/sales Comparing the actual and the potentlal number of Individual income tax fliers reveals that outright non fihng of tax returns major source of mdlmdual mcome tax evasion Table 1 1 shows 7 This section draws heavily from Manasan (1988)

is a that


Potential Revenue from theTable VAT 10 and the Level of Tax Evasion

Year 1985

Potenbal Revenue

Potential Revenue

Actual Revenue

Difference

Evasion Rate

Collecbon Rate

_:

{Inre,ilionP) 9 428 0

% of GDP 1 65

(In milSonP) 2 996 0

(In millionP) 6 432 0

(%) 68 2

(%) 31 8

F

1989

364140

394

101345

262795

722

278

1990

39 3950

368

13079 3

263157

66 8

33 2

1991

454430

365

15095 7

303473

66 8

33 2

1992

47 1910

352

18 112 9

29078 1

81 6

384

Source Authors e_mates


26

ROSARIOG MANASAN

only 22 5 percent m 1990

of potentlal

The Economlc

{1992) noted income

Intelhgence

a slmdar

tax

taxpayers

problem

The problem

filed their income

and Invest_gatlon

emsted

Bureau

wlth regards

also exasts m other

types

tax retums or EIIB

to the corporate of taxes

Table 11 Potential and Actual Number of Individual Income Taxpayers 1985 1990 PotentialNumber

ActualNumberof

Actual/

of Indwldual

Individual

Potential

Taxpayers

Taxpayers

(%)

Year 1985

10074 039

2 336 337

23 19

1986

9 247 644

2 093 335

22 64

1988

10 544 154

2 434 520

23 09

1990

11 651 988

2 619 271

22 48

Source Potential number ofindividual taxpayers author's estimate Actual number ofwndMdual taxpayers Bureau ofInternal Revenue Whale many thetr

tax

tax hable

returns

transactions many of these

mdwlduals

and

such

is needed

(because

corporatlons

opt to file

to expedlte

certain

e g wlth banks or those related to travel abroad) tax fliers underdeclare thelr income or recelpts Many

taxpayers

appear

to adhere

to the following

collectlon

agency

does not know

precept

wdl not hurt

What

the tax

the taxpayer

Another n-nportant source of evaslon _s overstating expenses and allowable deducttons in the case of self employed mdlwdual income taxpayers

and corporate

taxpayers

or NTRC (1986) reported claimed

to gross

slgmflcant gross ers

posltwe

income

income

t_me

to gross of overstating

the

a posltwe

Center

estabhshed

a

of deducttons

to

income

correlation

to actual

for corporatlons

deductions

(1988) ratio

levels of mdlvldual

tax (due to audit)

income

Tax Research

m the ratio of deducttons

Manasan

between

she also found

the ratlo of the deficiency prevalence

Moreover

relatlonsh_p

and the gross mcome

At the same

of deductions

The Natlonal

a wlde dlsperslon

tax and the ratio

All these

for tax purposes

taxpay between

lndlcate

the


BREAKINGAWAY FROM THE FISCAL BIND Theoretlcal probablhty fence and that

suggest

that a hlgh penalty

penaltles

and/or

the

Iukehhood

of being

the legal sanctlons

continues

to be a crltlcal

thy that m recent months such forthcoming than ever before study

stratlon

and

system

also identified

other

that encourage

weak

evamon

will be discussed

Reforming

m greater

points

It _s notewor

seems

to be more

m the

tax admml

low computemzatlon

level m

of the BIR/BOC to access of hard to tax mdlwduals m the following

section

tax administration

Various studies mlnlstratlon

identified

the following

Too much centrahzatzon BIR has

detail

right dlrectlon BOC to enforce

concern

commltment

the major collecting agencies and mabfllty avadable data on the true income/receipts These

caught

are not hlgh enough to actually discourage evamon The of special tax courts and the passage of new law prowdmg

stiffer penaltles on tax evasion are steps m the However resoluteness on the part of the BIR and

The

rate and a high

of detectlon can effectlvely deter tax evasion The preva magnitude of tax evaslon m the country thus mdlcate

exlstmg

pumshed creation

hterature

27

a hlghly

centrahzed

Issues

The NTRC (1986 orgamzatlonal

concerning

tax ad

1991) noted structure

that

the

Both

the

central office and the regional offices heawly engage m the actual collection audit and mvestlgatlon of taxpayers This arrangement has led to a number of mefficlenc_es m assessment and collection enforcement The centralized procedure audit has led to substantml

m issuing the Letter of Authority to delay m the assessment process For

instance

found

Manasan

months on the average credit and the issuance

(1993a)

that

It took

from

three

to six

between the receipt of an apphcat_on for VAT of the Letter of Authority to audit Also under

present rules collecting accounts receivable under the jurlsdlctlon of the national office

exceeding 20 000 falls This sltuatlon has not

helped unclog the plpehne collection of uncollected dehnquent accounts as the number of accounts receivable has remmned high


28

ROSARIO G MANASAN

over time

Thus

greater

delegatton

of authority

should

be pursued

within the BIR to enable the central office to concentrate on pohcy formulation program planning and evaluatlon of the management effectiveness of the lower level offices regmnal offices should focus on momtonng and evaluating Under such a set up personnel reallocated uneven and dmtncts

since the dmtnbutlon of revenue personnel m hlghly does not match the actual work load m some revenue

(Table

12)

Recent

pronouncements

clals are fully aware of these pmonty to decentrahzatlon Weak

systems

and

master hst of taxpayers tormg of tax comphance that and master

the revenue dmtncts operataons across revenue dlstncts should be

mdlcate

posslblhtles

procedures

and

The

mgmficantly Manasan

absence

identlflcatlon

system

BIR offi

attached

of an

high

updated

contributes to the poor morn (1991) uncovered for instance

revenue dmtrtct offices found it dlfficult follow up dehnquent accounts because file of VAT taxpayers

that

have

to Identtfy stop of the absence

The introduction

with the msuance

ofa umfied

of a unique

fliers of a

taxpayer

Taxpayer

Iden

tlflcatmn Number {TIN) to all taxpayers regardless of the type of tax they pay will go a long way m improving the system Increased computerization Meanwhile

will also make it easier to maintain the TIN system the NTRC (1986 199 I) identified the need for a clear

cut and defimtlve the assessment

pohcy on selecting workload

audlt

cases

Thin should

at the BIR to manageable

levels

Is tempting

to concentrate

on the audlt of large taxpayers

of revenue

producUvlty

such

result

of increasing

a pohcy

concentratmn

may lead

of collectmns

reduce While

It

for reasons

to the unwanted

from few taxpayers

(de Jantscher et al 1991) Thus a schelI_ whereto a specific percentage of returns per income bracket m selected for audit should also be consldered The NTRC (1986 1991) als0 recommended more vlgorous program of collectmn enforcement ment been partly baslc

the need to adopt a The non enforce

of warrants of distraint and levy on property that have already msued remains a major problem The study attributes thin to the lack problem

of revenue

of phymcally

selzure locating

agents defaulting

and

partly taxpayers

to the more


Table 12 D,stnbut,on of Taxable Returns Filed ,n 1990 and Assessment

Personnel by Revenue Regton

Average No ofTaxable Number of Assessment ReturnPer Assessment

Revenue Region Total

Total 1 2andCAR

BaguloCity Tuguegarao Cegayan andCorddlera Admln_sb'abon Region

,.3A 3B 4A

SanFemandoParnpanga ValenzuelaBulacan Manda

(1) 1694067

481and4B2 QuezonCdyandMa_tl 4C SanPabbC_ty 5 LegaspCdy 6A 6B 7 8 9 10A 10B 11A 11B

IlodoQty Baco_nd C_ty CebuC_ty Tacloban Cdy Zamboanga Qty Cagayan deOroCity BuPJan Qty Cotabato Cdy DavaoQty

Source

BIRAnnualReportasc_ted knNarwhal TaxResearch Center(1991)

Individual Corporation Pertnersh_p Personnel Personnel (2) 1672,052

{3) 20605

(4) 1410

55993 76520

446 370

I2 10

126 69

448 t 114

77077 173752 178043

76400 172276 173681

611 1369 3874

66 107 488

1t8 165 315

653 1053 565

505248 91562 55866

495931 90941 55602

8964 594 264

353 27 --

591 90 62

855 1017 901

433 848 1046 182 243 330 116 249 668

42 58 108 5 35 18 11 19 51

60 t08 140 59 57 65 45 59 86

955 507 685 669 718 886 695 571 794

56820 53825 94701 39298 40662 57253 31133 33425 6759"=

E

(5) (6)- (1}/(5) 2,215 765

56451 76900

57295 54731 95855 39485 40940 57601 31260 33693 68308

.11

_. m


30

ROSARIOG MANASAN Low level ofcomputenzatmn

(starting

m the

mld

computerlzatmn mg obsolescence quate

Although

1960s)

remains pnm_tlve of the mainframe

maintenance

the BIR has a long hmtory

of computer

the acute

use

its present

Thin was attributed computer system

backlog

m data

state

to the grow their made

procesmng

and

lack of an integrated

database

Instltutlonahzmg greatly enhance the

a major computenzatlon program agency s collectlon enforcement and

ment

functlons

computemzatlon

It should

m the BIR (Crown

be

will greatly

emphamzed

improve

Agents

and

the

1993)

however

collectlon

of

would assess

that

while

collectlon

en

forcement It will not cure all the 111s that currently plague the tax admmmtratlon system Better systems and procedures w111lead to better collectlon performance even wlthout the benefit of increased automatlon

(see preceding

sub

sectlon 1

Manasan (1988) noted that increased computemzatlon make It earner for the BIR to access mformatlon lodged d_vlslons Bureau and

within

the BIR and m other

of Customs

Industry

and

government

Socml Secunty

System

Department

way the BIR would be able to seek out more aggresmvely mdw_duals and corporatlons who do not file thelr returns

tax hable

ability

to access

Exchange

of Trade In thls

tmn through greater bat underdeclaratmn

and

hke the

Commmmon

The greater

Secuntles

agencles

would m other

these

computemzatmn of income

external could First

sources

of mforma

also help the BIR com It w111 be earner to

operatmnahze presumptlve income taxatmn (whereby tax m as sessed not on the basra of declared income per se but on mdlcators of income) 1982)

Following

specified

the experience

amounts

of income

ated wlth for instance bales boats mrplanes employment

Related

prohlbltmg the dmclosure impedes the BIR s access

Second increase

computer

countries

may be presumed

{World Bank to be assocl

ownership of remdent_al property automo and race horses forelgn travel and

of servants

(and accretmn thereto) therefore m m order

m other

to thin

the

Bank

Secrecy

Act

of mformatmn on bank deposlts greatly to reliable mformatmn on the net worth of mdlwduals

asmsted

the cost effectlveness

audit

An amendment selectmn

of BIR audlts

cnterla

S1mllarly

of thin law will greatly the enlarged


BREAKINGAWAY FROM THE FISCAL BIND mformatlon

system

that

would

31

also result

from a major

upgrade

of

the computemzatlon level should make It earner for the BIR to estabhsh "norms and standard ratlos that its examiners can use m evaluating tlon System taxpayers

taxpayers returns

glven

reported

annual

checking

mformat_on

countries

deductlon

or DIF (whlch mark

clalms

measures mdlcators

up

hke

the

act_vlty

resulting

agenclesl

effectiveness

has

Func

of tax error

economlc

and dlscrepancles

from other

to maxlmlze

The D1scmmlnant

the probablhty

sales

from cross

been

of audlts

m

used

m other

(de Jantscher

et

al 1991) Thlrd

computerization

contact

between

presents

the

revenue

opportumtles

BOC operations ments

should

mmlmme

agents

for corruptlon

should

and

the

medmm

whlch

computenmng

processing

assessment

term

taxpayers

For instance

lead to mechamzed

clasmficatlonoflmports

m the

of tax docu

and paymentofdut_es

and taxes Under thls system only taxpayers tagged as hlgh ones will be subject to audlt (Alano and Medalla 1993) Thus

the

ongoing

computenzatlon

program

BOC whlch is expected to be completed m 1997 tax admmlstratlon m the medmm term

at the

risk

BIR and

w111greatly

improve

Low compensa_on of tax collectlon personnel Alano and MedaUa (1993) pointed out that the low wages of revenue agents compared w_th

the

blggest

large problem

amounts

that

m curbing

formance

based

mmlmlze

the dlspamty

tax

evaders

tax evaslon

compensatlon

scheme

between

can They

success

of private

to employ workforce

to corrup_on and

agenmes mmntmn

legal and

suggest

illegal

by using

and pumshment

at the BIR and BOC quahfied

the right combmatlon (hlmng and

finng)

that

the a per

to effectlvely

raceme

of revenue

w_th greater flexa will be a powerful They noted

hke the SGS can be traced a hlghly

provldes

be mstltuted

agents They argue that such a system coupled bdlty m hlnng and firing tax collection personnel dlsmcent_ve

offer

the

to then" abfllty

effiment

of reward

that

and

honest

(compensation)


32

ROSARIOG MANASAN

Proposed tax enhancement

measures

Since 1986 numerous tax measures have been proposed and enacted year after year because of the need to bridge the gap between projected revenue of these measures

and programmed government have the overriding objectlve

tlonal

However

revenues

the

analysis

expendltures of generating

above

shows

Most addl

that

thelr

impact on overall efficlency and equlty has not always been favor able At the same tlme the ceaseless stream of new tax measures leglslated

each year places

undue

burden

system whlch further exacerbates and enforcement m the country In pmnc_ple holes

new tax measures

m the tax system

not make

should

the tax system

should

meet

take into account

the trade

state

all of these

than

objectlves

off between

of tax collectlon

focus

on plugging

lead to efficiency

more regresmve

all tax proposals

on the tax admlmstratlon

the poor

gains

and

before

should

Because

pohcymakers

these

|oop not

should

sometimes

confllctmg

goals as they often mdlcate the impact of vamous tax measures on sustainable growth Also the cost effectiveness of each tax measure 0 e potentlal should recelve

revenue relatwe due conslderatlon

to the

Given the above perspective base

and

elsewhere system

ratlonal_ze

the

m thls paper

the earher not make

expemence

of collecting

it _s appropnate

motor

vehlcle

including

will lead to efficlency

cost

to broaden

reglstrat_on

as _t reduces

more

regresslve

As noted m the VAT

tax cascading

w_th the VAT It _s hkely that

the tax system

than

such

before

tax)

the VAT

fees

more goods and serwces

gains

the

Given

a move will On the other

hand transport studies show that the current revenues from road user charges do not suffice to cover the cost of road wear and traffic congestion studles

Associates

also show that

dlstortlonary pends

{Nathan

structure

primarily

Inc

registration They noted

1990

World Bank

1988b)

These

fees follow an overly complex that

on the axle load rather

damage than

done on roads

on total weight

and de

Conse

quently rigid trucks 0 e two and three axle trucks) appear to be under taxed relative to articulated trucks under the exlstmg system In contrast the tax and m the stock

proposed increase in the documentary stamp transactions tax the shlft from the ad valorem


BREAKINGAWAYFROMTHE FISCALBIND to the specific

system

and the land documentary

convermon s_amp tax

3:]

m taxang dlstflled

splnts

tax do not (DST) would

hlgh cost of doing business m the proposed increase m DST on financml the cost

of capltal

It would

counterpart

certain

sectors

valorem drafts

tax

attorney

checks

Also

DST rates

m the

stock

thrust

to develop

much

need

the system

market

growth

sprats

and fermented

less buoyant

and

value

The pubhc

of tax revenues

a tamper

the

proposed

government ad valorem

frequent

adjustment

samply to mamtmn

debate

on the c_garette

land

the real tax shows

of the tax base

to tax avoldance)

convermon

the

tax wall make

actlon

that would make the tax less vulnerable wlth stricter enforcement of the law Meanwhile

to specafic

proof defimtlon

and

to hamper

the present

hquor

of

bonds)

wath the

will necessltate

legaslatave

powers for mflataon

and

at tends

Converting

m the tax rate through that thas case reqmres

and

penodacally

since

of

an ad

for the DST on bank

promes

tax _s mconsastent

investment

tax on dlstdled

as effectavely

m the DST (on stocks

the capatal

treatment

to the contentlon

except

receipts

not be adjusted

increase

transactaon

needed

Thus

warehouse

the proposed

Contrary

DST m most cases

it as not a Fixed tax

and

the uneven

an the banking sector compared and does not take into account the

risk m the latter the prevmhng

hquor

Ralsmg the the already

country In partlcular the instruments would increase

also exacerbate

of foreagn exchange transactaons wath those m the informal sector hagher

and fermented

seem deslrable further increase

tax

(one

coupled

would

deter the socaally optlmal shift m land use If the present classlficat_ton under the CARP law as v_ewed to be reflectave

tend

land of the

best land use then the conversaon from agricultural to resldentml commercaal or industrial use should not be allowed at all But thls as not the case deleterious Finally

allocatlve

_mpact

on

consumption

the land converslon expansaon

commodltaes are demrable

tax system other

they

economic

generate

tax would tend

if

to have

effects

while the proposed

on non essential on real property ter of the

then

to

m the excase tax coverage

and the amposatlon of a national tax to enhance the redlstnbutlve charac requxre

further

goals

Wdl the

enough

revenues

study exc_se

m terms tax

to warrant

of thear

on affluent the

cost

of


84

ROSARIOG MANAS/

collecting revenues

it? Will a natlonal tax on real property of local governments? Reforming

Pubhc

sector

center

wlth

finance local

Local 112recent

Government hlstory

government

adversely

Taxation

Is largely

units

affect tax

(LGUs)

concentrated accounting

at the for seven

percent of general government s expendltures or 1 6 percent of GNP m 1980 1990 (Table 13) The degree of fiscal decentrallzatlon ap pears ments

lower when measured in terms of revenues Local account for approxlmately five percent of total

govern general

government revenues during the perlod (Table 14) Thls has resulted from the fact that about 50 percent of total LGU income comes from external Thus

sources

mainly

the revenue

effort

transfers

from the

natlonal

of all LGUs m the aggregate

low with locally generated

revenues

not exceeding

percent of GNP m the 1980s The real property tax (RPT) is the

single

government has

remained

an average

major

source

of one

of locally

generated LGU income in 1980 1990 contributing 41 percent of total LGU income from local sources But its importance weakened in the 1980s its share in total local source LGU income dechned from 46 percent in 1980 effort hkew_se deterlorated

to 40 percent m 1990 Real property tax from 0 5 percent of GNP m 1980 to 0 3

percent m 1990 Meanwhile

(Table 15) revenues from

other

throughout the relatlve to GNP

period relatlve Revenues from

to total local LGU revenues and other local taxes shrank from 29

local

taxes

also

dechned

percent of total locally sourced m 1990 S1mdarly it contracted

LGU income m 1980 to 25 percent from 0 3 percent to 0 2 percent of

GNP dulnng

15)

economic

the

period

enterprlses

(Table kept

pace

0 3 throughout the 1980s Given the massive transfer slb111ties from

natlonal

In contrast

wlth

GNP and

of functions

government

LGU income remained

authol_tles

agencles

to LGUs

from

stable

at

and respon under

the

8 General government Is composed of the natJonal or central government and the local government unlts


BREAKING AWAY FROM THE FISCAL BIND

35

Table13 GeneralGovernmentExpenditures (In millionpesos) Year

Total

NG

Local

1986 1987 1988 1989 1990 1991

119122 162487 173328 206613 265411 306435

110874 153444 162570 193316 247502 282824

8 248 9 042 10758 13297 17909 23611

Average 198085 198691

67502 205566

61532 191755

5 970 13811

% DIstnbubon 1986 1987 1988 1989 1990 1991

10000 10000 10000 10000 10000 10000

9308 9444 9379 9356 9325 9229

6 92 5 56 6 21 6 44 6 75 7 71

Average 198085 198691

10000 10000

9116 9328

8 84 6 72

RatiotoGNP(%) 1998 1859 2414 2280 2180 2044 2261 2115 2466 2300 2429 2242

138 134 135 146 166 187

1788 2320

158 156

1986 1987 1988 1989 1990 1991 Average 198085 198691

1630 2164

Sources Annual F;nanc4al ReportsDepartment of Interior andLocalGovemments andCommLss;on onAudit


Table 14

General Govemment Revenues NominalLevels(tnmdhon pesos) I

Average1980 1985

Total Taxrevenues Non tax revenues

Average1986 1991

t988

f

Total

NG

LG

Total

NG

LG

Total

NG

LG

50 101 43 540 6 560

46 721 41 163 5 558

3 380 2 378 t 002

148 813 121 218 27 595

141570 116368 25 203

7 243 4 851 2 392

118 360 94 203 24 158

112861 90 352 22 509

5 499 3 85t 1 649

Raboto GNP(in percent) I

Average1980 1985

Average1986 1991

1988

I

Total

Total 13 27

NG 12 38

LG 090

Total 16 80

NG 1598

LG 082

Total 14 89

NG t4 19

LG 069

Tax revenues Nontaxrevenues

1153 1 74

1090 147

063 0 27

1368 3 11

1313 2 84

055 0 27

11 85 3 04

11 36 2 83

048 0 21

PercentageDistnbut_on I

Average1960 1985

Total Taxrevenues Non tax revenues

Average1986 1991

1988

I

Total

NG

LG

Total

NG

LG

Total

NG

LG

1000O 10000 10000

93 25 94 54 84 72

6 75 5 46 15 28

10000 10000 10000

95 13 96 00 91 33

4 87 4 00 867

10000 10000 10000

95 35 95 91 93 18

4 65 4 09 682

o O


Table 14 (conbnued) NominalLevels(In millionpesos) I

1989

Total Tax revenues Nontaxrevenues

1990

I

Total

NG

LG

Total

NG

LG

Total

NG

LG

161066 128020

152411 122463

8 655 5557

190 170 157710

180 902 151 700

9 268 6010

231 321 189256

220 788 182276

10533 6980

33 046

29 948

3 098 32 460 29 202 RabotoGNP(In percent)

3 258

42 065

38 512

3 553

[

1989 Total Taxrevenues Nontaxrevenues

1991

Total 1763 1401 3 62

NG 1668 1340 3 28

r_

1990 LG 095 061 0 34

Total 1767 1465 3 02

NG 1681 1410 2 71

'<

1991 LG 086 056 0 30

Total 1833 1500 3 33

NG 1750 1445 3 05

I LG 083 055 0 28

PercentageDistnbubon [

1989

1990

1991

]

Total

Total 10000

NG 94 63

LG 5 37

Total 100 00

NG 95 13

LG 4 87

Total 10000

NG 95 45

LG 4 55

Taxrevenues Nontaxrevenues

100 00 10000

95 66 9063

4 34 937

10000 10000

96 19 8996

3 81 1004

10000 10000

96 31 91 55

3 69 845

Notes

LG- Local govemment NG- Nabonal govemment

i _.


t4 OlD Table

t5

RevenueStructure of Local Governments 19801991 Nominal Levels(inmillionpesos) 19801985 19861991 Average Average A Local sources 1Taxrevenues

1986

1987

1988

1989

1990

1991

3 380 2 378

7243 4 851

4616 3288

4 887 3 418

5499 3851

8 655 5 557

9 268 6 010

10533 6 980

1 Realproperty tax 2 Others

1 460 918

2872 1978

2080 1208

2 123 1295

2276 1575

2 733 2 824

3 728 2 282

4 293 2 687

I_Operahng andm=screvenues Ill Capital B External sources 1 Sharesfromnational taxes

993 9 2 980 2 335

2 202 191 7 621 5 234

1323 5 4 045 3249

1461 9 4036 3359

1634 14 7860 4 202

2 444 653 6 626 4 097

3 039 219 9 794 6 995

3 310 243 13366 9 504

2 Grantsandaids

496

2 253

734

633

3 604

2 457

2 693

3 396

3 Interlocalgovt trans 4 Borrowings

16 133

19 115

12 50

30 13

20 33

24 48

10 97

17 448

Totalincomeandextraordinary receiptsandborrowings (A+B)

6361

14864

8 661

8 923

13359

15281

19062

23899

o

r.,,9


(.9 o _/_

5_ N<

0

_ 0

0

0

0

_ 0

_

(_

0

03 0

0

o

0

_ 0

0

0

0

_ 0

0

0

0

C_ 0

0

,_

0

_ 0

0

0

_3 0

0

0

0

0

_ 0

0

0

0

0

0 0

0

0

0

0

0 0

0

0

0

o

o3

_'--

l

_LO _--

¢0 0

m

0 C_'

o

-o_ O_

_

_ 0

m

E

8_ m

0

_ 0

e-

¢0 0

x

E

e--

_

0

E

k_J 0

_

cO 0

BREAKING AWAY FROM THE FISCAL BIND

eJ

.

39


Table15(continued)

_ o Percentage Distr=bubon

19801985 1986-1991 Average Average A LocalSources

1986

1987

1988

1989

1990

1991

5314

4873

5329

5477

4117

5664

4862

4407

3739

3263

3796

3830

2882

3637

3153

2921

1 Realpropertytax 2 Others

2295 1443

1932 1331

2402 1395

2379 1451

1704 1179

1789 t848

1956 1197

1796 1124

II Operabngandmlsc revenues III Capital B Externalsources

156t 0 15 4686

1481 128 5127

1527 0 06 4671

1637 0 10 4523

1223 0 11 5883

1600 4 28 4336

1594 115 5138

1385 t 02 5593

1 Sharesfromnabonat taxes 2 Grantsandaids

3671 780

3521 1516

3752 848

3765 7 09

3146 2698

268t _608

3669 1412

3977 1421

_o

025 2 10

13 0 77

14 0 57

34 0 15

15 0 25

0 16 031

05 0 51

007 188

o _

I Taxrevenues

InterIocaIgovt trans 43 Borrowings Totalincome andextraordinary receiptsandborrowings

>_ 10000

10000

10000

10000

10000

10000

10000

10000


BREAKINGAWAYFROM THE FISCALBIND Local Government

Code

(LGC) of 1991

m'e able to generate an increasing sources Thls is partlcularly true whlch

wdl suffer

respons:bdltles

negatlve from

(World Bank 1993) revenue mob:11zatlon meaningful the success

It Is imperatlve

that

national

of resources

government

and expendlture

to local

government

For the other LGUs improvements is equally important if local autonomy

m local is to be

Financial independence of LGUs Is a key mgredlent to of decentralization mlhatlves Thus a clear under

A number

of factors

the central

m determining

underlying account

government the rates

the poor revenue

for the poor revenue

severely

at which

restricted

they may

performance effort of LGUs

the latitude levy local

16)

Similarly

the centrally

mandated

of LGUs

taxes

the prescrlptlon of umt rates rather than ad valorem rates local taxes other than the RPT made these taxes hlghly (Table

LGUs

portion of thelr income from local for some 20 percent of total LGUs

net transfer

standing of the problems of LGUs is in order First

41

Also

for most melastJc

postponement

of the

general revlslon of the schedule of fair market value of real propertles meant that untd 1987 the real property tax was lewed on grossly outdated

(1981/1982)

property

values

9 The results

of Tan

confirm findings from key informant lnterv-lews (Manasan that the ratlo of the _rue market value to the falr market the assessor The

Code

s schedule

vanes

also reduced

the

for tax purposes and exempted value below P175 000 Thus must be adjusted thelr true market

from 3 to 5 (Table assessment

levels

(1993) 1992a) value m

17) 10 on real property

remdentml buildings wlth fair market the schedule of fair market values

upwards to levels that more closely apprommate values to counteract the negative impact of these

changes on potentlal RPT revenues of fair market values should not

Where possible fall lower than

LGUs schedule the zonal values

9 Pres_dentlal Decree 464 (Real Property Tax Code of 1974) mandated that the schedule of fau"market values should be rewsed every three years In 1980 such a rew_aon was implemented However the revlslon scheduled for 1983 was contmu ously delayed t.fll 1987 Under the Local Government Code of 1991 a new schedule is supposed to be put m place not latcr than 1994 10 The Local Government Code of 1991 transferred the authority and respons_blhty to update and unplement the schedule of fair market values to IX]Us


42

ROSARIOG MANASAN Table 16 Assessors Market Valuation and Advertised Market Prices for Selected Prices of Property 1992 Assessors_ Market

Actual Market

Assessors_ Valuation

Value

Value

MarketPrice

(PIm2)

(PIm2)

(%)

Diliman QuezonCity Commonwealth Avenue

1 800/m2

8 000/m2

22 5

(DonMananoMarcosAve) AyalaHeightsSubdivision La VistaSubdivision XaviervllleSubdlwslon

2 000/m2 800/m2 800/m2

6 000/m2 2 900/m2 7 000/m2

33 3 27 6 114

3 500/m2

15 000/m2

23 3

Buend=aand Gu_ngua PasayRoad(commercialproperties

8 500/m2

41 000/m2

20 7

from EDSAto PasongTamo) PasongTamo(VJtoCruzto J P

2 800/m2

9 300/m2

30 1

RizalSt ) MakabAvenue(commercial

4 000/m2

3 8000/m2

10 5

Makati Forbes Park(residentalproperties boundedby EDSA Aim McKinley Pih Tamannd

resident=al propertiesfrom Gen Luna St to J P RizalSt) MakatiAvenue(commerc=al propertiesfrom PasayRoad to JupiterSt ) San MiguelVtllage

Agriculturalland Laguna Coconutland Fishpond

10500/m2

3 000/m2

6 4000/m2

50 000/m2

16 4

60

Assessors

Actual

Assessors

Market

Market

Valuation

Value

Value

MarketPrice

(PIm2)

(PIm22)

(%)

P18/m2 P120/m2

P50/m2 P421/m2

36 28 5

Source E A Tan RealProperty Taxation andItsPotential AsaMajor Source ofLocal Revenue =nPoverty Growth andtheF#scal Crtsss byDeDiosetal 1993


BREAKING AWAY FROM THE FISCAL BIND

Table17 Buoyancyof Revenuesof LocalGovernments19801990 (In percent) Revenue Sources TotalRevenues I Localsources A Taxrevenues 1 Realproperty taxes 2 Taxesongoodsandservices Business taxes Occupation tax Franchise tax F=nes andpenalt=es MKscellaneous 3 Othertaxes Residence tax Amusements Sandandgravel Others B Operating andmiscellaneous revenue 1 Government services 2 Government business operattons Rentals Pubhcutlhtles Market Slaughterhouse Tollsonroadsandbndges Cemetenes Otherbusiness operations 3 Interest 4 Others Totaloperatingandserviceincome 5 Incomefrompublicenterprise orinvestments 6 Msscellaneous =ncome ContnbutJons Others C Capitalrevenue Salesofassets II External sources 1 Shares fromnat=onal taxes 2 Grantsandaids 3 Inteflocal government transfers 4 Borrowings

Buoyancy* 0 87 078 067 072 0 24 1 15 109 0 83 0 51 070 024 1 22 099 107 062 0 71 100 0 59 091 127 201 044 089 0 91 107 0 10 140 241 095 0 91 1 33 048 0 84

Buoyancy isdefined astheratJo ofthepercentage changeintaxrevenue to thepercentage change fn aggregate =ncorne GNP


ROSARIO G MANASAN estabhshed by the BIR for purposes and the estates taxes Meanwhile actlvlt:es and

the LGC perm:ts LGUs sectors that were formerly

taxatlon

Moreover

at whlch

most

revenue _mpose

the

Code razsed

local taxes

tlons the scope of taxes remains Second

of determining

the capztal

to :mpose taxes on some outslde the amblt of local

the mammum

can be zmposed

allowable

Desp:te

these

of LGUs authority to levy business and severely clrcumscr:bed and hmlted

local officlals

faded to maxlmlze

ra:smg powers (NTRC the mammum allowable

Property

Tax Codes

nominal

umt rates

and

chose

1981 rates

tax yields by mflat:on techmcal and poht:cal

In th:s expertlse

the use

rates

modzflca other

of thelr

types hmlted

1992) Many LGUs d:d not under the old Local and Real

to maintain

over the years

gains

desplte

thelr

taxes

the clear

at the same

eromon

of their

respect LGUs must acqulre the m setting local tax rates at levels

that are hlgh enough to maxlm_ze local revenues and low enough as not to dlscourage businesses from locating m thelr junsdlctlon Third the admmlstrat_on of local taxes has been mefficlent the

aggregate

property

tax

LGUs revenues

collect

less

(Table

18)

efficlency m collecting other types than that of RPT whose collect_on Poor LGU tax systems

and

admmlstratlon

procedures

that

than

60 percent

Whde

of potentml

no est:mates

ernst

so In real

of the

of local taxes they may be lower Is better orgamzed can be traced

currently

govern

to the

inadequate

assessment

Table 18 Collectmn Rate for BasmcReal Property Tax (In percent) Year

CollecbonRate

1983

58 61

1984

54 24

1985

46 85

1986

51 37

1987

52 82

1988

5430

1989

6815

1990

57 74

collec


BREAKINGAWAYFROM THE FISCAL BIND tlon

and

enforcement

The

45

Associates

(ARD 1992) noted that the required only need to be practiced conmstently I) estabhshmg (conducting bank

a tax roll for each a tax census

are key steps

m Research

improvements are rumple they These improvements include type

and developing

in thls regard)

Development

that

the

LGU admmlsters

an integrated

2) using

revenue

mdlcators

data

of presumptave

income prudently to arrlveat the _true gross recelptsof business estabhshments (thisinvolvesthe use of standard ratiosthat relate the amount of income with given levelsof easilyvcrlfiable expendi ture varlableshke utlhttes{electnclty/water) consumption

rental

number of employees and the hke) 3) sending tax billson a regular basis 4) consclentlouslymonitoring tax payments

and identifylng

and collecting tax dehnquencles and 51strictly implementlng sanc tions and penaltles (hke auctlonlng dehnquent

real propertles

closing business estabhshments imposing penaltles and sur charges at rates that are high enough to hurt}on erringtaxpayers Computerization ofrevenue operationsand greateraccess to mfor matlon maintained by other government agcncles (hke the BIR Regmter of Deeds) would alsohlghlyreinforcethe posmve effectsof the abovementloncd improvements on LGU finances With regards to the real property tax however

the biggest opportunity for Im

proving collection hes m proper records management Exploring User charges refer sector beneficiaries associated make

with those

to fees that of publicly

large

households

producing

the Potentml

private

and

firms

servlces

of User Charges

the government provlded goods benefit pay

Unhke

exacts from prlvate or servlces that are taxes

user

charges

part

of the

cost

for at least

they consume

As such

it has often

argued by many economlsts that user charges increase whde they raise revenues at the same tlme By collecting on the use of a pubhcly discourages funding

wasteful

the prowslon

the government wlth tax financing

produced

good or servlce

consumption of these

to avoid

goods

of such through

the deadweight

losses

user that

been

efficlency a charge

the government

good/s_rvlce charges

of

Moreover enables

are associated


415

ROSARIO G MANASAN Some

analysts

have

argued

that

since

user

charges

are

lewed

by the government on a quzd pro quo basis they effectively hmlt the access of the poor to needed government sermces However others have

shown

2here

are

that

thls

many

crltlclsm

subsldlzed

dlsproportlonately

benefit

University

of the

Phlhppmes

socialized

prlctng

government some

the better

scheme

can promote

relief

is misplaced

prior is one

off

Tertlary

out that

in LDCs education

example

as well

They

that at the

implementation

and efflclency

constraints

point

services

to the such

its equity

from Its fiscal

They

(government}

of the argue

objectlves

that

and find

by charging

all users

of the government service cost based fees and by surnultaneously installing well targeted programs to deliver the needed subsldles to the poor

In the case of university

of selective

education

thls may take the form

scholarshlps

The revenue potential plolted m the Phlhpplnes total national 15 3 percent

of user charges has Thus the contribution

government revenues in 1976 to 5 8 percent

not been fully ex of user charges to

continuously declined from m 1992 Measured relative to

GNP user charges were halved m the last 17 years from 2 2 percent to one percent This resulted largely from the government s failure to automatically adjust user producing the goods/servlces Some specific

examples

charges

of user

to reflect

charges

changes

in cost

m the Philippine

of

context

are presented below The subsequent section describes the possl bfllty of raising revenues from cost sharing or cost recovery through user charges m government hospitals The discussion tlal of user charges m LGU public enterprises follows Many charges

other The

charges sources

to capture is another

User charges Over

possibilities road

60

hospital Because

user

exist for the more tax

the economlc (Box 3)

in government

percent services hospltals

is one

of natlonal which

from

The exploltmg

use of user use

of forest

natural

re

hospltals government

are under

provide

effective

possibility

rent

on the poten

health

s health

the Department care

with

large

outlays of Health private

go to (DOH) beneflts


BREAKINGAWAYFROM THE FISCALBIND

47

BOX 3 Prtcmg Access to Forest Lands Phthppmeforestlandsareclass=fied as partofthe publicdomain hence they are not alienablenordisposablefor pnvateownership Accessto such land and the resourcesthereto such as the t_mber and nonttmber re sourcesminerals floraand fauna have beengrantedmthe formof licenses and permttsforresourceextract=onThe privilegeto harvesttimberproducts from naturalforestshasbeen grantedthroughhcensesof 25 year duration renewableonlyonce with the attendantItcenseapphcationfees and forest chargeson logsand the usualtaxes on processedwood products Various studtespomtedout however that stncethe Phlhppineforest charge systemdidnot reflect suchvalues tt led to the followmgeffects 1) wastefulprocessingand consumptionofwood basedproducts(delosAnge les 1993) 2) htgheconom=crent and rent seekingactiwties(Paderanga et a/ 1983) 3) and a btas for capttal_ntensiveloggingtechniques (delos Angeleset a 1993) Two mechan=sms were developedto =mprovepnc=ngof accesstotimber resources The firstfocusedon the longrecommendedstumpagevaluat=on system(e g Revtllaeta/ 1977 Cerna 1975) uponwhich to basea system of btddmghmberharvesttngrights The Natural ResourcesDevelopment Corporatton(NRDC) pdotedin the late 1980s which recommendeda mm_ mum bid price of 25 percentof the log price to _mplementm a T_mber ProductionShanng Agreement(TPSA) However followthroughacttwttes to thiseffortwas minimaldue to problemsassoctatedwiththe NRDC whtch was taskedwith the responsJbdlty of operationahzingthe TPSA The other attempt focused on developingan _mprovedsystem upon whichto base revisionsof forestcharges Studsesconductedto explorethe =mphcat=on of thesystemofforestchargesandtaxesapphedontheforest basedindustries indicatethe need for increasingforest charges(delosAngeles 1980 Saas tamomen1990 and Baut=sta1992) Alltheseindicatethe needsforadjusting forestchargesto enable governmentappropriat=on of economicrent PartA of Table C illustratesthe pre adjustmentlevelsof economicrent for both old growth and secondaryforest loggingfor extreme cases of inefficientand efficientfirms For old growthioggmg the low forest charge of P30 per cubtcmeter allowedeconomtcrentseven for inefficientfirms at 18 percentof total costs Upwardadjustmentsof forest chargeswell thus hkelyreduceinefficiency(causeshut downfornon viableoperattons)aswell as lowerthe size of the loggingsector The residualforest case mdtcatedin Part B lower loggingcosts on accountof lower infrastructurecostspertainingonlyto road and buddmg maintenance(versusroadconstructionfor old growthoperations) The high


48

ROSARIO G MANASAN

economic rent levels are indicative of the rewards that sustainable logging practitioners could have expected from the second growth forest assuming no total log ban is imposed Part C of the table shows the current situation under full _mplementatlon of RA 7161 which increase forest charges from P30 per cubic meter to 25 percent of the local log f o b price Under current log pnces Part C indicates that Ioggings even with the old capital intens_ve techniques under hgher forest charges is still wable Thus for as long as selective logging is allowed under conservation onented practices h_gher forest charges are expected to generate revenues for the government The current sh_ft_nuser groups from large scale logging to small scale communtty based logging in fact allows for h_gher econonlc rents from logging Part D of the same table indicates lower production costs with the use of less capital intensive logging log hauhng and transport technologies which are more appropriate for smaller s_zed logs The potential economic rents are h_gher as _nd_catedin Part C Assuming that these techniques are also less soil erosive then the shift from larÂŁa scale capital intensive logging toward community based labor intensive logging is favorable from the perspectives of equity efficiency and conservation The rewsion of the forest charge system through Republic Act 7161 passed in 1991 providing for a level that is 25 percent of the site specific f o b log price (ex forest pnce) is not yet fully implemented Pending ongoing studies on the system for determining local log prices an interim mechanism of basmg the forest charge on logging cost was developed A study by Bautlsta shows that this results in lower government appropriation of economic rent from logging and wood processing actJwties compared to DENR s administratively imposed Enwronmental Fee temporanly appSed in the previous year Moreover the system currently disregards the off site externaht_es of using upland areas Nevertheless the interim system results _n higher tax rates on the industries concerned compared to histoncal rates and represents upward adjustments of user charges for scarce t_mber resources With the current shift in forest cover from old growth to managed secondary forests and of user groups from large scale to small scale an _mproved .,ystem of charging the right price for exclusive access to a specific forest ecosystem and the resources therein has yet to be developed Such a system should have the following charactenstlcs (1) it must be based on the expected flow of products both timber and non timber and serwces from the land management unit through a perpetual period of t_me instead of being primarily timber resourse based and (2) it should allow for off site externahtles penalize erosive pratlces and reward environmentally sound practices sour e delosAngelesM S PricingEnv onmentalResourcesTheCaseof Foestry Water andAhrResources 1993


Table C Simulated Profitabd,ty Across Firm and Forestry Types 1987 1993 (In current pnces) A Old GrowthForest

B ResidualForest 1987

C ResidualForest 1993

D ResidualForest 1993

1987(capttalmtensive

(capitalintensive

(capitalintensive

(labor intens_e

logging)

logging)

logging)

Ioggmg)

Inefficient Firm

Efficient Ineffictent Firm Firm

Efficient Inefficient Firm Ftrm

Efficient Inefficient Firm Firm

<_

Efficient Ftrm

-% c_ > L-_

a b c

Roundwoodprice Produc_oncost Retumon_nvestment

2 932 1 341 1 319

2 932 80l 1 319

2 932 939 423

2 932 523 235

4 000 1 663 749

4 00O 927 417

4 000 1 331 599

4 000 741 334

d e

% pnce Forestcharges Excessprofit

45% 30 2416

45째/ 30 781 6

45% 30 1 540 45

45 / 30 2 143 65

45 / 1 000 588

45 / 1 000 1 657

45% 1 000 1 070

45% 1 000 1 925

(economicrent) percentof costs

18/o

98/o

164째/

410%

35/o

t79%

80째/

260%

Notes

a

._ u

Ex forestpace actual

b 1987costfor averagefirm=sbasedon artaverageof variousestimates(delosAngeh_s1989) me retat_ve costsforeffic4entfirmswereestimatedusLngMoncayos case stud,s 1993f_juresfor K trttens_ve Ioggtngts basedon 10 percentgrowthrate peryearof 1987cost of averagefirm labor_nlens=ve togg_ =sassumedto be 20 percent_eaber tf_anK _ntenslvelogging c ArLestimate assumedto be price based d As prowd,ed bylaw a fiatrate of P30per cubtcrneterwas In effecttn 1987 RA 7161providesfor a 25 percentof ex forestprtceeffective1991

t


SO

ROSARIOG MANASAN

and

possess

the

implementing

administrative

cost sharing

and

control

mechanisms

systems

necessary

the charging

for

of fees for the

services they promde represents a natural supplement if not an alternative to the regular budgetary allocations financed by tax revenues

that

A study

now support

(SGV Consulting

faclhtles

in Region

average

only five percent

1987 uted

their

1989 were

1991) showed

3 exhibit

by user

seeking

pricing income

and costing remittance

behavior

administrators The

of cost 19) (1 e

market)

and

On

the

hospitals

m

The study

attrib

the overall

area of government

of the

DOH hospital

recovery

m these

fees (Table

to both external

m the catchment

health

that most

low levels

of the expenditures

covered

thls poor performance

development

operations

hospitals

internal

level of and the

factors

practices for government hospital pohcy and the culture/orientation

(1 e

servmes the of hospital

and personnel)

study

pointed

system to steer in the tendency

out that

the mablhty

of the current

patients to the appropriate of patients to seek all types

DOH hospital

network

even if what

referral

health facdlty resulted of health care from the

they need

could

adequately

be

promded by lower level faclhtles Thls tendency is exacerbated the underpriced services of DOH facilities In turn this has creased

hospital

operating

full cost recovery dehvery

system

At the same time

the service

for all DOH hospitals

difficult

lower level facflltles

Also DOH gmdehnes and do not take

paying ability of different catchment costs across hospitals The study personnel

At the same

to attam

m the DOH

are themselves time

restrlctmns

resistant

recovery

level is qmte high m situations

to retain

the income

collected Fund

hmlt the user fees

uniform

the varying productmn some DOH

of income

gener

incentive to hospital In contrast the cost

where

from the user

m the Sapang

are the

to the idea of charging

on the retention

DOH hospitals severely to charge and collect

Drugs

prescribe

into account

areas and different further found that

ated by personnel

the Revolving

it more

the study noted that prices of hospital services on outdated gmdehnes that do not truly reflect

cost of providing

hospital

making

are underutfllzed

Moreover usually based rates

costs

by in

hospitals charge

Palay

are allowed An example

Hospital

is

(Table 20)


BREAKING AWAY FROM THE FISCAL BIND

51

Table19 Cost RecoveryLevels Incomeand Expenditures 19871989 Region3 (Inthousandpesos) TypeofHospltal

t987

1988

1989

8 115050

7 29230

7 18990

2437330 4 72

6 10210 4 79

5 80170 327

29

28

24

3 73980

4 68620

9 62330

Expenditures income/expenditures (%) TertCary Number Income

9263830 4 04

14006020 3 35

12712250 7 57

5 4 92950

7 4 80740

6 4 87580

Expenditures Income/expenditures (%) AllLevels Number Income

11051400 4 46

11069420 4 34

9410400 5 18

42 9 81980

42 9 78590

37 1468900

22752560

25685650

22702820

4 32

381

6 47

Primary Number Income Expenditures Income/expenditures (%) Secondary Number Income

Expenditures Incomelexpendltures (%) Source

AStudyonUserFeesandCost$hanng/Recove_/in DOHHospitals(FinalReport) Department of HealthOctober 1991


52

ROSARIO G MANASAN Table 20 Sapang Palay District Hospital Level of Cost Recovery from the Revolving Drugs Fund 1989 1990

Totalcost ofdrugsand medicinespurchased

1989

1990

792 498

936 961

8 494

37 027

784 004

899 934

98 9

96 1

Totalvalueof drugsand medtcmesreimbursedfromthe mafntenanceand otheroperatingexpenses (MOOEs)budget Totalestimatedrevenuesgenerated Costrecoverylevel(in percent) Source

A Study onUserFeesandCostShanng/Recovery inDOHHospitals (F,nal Report) Department of HealthOctober 1991

Fortunately as part

with the transfer

of the devolution

restrictions

on income

program

retention

set up will substantially government ever

hospitals

LGU officials

of most mandated

no longer

improve

m cost

based

rate

setting

for cost recovery

that generate

drugs

medicines

should

vary

catchment flexlblhty rates

and

SGV Consulting

higher

prwate

medical

and

to use their m_t_atwe

level of cost recovery

and

3) hospital

as well as cost containment

(versus

supphes

wxth demographic area

operatwe

setting should social)

efforts

suggests

for govern be targeted benefits

non to attain

e g

recovery

characteristics

admxnlstratlon

to implement

of setting

s study

2) _ost

Income

in

how

to the costs of service with technical assls

that the following principles should guide rate ment hospitals 1) h_gher levels of cost recovery for services

the devolved

to the advantages

user charges at levels that are closely hrtked dehvery Moreover LGUs should be prowded tance

Thus

to become

to be sensitized

to LGUs

by the LGC of 1991

apply

the incentives

For thin incentive

have

DOH hospitals

should

levels of the

have

the

cost or cost

based

an overall

target


BREAKINGAWAYFROM THE FISCAL BIND User charges Like most

in LGUs

LGUs

cities

faclhtles

hke

services

waterworks

passenger

operate

markets

of city pubhc

quately

In the earned

In principle

pubhc

(MOE) in 1988 only earned

markets

slaughterhouses

and

include

the outlays

to them by other state of a number

costs

enterprises

(Table

governments

lngs with an operating this figure was found

these

as a group

P0 33 for every peso spent

dltures

and

sanitary

facilities

and road

enterprises

enterprises

and malntenance

aggregate

enterprise

do not

of these

run

Pubhc

utflltles

P0 20 per peso spent appeared

Consult that the cover

and

ade

fac111tles

operating

expen

operated

by city

in MOE

While pubhc

to be profitable

undertak

income to operating expense ratlo to be misleading The cost figure

on securlty

and

by clty governments

on maintenance

21)

are

Planning

International Inc (PADCO)/ (PHILNOR) (1992) estabhshed enterprises

the operation

waste

telephone

for profit hke business

Development Collaborative ants and Planners Inc

of pubhc

sohd

facd,t,es

fac_htles

primarily

earnings

a good number

slaughterhouses power

transport

operated

S3

engmeenng

of 1 84 dld not

servlces

provlded

city government offices Moreover the dllapldated of these facfl,tles mdlcate that actual MOE levels

are sub optimal The study level Imphclt 231 (whlch restricted faclhtles

traced

the roots

m the pricing has

been

of

repealed

that

deters

to the high enterprises

subsldy While

by the new Local Government

them

The Local Government on the

levels

serrate

The experience

households

LGUs

in other

are more wdhng benefits

this perspectlve

pubhc enterprise harnessed

from adopting

cost based

Code of 1991 effectlvely

of fees that

corresponding

Given

pubhc

run

PD

Code)

the rates LGUs can charge for the services of some of these the problem partly comes from the pohttcal orlentatlon of

local officlals

the

of this problem city

may

charge

countries

to pay user from the

performance

removes

for pubhc

lnd_eates charges

former

one sees the great

the hmlt enterprise

that

than

are easily

potential

on revenue

pricing

firms

taxes

identifiable

oflmproved

generation

and

because LGU

if properly


Table 21 Prof,tabm|=ty Compar,son Between Cm_ Government Operated PublmcEnterpr,ses and Comparable Pr,vate Sector Run Fac,htmes1988 (Values mnthousand pesos) Pnvate CI_ Govt

Operating

Profrt

(3) = (1)/(2)

Income

Expenses

(6) = (4)/(5)

(2)

(3)

(4)

(5)

(6)

791 221

0 20

t0 272 099

7 475 623

1 37

182063

74 312

2 45

51 828

31 584

1 64

Telephonefaclbtles

6 907 182

4 935 791

1 40

Roadpassengertransport

3131 026

2 433 936

1 29

PublicUtlbbes

Operating

Income

Expenses

(1) 157647

Sector Operating

ServJcerrype

Operating

Profit

Sobdwasteand sanl_ry se_l_S Waterworkselectnclty/bght/power

Marketand slaugh_rhouse Cemeteries

146880 1 547

79 904 1 130

1 84 1 37

1 262 396 277460

684 018 177 166

1 85 1 57

Otherbusinessoperations

13670

85 871

0 16

349 218

233 196

1 50

319 744

958 126

0 33

22 433 245

16 045 626

1 40

Total

Note Other per_n_ge _,'(_aremduded =nth__alys__use t_ VATmp_ced some ofth_ _y,_

I_

>_


3 Improving Allocation

the

of Pubhc

Spending

In recent years maintenance and other operatJng expenditures (MOOE) and capltal outlays dramaUcally fell Whlle the government undertook

thin reductlon

the economy capltal

cannot

spending

financial

to achleve

afford

to continue

fiscal stabdlty such

an unabated

iflt is to grow m a sustained

posltlon

the

government

must

m the short

fashlon also

run

decline

m

Given its dlre

increasingly

seek

a

blgger value out of each peso it spends Thus It Is now nnperatlve for the government to rewew its spending prlor1_es To do thin the government

has to reconmder

that of the private economic

sector

development

_ts approprmte

glven Also

changing

role and scope ws a ws technologies

the government

has

and

to reassess

level of how

Itshmlted resources can be spent most efficlently and effectively in areas where government part_ctpatlon zs needed Trends Aggregate National panded

national government mgmficanfly

and Patterns

government

expendstures

expenditures m the 1986

on an obhgatlons 1992 period

barns

11 ex

nsmg to 22 3 percent

11 Government obhgatlon expenchture data are based on accrual accounting as such cxpenchtures are reckoned according to the tnne contractual obhgalnons are made In contrast government cash expenchture data are based on cash accounting whereto encpenchturesare reckoned relauve to the ttmc actual d_sbursemcnts forboth


56

ROSARIOG MANASAN

of GNP compared 2)

This

wlth an average

came

about

as

of 16 9 percent

aggregate

natlonal

exhlblted robust growth not only m nominal While total national government expenditures m real terms

m 1975

percent

m 1986

sharply

m 1986

These

1985

1992

National

1987

figures

budget

accounted

m 1975

m 1986 1986

1992

almost

Consequently of the nataonal net of debt capita (Fig

has

times

1992 Current

the

rose

came

1985

of the While

government of the budget

to 9 4 percent

of GNP m

level of 3 2 percent

from

5 3 percent

extent s capacity

to 4 2 percent

government

s current

pendltures

in the last

slx years

the

needed

outlays

in current capital

of GNP (Table

has serv

showed

m 1986

expendltures of GNP in 1975

outlays

contracted

22)

decomposition

followed

pnces

burden

much

11 6 percent

while

m 1985

debt

government

from

Further expenditures

service

per

expenditures

growth

1992

Moreover

level of P2 031 m 1981

to provide

government

expanded in 1986

1983

to which

in total national

expendztures

since

net of debt

from the rapid

expenditures to 18 percent

depressed

of national

increase

1985

Current

of the growth

of the national

well below its peak

mdicates

categories

largely

indicators

its 1975

expenditures

hampered the government ices to the people

The marked

1990

service

been

at P1 720 m 1992

Economic

increased

despite the substantial growth m the overall outlays government total national government expenditures

servace

3) Thls

of 10 1

dunng the period Thls is because service m the government budget

debt three

government

stood

average

this item ate up 40 8 percent

Thus

outlays

expenflltures

are mlsleadmg

for 18 9 percent

1985

1992

and

1985 (Fig

but also m real terms grew by one percent

by an annual

government

1989

however

and slze of the government explosive growth of debt debt service

It surged

m 1975 government

that

the rapid

of the

natlonal

the increased growth

ex

in three

current and prior years obhgattons are made Under the Modified Disbursement System the Department of Budget and Management first releases the Advise of Allotment (AA)which gives government agencies the authority to recur obhgataons or enter contracts Then it releases the corresponding Notice of Cash Allocatlon (NCA) which specifies the maximum amount of wlthdrawal an agency can make from a government servlcmg bank


26

F,gure 2 Nat,onal Government Expend,tures as a Percentage of GNP 1975 1992

I_

24

N

20

_ N

e n

18

_ N

t

16

p e cr

14 12 10 1975 1976 1977 1978 1979 1980

1981 1982 1983

1984 1985 1986 1987 1988 1989

v A

Total Expend¢tures

Total Net of Debt Servce

1990 1991 1992


== F,gure 3 Per Cap,ta Nabonal Government

Expend,tures

,n 1985 Pnces

1975 1992

3000 2800 2600

I 2400 n 2200

_ooo -

_/_

o 1800 s 1600 1400 1200

_)

1000

! 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

=

TotalExpendf(ures

TotalNetof Debt$e_ce

i


BREAKINGAWAYFROMTHE FISCALBIND items

interest

t.tons

and

payments

current

expenditures

59

transfers

on personal

to government

sermces

corpora

Interest

payments

soared to 6 3 percent of GNP in 1985 1992 compared wlth an average of I 3 percent in 1975 1985 Personal sermees expenditure rose from four percent government 1985

corporations

to 0 3 percent

Interest even

pluses 1985

1992

of 0 1 percent

meet

s access

larger

would

of GNP in 1983

volumes

1980s

partly

1985

1) the national

under

of

sur

and 3 2 percent

of finance

s mopping

IMF Program

debt

issue

the national increasingly

tnggenng

reglstered

in

payments

government

sources

the

of domestic

reqmred to finance time the government

have

rise m the interest

the government

targets

that they the period

assumed

of government corporations and financial interest rates were rising and 3) the

to the foreign

On top of this hqmdity

during

out of the overall defimt

country

1992 (Table 23) The phenomenal

the guaranteed Imblhties mstltutions 2) domestic

to

of GNP in 1975

deficit

were netted the

may be traced to three factors

]shed

0 2 percent

transfers

(Table 22)

government

payments

government

government

Current

were so huge in the last seven years

the national

if interest

the national

of GNP

grew from

in 1986

payments

surpassed

Thus

to 5 6 percent

also

dnnln

up operation demanded

compared

vnth

to

much what

is

government defimt At the same relied on domestic debt in the late

the higher

interest

rates

during

the period

The government had to offer higher rates to make the larger volume of Its T bills more attractlve The government also followed a high interest

rate policy to keep the forelgn

upward

adjustments

m sermcing

exchange

its forelgn

rate down

habihties

to avmd

Thin led to an

explomve situation where the large stock of domeshc debt led to an ever increasing domestic debt sermce burden further exacerbating the fiscal defimt that had to be financed (Boxes

borrowing

4 and 5)

The salary adjustments ing the Aquino

granted

admmmtration

crease In national government These included the I0 percent July

by more domestic

1985

positions

the and

five percent the

30

percent

to government

partly

explmned

employees the dramatic

dur in

expenditures on personal sermces across the board salary increase in salary

increase

salary

increase

for career

executive

for rank and

file


Table 22 Nabonal Government Expend,tures by Econom,c Ciass,ficabon on an Obhgatlon Basis as a Percentage of GNP 1975 1992

19751985

19751982

1983 1985

1986 1992

1986

1987

1988

1989

1990

1991

1992

1690

1674

1709

2264

1920

23 I0

2105

2180

2377

2324

2395

t157 408

1087 435

1234 377

1844 5 56

1298 478

1896 469

1814 548

1864 569

2001 5 97

1885 5 49

1901 602

B Ma=ntenance andotheroperabng expend_tu[es 749

652

8 57

1288

8 20

1427

1266

1295

4 04

1335

1300

Tota_

I Current operating expend=tures A Personal services a Interests

130

092

172

6 27

362

1043

5 77

603

6 61

594

587

b Transfers

1 20

1 42

097

137

10

0 88

10k

120

153

140

19Z

1 tok:_algovernment

067

087

067

0 65

061

0 28

058

041

0 5t

055

125

2 toall9ovemment corporations

019

024

013

033

022

029

039

029

063

026

001

000

0 01

_ to nonfinancial government c_rporatJons 0 t8 3 toothers 035

0 24 05t

0 12 0 17

040

043

0 39

0 19

040

0 73

022

041

Š

073 346

34_ 240

268 256

108 246

000 296

320 264

304 268

327 263

361 241

284 237

,_ _>

tofinancral government corp0raUons

c Loanrepayment ands,nk,ng fundcontob d OtherMOE

204 296

,_


_0 Table 22 (continued) 1975-

19"/5-

1983-

1986-

19_,

1982

1965

1992

1986

t987

1_

1989

t990

1991

t992

5 34

587

4 75

420

622

415

291

317

375

4 39

4g4

A Landland_mprovements ands_ctureoutlays 161

212

B Budd_sandskuctures C Eqmpment

061 028

077 027

103

154

0 51

112

094

1 17

175

190

230

042 029

082 0 34

100 010

056 018

055 0 35

069 0 38

099 023

100 040

081 0 51

D 7nvestment outlay

227

237

215

064

209

070

030

061

052

040

051

018

000

0002

0002

023

024

025

031

<> II Cap_al outlay

a tolocalgovernment b toallgovernment corporabons 218 1 tofinancml government ¢orporabons1 17

232 0 86

202 151

043

206

069

027

030

027

014

019

2 tonon-financial govtcoq_oratmns 101 c toothers 00g

146 005

051 013

028 002

206 003

069 001

027 003

008

001

001

001

058

033

085

086

253

158

077

032

027

070

080

002

0003

003

003

00t

002

002

001

053

028

080

061

253

t14

062

017

020

064

011

1 tofinanaalgovernrnentcorpoxatmns 064

001

007

2 tonon-Jinanc_al gov'Lcorpoxabons0 48

0 27

0 72

034

Z53

114

005

005

023

0003

042

012

013

005

004

069

E Loar_ o_y a tolocalgovernment b toallgovernment coq)orabons

c.toofhem Source ofbasedata

005

_0

Deparl_ent ofBudget andManagemenL ot k,=


b_

Table 23 National Government Deficits 1975 1992 (In mdhon pesos)

19751985

1975t982

19831985

19861992

Overallsurplus/(deficJt) 67687

39050

28637 170225

Interest payments

43584

13527

Pnmarysulplus/(defiat) 24 103

25523

1986

1987

1988

t989

-31252

16693

23206

30057 384671

21 612

36905

1420 214446

9640

20212

1990

1991

1992

19567 -37194

26348

15965

45865

54714

71 114

74922

79 539

22659

35 147

33920

48574

63 574

% to GNP I _rl

Overallsurplus/(def_t)

2 25

2 46

2 01

2 55

5 24

2 48

2 92

2 14

3 46

2 09

1 17

Interestpayments

1 45

0 85

2 11

5 75

3 62

5 48

5 77

5 99

6 61

5 94

5 81

Primarysuq)lus/(deficd)

080

1 61

O 10

321

1 62

300

285

385

3 15

365

464

Sources ofbasedata Deparbne_ ofBudget andManagema¢ andBureau ofTreasury

I

I


63

BREAKING AWAY FROM THE FISCAL BIND

BOX 4 Mopping Up of Excess Liquld,ty The national government s domestm debt started to pick up dunng the Aqutno government By May 1993 domestic debt of the national government stood at P541 5 billion or about P400 bdhon more than the outstanding publfc debt at the end of 1986 the first year of the Aqutno government (Table D) A factor behind this spiralling public debt _s the mopping up of excess liquidity Liquidity in the system increases if net foreign assets of the Central Bank (CB) improves

among other things

If a ceiling on hquldlty is imposed then

the increase in net foreign assets has to be offset by reducing net domestic asset This process Is commonly called the balance of payments (BOP) sterilization Balance of payments (BOP) sterilization is easily explained using the balance sheet of the CB In the balance sheet of the CB reserve money (RM) falls under the hablhtles column The assets column has two major items net foreign assets (NFA) and net domestic assets (NDA) In turn the NFA comprises two items international reserves (positive) and foreign habthttes (negative) The NDA includes a major item net domestic credit (NDC) to national government (r e the CB s lending to the national govern ment [NG] less NG s savings in CB) Expressed In an equation form we have RM = NFA + NDA Thus Jfa cethng on RM Is imposed then an increase JnNFA ts stenhzed by decreasing NDA NDA can be reduced if the NG increases its savings _n the CB Except for 1990 BOP registered annual surpluses since 1986 These surpluses Improved the NFA From a deficit of P133 bllhon Jn 1986 the NFA deficit declined to P108 2 billion in 1989 The BOP stenhzatlon in the Aqumo government

took the form of a

dechne of CB net credit to NG CB net credit to NG dropped from +P42 3 billion in 1986 to P29 5 bJlhon in 1989 TNs decline arose from the surge in NG deposit in the CB from just P16 4 Nlhon _n 1986 to almost P70 bdhon m 1989 NG savings m the CB came from the increased issuances of Treasury NIIs (T bills) for open market operations In 1986 total outstanding T bills reached P55 4 bdhon In 1989 tNs rose to P172 5 billion or an increase of P117 btlhon in three years This

operation

drastically reduced

the growth

of reserve money


64

ROSARIO G MANASAN

Tfe

ry Bill (I b il

O tst.= dl g p )

50O 450 4OO 350 300 250 2OO 150 100 5O O 1986

1987

1988

1989

RM grew at 31 7 percent m 1986

1990

1991

1992

1993

In 1987 the growth declined to 15 5

percent In 1988 RM growth settled at 16 5 percent In 1989 however RM growth surged back to 38 percent The increase can be attributed to the wage standardization of government employees among other things In 1999 a foreign exchange crisis took place BOP registered a deficit of US$185 million Thus NFA in 1990 swelled backto P140 5 btlhon As a result BOP stenllzatton efforts stayed "tt rain=mum levels In fact NG deposit in the CB dechned by P2 3 btllion BOP sterilization operation resumed in 1991 and 1992 (or even _n the first half of 1993) as shown in the data The BOP surpluses led to an upsurge in NG deposits in the CB which amounted to P137 8 bdhon in 1992 In terms of NG cash balances in the CB the level stood a lot higher P150 billion m 1992 As a result the growth In RM was pulled back to 12 percent in 1992 The mopping up operation increased the stock of domestic debt of the national government In 1991 domestic debt grew to P340 8 billion or an increase of P87 billion relative to the outstanding debt for 1990 In 1992 T bdls outstanding stood at P441 1 bllhon or an increase of P169 6B relative to the 1991 level As of May 1993 domestic debt outstanding stood at P541 5 bllhon and T bills at P482 2 bdhon The above analysis showed that the price that the economy had to pay for trlmm=ng down the growth =n reserve money _sdomestic debt accumula tion Generally thts is not sustamable because a nslng stock of debt makes it harder to sustain macroeconomlc balances since debt servicing introduces an additional burden

This is especially true for countries with large debt

stock to begin with hke the Philippines Therefore, adjustment via additional debt is usually not viable in the long run source

caesarCororaton PublicSectorDefiet andDomesticDebtHeavyBurdenof Phf ppneEconomicGrowth 1993


Table D Domesttc Debt of the Natmnal Government and Central Bank Balance Sheet

Domesbcpublicdebt(PB)

1986

1987

1988

1989

1990

1991

I992

1993

1444

161 2

207 2

237 2

253 8

340 $

NA

541 5

T btNsoutstandng(PB)

554

1059

1426

1725

1926

2135

441 1

4822

Reservemoney(EOY PB)

50 0

57 7

67 3

92 9

1087

1294

1448

NA

31 7 t33 3

15 5 132 3

16 5 1216

38 0 1082

17 1 1405

19 0 68 5

12 0 38 2

NA NA

(growth/) CB netforeignassets(EOY PB) Balanceof payments($M)

1242

264

516

447

185

1065

498

NA

CB netdomest_cassets(EOY PB)

1843

190 0

1889

20t 1

249 3

197 9

1067

NA

CB nelcred_tto NG(EOY P8)

423

32

173

295

275

432

1095

NA

NGdepostts_nCB (EOY PB)

16 4

42 6

58 2

69 6

67 3

75 3

137 8

NA

May1993 PB--tn bllJon pesos EOY-- end-of year It A -- notap_lcable

o


Cash Balances of the Nahonal Government by Locabon 1986 1992 Table E (In mLIlionpesos)

1986

1987

1988a

1989

1990

1991

1992

318

281

270

280

417

319

314

14403

39636

55512

68145

59587

73395

150270

PhlhppmeNationalBank

5496

5848

572I

5370

5377

8002

t6978

PhilippineVeteransBank

1502

1492

1492

1486

1486

1486

1486

LandBankof the Phd_ppmes

4712

2016

1773

1430

I523

2565

3954

DevelopmentBankof the Phtl_ppmes

2617

2361

1721

1530

416

414

4602

Treasuryvautt CentralBankof thePh_hpplnes

Phtltpptne AmanahBank Otherbanks Total

118

127

t43

105

91

91

79

2545

3t07

6179

7647

403I

4803

3969

31711

54868

72811

85993

72928

91075

181652

09

> O

Includes balances ofbank depomt accounts ofna'oonal agenoes under thenewdisbursement scheme So_rce

'_

Bureau ofTreasury Co > 2:


BREAKING AWAY FROM TIIE FISCAT BIND

67

BOX 5 Dynamics of Domestic Debt Box 4 shows that as of May 1993 the domestic debt of the National Government (NG) stood at P541 5 billion (B) NG s domestic debt increased by more than P400 billion since the end of 1986 the first year of the Aquino government It is shown below that at the rate the economy usmoving (i e =eal interest rate asstill structurally way above real economic growth)

the

present domestic debt accumulation behavior cannot be sustained If the present pattern _snot reversed it would be hard to sustain macroeconomic balances conducive to a sustainable economic growth because of heavy debt service burden Let the debt income ratio be 1

(1)

b-- B/(P Y) where B _sthe nominal stock of debt outstanding

P the general price

level and Y level of real output of the economy The debt income ratio changes through time by Ab This change can be derived by differentiating (1)

(2)

Ab = AB/(P Y) - b,(AP/P + AY/Y) = AB/PY - b*(_ + y)

where _ ,s the rate of ,nflat,on y ,s the real growth of the economy The increase ,n debt ,s equal to ,nterest payments which ,s equal to the debt outstand,ng t,mes the ,nterest rate , B less the nonlnterest budget surplus x wh,ch is written as the pnmary budget share t,mes nom,nal output Thus

(3)

AB=I*B-xPY Subst,tute (3) ,nto (2) and rearrange to obtain the follow,ng result

(4)

b--b(r

y) x

where the real rate of ,nterest is (, e 1 SeeDornbusch andFischer(1990) pages6278

r =,

=)


68

ROSARIO G MANASAN

Box 5 (continued) T

ry B

Iis

Outstanding

(t bin p

)

00 4O 400 35O 30O 250 2OO 150 100 5O 0

1986

1987

1988

1989

1990

1991

1992

1993

An unsustamable budget deficit pubhc debt problem occurs when (4) is posEtJve ] e debt Is mcreasmg relative to income Thts can happen in two cases Case 1 the debt service (the first term in the right hand side of the equatton) Is btgger than the surpluses in the pnmary balance x Case 2 the pnmary balance (budget deficit net of interest payments) is in the defictt The first case properly describes the Ph[hppme budget deficit pubhc debt ddemma There were surpluses _n the basic acttvttres of the nabonal government but th_'se were not enough to service debt (see Table m this box) The pnmary balance was negative only m 1986 In 1987 up to the present primary balance always remained positive In 1992 pnmary bal ance amounted to P63 3 Nlhon wNle Interest payment was P79 6 bdhon The national government has been borrowing more than the amount required to finance tts deficit For example NG s deficit m 1988 amounted to P23 3 billion The net increase m public debt amounted to P46 bilhon or an excess of P22 7 btlhon in 1989 the excess was another P10 bdhon There was no excess

however

m 1990 But in 1991 the excess soared to P60 7

Nlhon In 1992 the gap between the net increase m T bills outstanding and NG defic=t amounted to P153 3 bflhon Domestic government borrowing _sstill excesstve even when compared to the consohdated pubhc sector deficit (CPSD) especially rn the last two years 1991 and 1992 In 1991 the gap between CPSD and the net tncrease _ndomestic debt stood at P66 7 bdhon In 1992 the gap between CPSD and the net increase in T bills outstanding reached P143 5 b_lhon


BREAKING AWAY FROM THE FISCAL BIND

69

Box 5 (continued) Box 4 attnbuted th=s excessive government borrowJng to the mopping up operation which in turn emanated from the tight monetary policy pursued by the government all these years The question anses Is th_s process susta_nableV This process Is h_ghly unstable and explosive because real interest rate _sstructurally way above real economic growth In terms of (4) r real interest rate _salways above y real economic growth It was only _n 1988 when real economic growth marginally exceeded real interest by 0 3 percent Since then the gap has widened In 1992 the gap amounted to 7 1 percent Th(s high degree of unsustamabfl_ty comes from the fact that the gap generates a snowball effect on the debt problem

High interest payments on exlsbng debt add on to the

existing debt level In the first half of 1993 average interest rate on T bLIIsd_pped to about 11 percent

With _nflatlon rate of about 7 percent

real _nterest rate shd to 4

percent The recent drop in interest rate however is just temporary the dechne came mainly from the slack tn the demand for loans because of the ongoing recession If the demand picks up then an upward pressure on interest rate would occur Th_s will therefore put a heavy burden on fiscal finances because of the huge stock of domestic debt and w_ll make healthy macroeconomic

balances very d_fficult to sustain _nthe future (Conhnued next page)


Box5 (continued) 1986

1987

1988

1989

1990

1991

1992

1993

NatJona_ government(in b_thon pesos) Revenue Expendqture Interestpayments Balance Pnmarybalance Consolidatedpublic

793 110 5 21 6 31 2 96

1032 119 9 36 9 16 7 20 2

1128 1361 45 9 23 3 22 6

1524 172 0 54 7 19 6 35 1

1803 216 9 7t 0 36 6 34 4

2208 247 1 75 1 26 3 48 8

2424 2587 79 6 163 63 3

NA NA N4 NA NA

sectordeficit(Jnb_l]lonpesos) / toGNP

29 7 50

15 5 23

29 8 37

3Q1 43

57 8 54

20 3 16

28 1 19

NA NA

Domesticpublicdebl (in bdllonpesos)

1444

161 2

207 2

23/2

253 8

340 8

NA

Increasein publicdebt (Lnbillionpesos) T billsoutstanding(in billionpesos) Increasein T bill outstanding(/_)

55 4

168 105 9 50 5

46 0 142b 36 _

30 0 172 5 29 9

16 6 192 6 20 1

87 0 213 5 20 9

NA 44l 1 227 6

541 5 200 7 482 2 41 1

T bill rates(ave alLmaNntbes)(/) lr_flabonrate(/)

143 08

131 38

157 88

195 122

249 141

226 187

169 89

NA NA

GNPgrowth(/) (T billrate_ (inflationrate)(/) (GNPgrowth) (reaI interestrate)(/o)

41 135 93

5I _3 4 1

7L 70 03

58 73 17

43 108 65

03 39 36

09 80 71

NA NA NA

p_

May1993 Source Caesar Cororaton (1993)Pubflc Sector Deficit andDomestic Debt. Heavy Burden ofPhlhpptne Economic Growth

> rb _<


BREAKINGAWAYFROM THE FISCALBIND

71

employees m selected government agencles m 1987 and the creases under the salary standardlzatlon scheme implemented July

1989

These

adjustments

pace

with

mflaUon

Thus

sermces w_th

expenditure

1 1 percent

expenditure ment ment

may have

1985

sufficlent

m 1986

personal

1992

compared

of personal

sermces

from the rise m the

(DBM) data reveal that the government s personnel rose from one million m 1987 to 1 2 mflhon m 1990

comple

government

corporatlons

despite

some

ment

The Department

subsldles

(GOCCs)

improvement

corporatlons

of Budget

number Manage

trolled

to government

meanwhile

(Manasan

and

Intal

owned

of MOOE)

to 2 7 percent

contracted

m 1986

expanded of govern

1992)

The

pomt_ve nominal

1983 1985 crlsm To make MOOE m 1991 and 1992 development capital

and

Capztal outlays 1983

has

national

matters dld not

the need

been

primarily

government

of GNP m 1975

worst exceed

it suffered

of the government

by capital capltal

carried

sux years

outlays ment

This contractmn

of the national corporatmns

its own

account

occurred

government

Meanwhile regmtered

s

mostly

since

expendltures

outlays

of the

of the

natmnal

government continued to shnnk dechnmg from 5 9 percent m 1975 1982 to 4 8 percent m 1983 1985 and 4 2 percent last

it the

rehabflltatmn

of the fiscal adjustment

absorbed

dunng

the growth rate of other the mflatmn rate Thin

detenoratmn

Aggregate

1985

item posted

m the last seven years

setback

for thelr earher

The brunt

of the

current trans or dmcretmnary

thin expenditure

growth

from the

led to the premature

assets

3 percent

While

and real average

not yet fully recovered

bulk

period went to the Natlonal Food Admmmtratlon and the Off Prod

from

1992

con

performance

In contrast MOOE other than interest payments and loan repayments (1e the non contractual

portion

and

substantlally

m the operating

subsldles to GOCCs dunng the Authority the National Irrigation ucts Stabfl_zatmn Fund

has

to keep

for mflatlon

The expanmon

also emanated

employees

than

and

Natlonal

fers

more

adjusting

rose by 10 9 percent

m 1975

of government

were after

m m

of GNP m the

m the investment

partlcularly

natmnal

government

a turnaround

m 1987

those

to govern

investment and

started

on the


72

ROSARIO G MANASAN

slow upward climb reaching than Its average level J'_ 1976 lower

than

its peak

Functional The

lev 1 of 5 1 percent

categories

last

s_x years

of natlonal

saw

from the economic public admlmstratIon Generalpubhc eral

pubhc

cost

cutting

stratlon

3 6 percent of GNP In 1992 higher 1982 (Table 22) However this m still In 1975

government

national

government

admmzstratmn

measures

It figured

Government

proved

of the crisis years

among

1985

2 7 percent

the fastest

to two percent of GNP

(Table 24) Some reallocatton pubhc

Dunng

expenditures

declined

budget (net

of 88 8 percent for durable

in 1986

equipment

to the

stringent

items

In the last mx years level in the last

within

the

The share

m 1975

1992

This arose

build

ngs

and

m 1986

3 2 percent (Table 24) to debt 1983 the

s general

expenditures

percent ditures

in terms thelr

corporations)

1985 to an average

from the increased

marginally

service

sectors

serwce

1985 to 4 1 percent on social

of growth share

outlays

from

when measured relative net of debt service

total

sectors

ranked

to total national

rose from only second

of the

national

18 9 to 18 3 percent Increased

on the and real

in the last su¢ years

service

a reversal

In the

actually

to

structures

for the social

expenditures

While

dechned

social

Outlays

of GNP In 1975 These

sermee

1985

budget

1992

_t

18 years

government

of current

to government

of 92 5 percent

In 1990

Soclal service sectors National government expenditures social servlce sectors grew substantially in both nominal terms

admlni

in the govern

on agrarian reform social it rose from 1 2 percent of

of transfers

from an average

on gen

the Aqutno

growing

its highest

appeared

admlnlstratmn

total

reallocated

expenditures

to be remhent

ment budget next only to expenditures welfare and debt service Consequently reached

resources

service sectors and natlonal defense to general debt service and the socml service sectors

admlntstratmn

GNP in 1975

expenditures

from

pattern

in

government the share

of

23 3 to 30 3

government

expen


Table 24 Nabonal Government Expend,tures by Sectoral Classification on an Obl,gatlon Bas,s as a Percentage of GNP 1975 1992 1975 1985

1975 1982

1983 1985

1986 1992

1986

1987

1988

1989

1990

1991

t992

1690

16 74

17 09

22 64

19 20

23 10

21 05

21 80

23 77

23 24

23 95

6 82

7 64

5 92

5 52

6 94

4 95

4 16

4 54

5 26

5 94

6 45

Agriculture Agrarianreform Naluralresources

0 78 0 08 0 68

0 87 0 11 0 31

0 68 0 06 1 08

0 61 0 37 0 29

0 25 0 06 0 19

t 33 0 18 0 22

0 57 0 20 0 24

0 59 0 54 0 34

0 53 0 50 0 36

0 54 0 21 0 33

0 57 0 63 0 29

lndust_ Trade Tourism

0 27 004 0 03

0 36 005 0 04

0 16 004 0 02

0 12 001 0 02

0 05 0002 0 002

041 0006 0 02

0 10 001 0 03

009 001 0 03

009 001 0 02

0 10 001 0 02

009 001 0 03

Powerand energy Waterresources development Transportation andcommunlcabons Othereconomicservices

0 86 0 16 2 88 1 03

1 21 021 3 90 0 56

0 47 0 12 1 74 1 55

0 24 005 2 99 0 80

0 02 000 1 72 4 64

0 20 008 2 24 0 27

0 02 0 06 2 21 0 71

0 08 005 2 62 0 19

0 59 0 04 2 80 0 33

0 45 006 3 61 0 59

0 14 0 07 4 19 0 43

Totalsocialservices

3 19

3 50

2 86

4 14

4 22

3 58

3 76

4 29

4 52

3 91

4 43

Educabon Health

1 87 0 57

2 04 0 62

1 68 0 52

2 78 0 67

2 34 0 55

2 51 0 60

2 77 0 69

2 98 0 69

3 09 0 71

2 60 0 70

2 90 0 69

SoQalserv=ces laborandemployment021 Hous=ng andcommun=ty development0 51 Othersoc=al serv=ces 0 03

025 0 55 0 03

016 0 47 0 03

030 0 32 0 07

017 1 14 0 03

011 0 34 0 02

011 0 16 0 03

014 0 35 0 13

017 0 41 0 14

027 0 27 0 06

078 0 01 0 05

Grandtotal Totaleconom¢services

_>


_z

Table 24 (continued) 1975 1985

1975 1982

1983 1985

1986 1992

1986

1987

1988

1989

1990

1991

1992

Nabonaldefense

1 78

2 22

1 28

1 31

1 29

1 29

1 56

1 41

1 30

1 22

1 21

Totalpubbcservices Pubbcadm=nlstrabon Peaceandorder Others

1 92 1 18 0 54 0 21

1 99 1 27 0 53 0 19

184 1 07 0 54 0 23

2 59 1 97 0 59 0 02

2 05 1 12 0 67 0 26

2 85 2 23 0 61

2 60 1 82 0 78

2 36 1 90 0 47

2 80 2 72 0 08

2 63 1 84 0 79

2 64 1 90 0 74

Debtservice

3 19

1 40

5 18

8 95

4 71

10 43

8 97

9 02

9 88

9 55

8 75

0 002

0 47

Unallocated

0 12

Net lending

0 19

0 53

0 28

0 80

0 58

2 53

1 14

0 62

0 17

0 20

0 45

0 11

Grandtotal debtserv_ce

1371

1534

11 90

1369

1450

1267

1208

1279

1388

1369

1521

Grandtotal debtservtcenetlendlng

1319

1506

11 10

13tl

11 97

1153

1147

1261

1368

1324

1510

2 31

2 75

1 82

1 96

1 90

2 34

1 87

1 38

2 01

1 96

Nabonaldefense peaceandorder

Sourceof baspcdata

Deparlrnent of BudgetandMar_agemenL

1 90


BREAKING

AWAY FROM

National real

and

THE FISCAL

govemment

BIND

7S

expendlture

real per caplta

terms

on

exhlblted

social

m nominal

welfare

a well defined

upward

trend

during the penod under study In 1986 1992 Its nominal growth rate accelerated to five tlmes that m the 10 year period ending m 1985 whlle its share m GNP almost doubled from 0 16 to 0 3 percent However

thls

increase

largely reflects typhoons

does

a reactlon

expendltures

an upward

tendency

tapered off m 1991 1992 tlon rose from 1 9 percent 1986

1992

per caplta last

whlle those

and health

the perlod

although

also both

grew from 0 6 to 0 7 percent

on education

m 1992

It

at that lame

on educatlon

during

change

Natlonal government outlays for educa of GNP m 1975 1985 to 2 8 percent m

for health

expendltures

18 years

pohcy

(volcamc eruptlons

that hlt the country

government

reglstered

a major

to the series of calamltles

and earthquakes}

Natlonal

not mdlcate

reached

In contrast

its peak

real per caplta

Real

(P329) m the

expendltures

on

health has not yet recovered the reductions It suffered dunng cnms years such that its 1992 level (P78) is even smaller than 1982 level (P85) In the soclal to total national

serwce

sectors

government

the share

outlays

of current

m the Aqumo years to total government

percent In the other social from 69 to 49 7 percent Economic the

sectors

economlc

sermce

to government

a result

growth

government

In education it m 1985 to 89 2

In health the share of current expen expendltures dechned from 93 to 90 4 service

The growth sectors

sectors

reduction

of national lagged

expenditure categories For 1986 nomlc sectors grew by 5 4 percent 10 1 percent

expendltures

{net of transfers

corporatlons) decreased m the period under study went down from 92 6 percent m the decade ending percent dltures

the the

was sharpest

government

behind

most

outlays of the

for

other

1992 expendltures on the eco in real terTns compared wlth a

m total national expenditures

government on these

expendltures

sectors

dropped

As from

7 6 percent of GNP m 1975 1982 to 5 9 percent m 1983 1985 and to 5 5 percent m 1986 1992 (Table 24) Moreover the share of the economlc servlce sectors in the aggregate budget sank from 40 4 percent

m 1975

1985

to 24 4 percent

m the last slx years


76

ROSARIO G MANASAN Desplte

thin contractlon

m the allocatlon

for the economlc

service sectors the agrarian reform sector emerged to be a blg winner m 1986 1992 The budget for agrarlan reform expanded by 60 8 percent on a yearly average m 1986 1992 compared wlth 3 7 percent m 1975 1985 Relatlve to GNP outlays for agrarian reform rose fourfold from 0 1 to 0 4 percent (Table 24) Thin m consmtent w_th the government s commltment to the land reform program In contrast power and energy water resources development and the trade and industry sectors figured as big losers Natlonal government expendltures on power and energy dlved from 1 2 percent of GNP m 1975 1982 to 0 5 percent m 1983 1985 and to 0 2 percent m 1986 1992 Those on water resources development plummeted from 0 2 percent m the decade ending m 1985 to 0 05 percent m the last sLxyears National government outlays on trade and industry fell from 0 07 to 0 03 percent (Table 24) Government expenditure on transportation and commumca tmn which was hit hard during the cnsm years regained some ground m 1986 1992 The expenditure level m 1986 1992 averaged three percent of GNP Thin m higher than the 1983 1985 level (1 7 percent) but lower than the 1975 1982 level (3 9 percent) In the economic service sectors no clear pattern emerged m the budget allocation between current and capital expenditures in the last 18 years In all the economic service sectors the share of current expenditures to total expenditures (net of transfers to government corporations) consmtently increased from 52 8 percent m 1975 1982 to 58 9 percent m 1983 1985 and to 63 1 percent m 1986 1992 A mmflar trend occurred m the power and energy sub sector In the transportatmn and commumcatmn sub sector the trend m the share of current expenditures took the reverted U form For instance the share of current expenditures stood at 43 3 percent m 1975 1982 then increased to 68 1 percent m 1983 1985 and dechned to 53 8 percent m 1986 1992 From the above the government seems to have shifted its resources from capital to current expenditures m sectors usually assocmted w_th pubhc sector investments (1e economic sectors) and from current to capital expendltures m sectors usually assocl ated with making current expenditures Largely however these


BREAKINGAWAY FROM THE FISCAL BIND movements tures

slmply

during

evolved

peraods

of severe

from the reductaons

of fiscal restraint

Pubhc Because

77

Sector fiscal

(1983

Investments constraints

in capital

expendl

1992)

and Growth m the

last

half

of the

1980s

public sector investments plummeted in real terms from 1985 through 1989 While some real growth took shape in 1989/1990 this was eroded m 1991 1992 Pubhc sector investments followed a similar actual

trend

when

levels

of public

GNP in 1986 1987

1992)

depressed

does

sector fell way

1992 Medium

The years

measured

relatave

to GNP (Fig

investments

(equal

below

Term Public

Investment

level of pubhc

not augur

the target

well for the

sector

of

set under

Program s growth

Moreover

to 5 1 percent

levels

investment

country

4)

the

(MTPIP) m the prospects

last

six The

posltlve relataonshlp between economlc growth and public invest ment xs generally taken to be part and parcel of conventlonal wasdom or received knowledge However firm estimates of this relataonshlp s parameters partacularly for developing hard to come by Attempts to derive relataonshlp

between

economic

expenditures/ investments feedback relataonshlp exists d_tures

and

growth

public

growth on the between

countraes estamates

on the one hand

expendltures

ment crowds infrastructure Composition

and

and public

other show that 1) while a current pubhc sector expen

sector

infrastructure

Granger cause economic growth 2) public tures have a stronger output effect than operating

are scanty and of the emplncal

3) pubhc

sector

expenditure

sector capital expendl pubhc sector current infrastructure

invest

In pravate sector investment while pubhc sector non investment crowds out private sector investment of public sector/nvestment

By level of government National government investments on its own account climbed from 1 7 percent of GNP m 1983 1985 to 2 5 percent m 1986 1992 grew from 0 27 percent contracted

further

Capital outlays of local governments also to 0 32 percent In contrast those of GOCCs

from 5 8 percent

to 1 9 percent

of GNP (Table 25)


= F,gure 4 Public Sector Investment by Level of Government as a Percentage of GNP 10 9 8 P

7

r c

6

e

5

n

t

4 3 2

0 1978

t979

1980

Total Pubhc Sector

1981

t982

1983

1984

Nat onat Government

1985

1986

1987

1988

1989

1990

1991

A

â&#x20AC;˘

LGUs

GOCCs

1992

z 3o _>

z


BREAKINOAWAYFROM THE FISCALBIND Thus

public investments

by GOCCs

m sectors

hke agriculture

development

suffered

power

severe

79

that are traditionally and

energy

and

dominated

water

resource

cuts Table 25

Publ,¢ Sector Investment by Level of Government, as a Percentage of GNP TotalPublic

National

Year

Sector

Government

LGUs

GOCCs

1978 1982 1983 1985 1986 1992 1986 1987 1988 1989

7 34 7 81 5 14 428 3 97 3 72 4 99

2 58 1 73 2 48 1 54 1 73 1 93 2 51

O34 0 27 0 32 0 13 0 19 0 22 0 26

4 42 5 81 2 34 261 2 05 1 58 2 22

1990 1991 1992

7 26 5 15 5 33

3 30 268 2 73

0 32 046 0 44

3 64 201 2 16

Source ofbasedata Na_nal 8tat_bcs andCensus Board 1992(prekm=nar/) By sector The share of the economic sectors investments dechned by roughly 12 percentage 1981 1985 and 1986 1992 But the contnbubon sermce canfly

sectors

and

by 8 1 and

that

of pubhc

5 S percentage

administration points

expanded

1992

munlcatton

Public

sector

dropped

investments

slightly

power

and energy

were halved

sector

investments

in water

factor

of three In contrast

strat_on sectors

from

in the economic to 3 9 percent m

in transportation

2 1 to two percent

from 2 3 to 1 2 percent resource

stgnffi

respectively

Relative to GNP pubhc sector investments sectors dechned from 6 6 percent in 1981 1985 1986

in pubhc sector points between of the social

development

and

corn

but those of GNP dropped

on

Pubhc by a

from 0 50 percent to 0 15 percent of GNP (Table 26) pubhc sector investments in general pubhc admml

(from 0 08 to 0 34 percent (from 0 65 to 0 86 percent)

of GNP) and expanded

the

socml

significantly

service


Table26 PublicInvestmentbySector as a Percentageof GNP 198t 1982

1983 1985

1986 1992

1986

1987

1988

1989

1990

1991

1992

Gran(ltotal

8 14

7 81

4 08

4 28

397

3 72

499

726

5 15

533

General pubhc serv=ce

0 09

0 22

0 28

0 03

033

047

040

047

0 27

040

0 07 0 01

0 08 0 02 0 12

0 27 0 01

003

032 001

046 001

033 007

047 000

0 25 0 02

039 001

Defense

0 12

0 17

0 05

003

0 06

008

0 10

0 11

0 04

006

Educabon healthsocialhousing and

0 68

0 69

0 68

171

0 81

062

0 89

1 15

0 68

0 69

Education culture andsports/ 0 24 manpowerdevelopment others Healthnutrition andpopulabon control 0 06

0 27

0 30

028

0 42

037

0 39

0 51

0 39

0 30

0 04

005

005

0 07

009

0 09

0 13

005

0 03

! r;_

0 0 37 00

0 32 000

138

0 31

0 15

0 0 40 01 0 01

0 51

023 000 001

0 36

t_>=

Publ=c admlnlstrabon Peaceandorder Unallocable

Housing development 0 37 Soaal_ andcommunity labor andwelfare/employment OthersocJat services 0 01


Table26(continued)

Agnculture natural resources industry tradetounsm power

._.

1981 1982

1983 1985

1986 1992

1986

7 25

6 73

3 06

251

1987

1988

1989

1990

1991

1992 <>

277

255

3 60

553

4 16

4 17 'zd

Agranan reform

0 02

0 02

0 03

001

0 02

005

0 17

008

0 01

Agnculture Natural resources Indust_ Trade Tourism

0 68 0 02 0 05

0 90 1 57 0 01

0 17 0 08 0 01

041 0 01

0 51 0 01

042 004 0 04

036 0 15 001

0 14 0 23 0 01

004 0 12

0 06 0 10

Power andenergy 283 Waterresources devt.andfloodconlrol 0 41

206 0 57

092 0 12

1 10 0 15

069 0 12

058 0 10

121 0 15

197 0 21

097 0 19

131 0 12

Transportation andcommunlcabon Other economic services

1 59

1 59 0 13

0 80 0 03

142

131 001

156

263 027

2 61 0 22

2 25 0 33

3 23

i _'_2 z

less 1ban01 percent. I.L


82

ROSARIO G MANASAN

Table 27 Relabonsh,pBetweenFconomlcGrowthG andGovernmentExpend,turesE OptionalLags G= f(G E)

E = f(E G)

Relat,onshlps

Totalexpend,tures a Current expend,tures a Capital expend,tures a Maintenance expenditures b

(31) (31) (34) (13)

(1 2) (1 4) (1 1) (3 2)

feedback feedback E causes G feedback

Infrastructure expend,tures b II Totalpubhc sector

(13)

(1 1)

E causes G

Totalexpend,tures c Current expend,tures c Cap,tal expend,tures c Infrastructure expend,tures b

(16) (31) (12) (13)

(1 1) (1 4) (2 6) (1 1)

E causes G feedback feedback E causes G

I Nabonal government only

E_rnabon penodfrom1960 1990 bEstlmatJon period _m 1975 1990 CEsbrnabon pedod from1970 1990 Source Manasan (1993b) unpublished

Trade off between current expenditures

and capital expenditures

In the sub sectmns that follow two dlfferent approaches analyzed the relatlonshxp between economzc growth and the compomt_on of government expendltures At the crudest level the test for Granger causahty was apphed between government expenditures and its components and economic growth As another optlon a macro model was used to estabhsh the impact of Increased government expendztures on output m a general equlhbrmm context Granger causahty between economic growth and pubhc expendz tures 12This sub section examines the question of whether 1) govern 12 A variable ts stud to Granger cause another variable _f the former and Its past values are good prechctors of the latter in a statistical sense regardless of the underlying theoretlcal relattonshlp


BREAKINGAWAYFROMTHE FISCALBIND ment

expendltures

as the

rate

of GNP

government tween

the

Table

nabonal

data

economlc

real levels

Granger

expendltures

cause

economic

government

reveals

a feedback total

growth

However

dltures

relationship

and economic

between

pubhc

coefficients infrastructure

of the

these

Hsmo

(1981) growth on obh

was found

capltal

R2 = 0 89

of

on the other expendltures are shown

to

g = f(g,e)

capital

expenditure sector

economic

suggests

economic

expenditure

sector

current

A SUnllar relationship

of pubhc cause

total pubhc

the analysls

the

growth

and

and

is found economic

infrastructure growth

joint

expen

Moreover

slgmficance

of lagged

pubhc

sector

lZ

007+031 st +0000017 el 0000018 (165) (310) (234) F= 1453

where the numbers m parenthems are t statistics

2 0000014 (153)

the

of the

13 Towlt g = (364)

to

and real levels

expendltures

between

sector

real levels

of lagged

between

(based

expenditures

sector

growth

are found to Granger

F statistic

18 other

growth

Using data on real totalpubhc expenditures

alone relation

expendltures

infrastructure

expen

economlc

on the one hand

of national

government

PIDS NEDA

â&#x20AC;˘

a bl directional

growth

the

between

be

government

emsts

of applying

and maintenance

causes

exists

However

promotes

expenditures

government

economlc

natlonal

growth

relatlonshlp

here

expenditure

growth

causahty

from the DBM)

(the

government

the results Granger

Granger

that government

economlc

of government

expenditures

In contrast

Thus

defined

causality

to date

assume

a feedback

to estabhsh

exist between

and

that

27 summarizes

Uslng

growth

growth

studies

vanable

argued

real levels

current

Most

as causing

and that

procedure

gations

2) economlc

Model included)

assumed have

econormc

or 3) bl directional

IS an exogenous

expendltures variables

g and

growth

two variables

imphclfly analysts

cause

expendltures

Macroeconometnc d_ture

Granger

83

3


84

ROSARIO G MANASAN

Table28 Reallocationof ExpenditurefromCurrentto CapitalOutlays Period Variable

1

GDP GNP CPI TBILL CP CG

0 390 0 392 0 257 1822 0 088 6 047

CONSPR IDER GDCF XD MD DEFNG

0 597 0 554 4462 0 262 0 332 0 309

2

3

4

Percentage deviation fromthebaseline 0 132 0 073 0 053 0 1331 00734 0 0529 0 035 0 025 0 019 0 611 0024 0 026 0 068 0042 0 029 2 306 0808 0 270 0 475 0 446 1395 0 130 0 173 0 581

0423 0307 0578 0 076 0086 0905

5

0 039 0 0385 0 008 0022 0021 0 079

0 305 0 172 0 249 0 046 0 045 0 407

0 241 0 107 0 133 0027 0025 0 195

0 4768 0 625

04385 0 536

Deviations frombasehne TRABAL BOP

4 5344 5455

(InmillionUS$) 3 7485 1 5996 -4 270 1893

VanableDefinitions GDP GNP

Gross Domestic Product GrossNational Product

CPI TBILL CP CG CONSPR

Consumer Pnceindex XD Treasury RillRate MD Personal Consumption Expenditure DEFNG Government Consumption Expend=ture TRABAL TotalPrivateConstruction BOP

Source

Table10A ofYapandReyes(1993)

IDER GDCF

Investment inDurable Equipment GrossDomestic Capital Format=on DollarExports (million) DollarImports (million) NabonaL Government Det]clt TradeBalance (million $) Balance of Payments (million$)


BREAKINGAWAY FROM THE FISCAL BIND In summary above

the results

indicate

that

8S

of the Granger

real levels

causality

of government

tests described

infrastructure

expen

dltures Granger cause economic growth However the relatlonshlp between current government expendltures and economic growth IS bl dlrectlonal in nature Thus we conclude that pubhc sector znfra structure current

expendzture pubhc

ts a good predtctor

sector

Results from macroeconometnc omy wlde effects rent to capltal

expendzture

macroeconometnc model Yap and of reallocatmg

outlays

they reduced

szmulatzon Reyes (1993)

government

the level of pubhc

sector

The outcome

Using studled

wh_le

the PIDS the ecor_

current

from cur

slmulatlon operating

whereto

expenditure

the level of pubhc

by P5 bllhon relatlve impact of these changes

over a five year period simulation In essence

growth

expenditures

They dld a counterfactual

in 1986 by P5 b11hon and increased expendlture tracked the

of economic

ts not

sector

capital

to thelr baseline levels They on key endogenous varlables

Table 28 summarizes the results show that

the

of thls exerclse demonstrates

results

the stronger

of thls out

put effect of capital expenditures as compared to current operating expenditures This can be attrlbuted to two factors (1) Government investment actlwty dlrectly adds to the capital stock and thus permeates

more sectors

of CONSGO (government tlve to changes

of the economy constructlon

In the general

impact of nominal investment spending

(2) The imphclt deflator expenditure)

price level thus

IS less senm

maintaining

the

m real terms relative to consumption

(Yap and Reyes 1993)

The statement

further

hlghhghts

the gains

that could

be derived

by generating savings via the streamhnlng of bureaucracy and using those resources to finance additional public sector investments Impact

of public sector

In the hterature crowds

there

out or crowds

offer some

evldence

investment is some m prlvate

that pubhc

on private sector

debate

on whether

investment infrastructure

investment

pubhc

A number investment

investment of countries crowds

tn


86

ROSARIOG MANASAN

or complements private investment while pubhc investment crowds out or substitutes for prlvate

non infrastructure investment (Blejer

and

1988)

Khan

1984

wlth severe tlve that

Chlbber

budgetary

_ts pubhc

to adequately

and Van W_jnbergen

constraints

investment

explolt

program

whatever

following

effective sector

explanatory

to GNP (ndcrp)

investment

to total

lagged

gnn

respectlvely)

were

were entered

as

The

(1+rl) Apnon

of pubhc investment

included

instead

m logar_thms

utlhzatlon

(cu)

credlt

real

to prlvate

sector

infrastructure

(sgn)

and

level

of sgu

except

of private

real

In both

rl which

investment

ifcapacltyut_hzatlonlslow

are included investments

pl

other things

GNP

cases

was set"red

all

entered as

the

pnvatemvestmentlsexpected

being equal

The ndcrp

and the rl varmbles

to account for the posslble crowding elther through the decreased avaflablhty

sector

expected

against

variable

to be letharglc

private

real

was regressed

speclficatlon the lagged levels of real pubhc and non infrastructure investment (g11 and

variables independent

between

capaclty

share

sector

formulated ernst

(rl) ratlo of net domestic

pubhc

(y) 14 In an alternatlve sector infrastructure

be consclously

investment

variables

cost of borrowing

_t is impera

complementantles

pubhc and private investments Given thls perspectlve private the

In a country

hke the Phfllppmes

or through

the mcreased

rate of economlc

growth

out of prlvate of credlt to the

cost of money

(proxled

The hlgher

the

here by lag GNP) the more

prlvate investment is expected to be stlmulated FmaUy pubhc invest ment could e_ther spur or deter private investment depending on whether competing

the former

Is seen

wlth private

by the private

investment

sector

It _s expected

as supporting that

the impact

or of

pubhc investments wdl be felt after some lag because the capaclty of installed infrastructure rather than the investments m the current year will have _mpact on private

mvestment

at any given tlme

14 Followmg Chlbber and van Wijnbergen (1988) the estlmatlon equation was derived from an accelerator model ofprivate investment where actual stock of capital Is assumed to adjust to the desn-ed stock following a partlal adjustment mechanxsm The coefficlent of the adjustment _s then assumed to vary w_th government pohcles and other econormc factors i e the variables used as explanatory varmbles m the esumat_on equation


BREAKINGAWAYFROM TI-IEFISCAL BIND

87

The estlmatlon results for the first speclficatlon coefficlent for the raUo of pubhc sector infrastructure total

pubhc

and

sector

statlsUcally

that

pubhc

ment

mgmficant

lagged

The results

borrowing

expenditure

also show a rapld

for the

five percent

level

investment increased

credlt

cost

and

Thls tmphes out prlvate

of borrowing

to the prlvate

sector

that

through

When mated

the levels

of pubhc

investment coefficlents

investment investment

whlle 16

suggest the

former

has

the

However

financing

the

of pubhc

the

ratlonmg

effectlve

years

pubhc

latter

of

crowds

m the

non

m the equaUon

no slgmficant

the

by the fact that

for many and

of

at the

through

be explained

included

that

mgn

cost

not so much

infrastructure

were both

by the

of real

_s mgmficant

the domestic

Thls mlght

invest

as mdlcated

varmble

the financlal market was not yet hberahzed estlmatlon perlod (1973 1990} structure

m prlvate

coefficlent

investment but

level 15 Thls mdlcates

the wrong

sector

the to

(sg11 31 is posltlve

crowds The

has

to the private

crowds

years

adJustment

pl I varmble

is not slgmficant

net domesUc

three

at the five percent

infrastructure

low t statlstlc

credlt

investment

show that investment

out

effect

mfra

the esU on

prlvate private

15 The estlmatlon of the first speclficaUon ylelded the following result Inpl-

24 97+0421np11 (2 51) (I 19)

+067nderp+ (2 20)

+3481ncu+0 {237)

13 In(l+rl) (0 38)

141sg113 +0561nyl (1 72) (1 57)

R2=089 F_ 19 81 16 The estm_at_on of the second specdicatlon (after dropping all variables wh,ch had mslgmficant coefficlents) ylelded _armlar results Inpl=

834+086Innderp (1 55) (7 96) R_=091

0621ngnu3 ( 3 00)

+ 172Inyi(7) (3 27)

F_ 19 30


88

ROSARIOG MANASAN Subsidles

In prlnclple

government

for two pnnclpal

may grant

reasons

encourage

a more

speclahzed

lendlng

men

to production

access

given

and Tax Expenditures

to private

First

efficient

subsidies

it may devise

allocation

programs

subsldy

of resources

designed

credit

businesses

to the private

government

to encourage

farmers

incomes

to the Natlonal and

support

fall under

this category

them

subsidms

serve

as other

Government allocatlon percent went

may

from the government natlonal

to submdles

government

The

budget

are

reflected

to the usual the legmlatlve

be Imphclt acttwtms

Thus over

addltlonal tax outside budget

1985

stood

Other tax

as outlays personnel Given

Subsidies

m both

the execu

private

tax

just

tax expenditures

llke outlays

the government

for wages s hmlted

and

capacity

As such referred should

salarms

may sector

credits

deductlons are largely extra budgetary process because they represent revenues

Nevertheless

are

subsidies

of certain

exemptlons

national

program

government

tax treatment

1992

for oll prace

at 1 6 percent

review process

over two

in the

s expenditure

branches

cash

in 1986

a subsidy

budgetary

through

actual

barns

of submdles

not collected and therefore not programmed foregone from tax exemptions are sometlmes expendltures

and fertfllzer

revolve

On a cash

including

share

government

preferentlal others

price ceihngs

dmbursements

types

m 1975

subjected

(NFA) to bolster

programs not

s coffers

average

in the

tlve and

or may

government

of various

m 1990

in actlvltles

may provide subsl transfers from the

prescribed

housing

fisher

examples

subsldms

of the

support that

government

to are

are subsidies

to invest

Food Authority

Subsldlzed

and

Illustration

deemed to be winners Second the government dies for purely egahtartan reasons Current natlonal

programs

An example

to glve farmers

Another

sector

and

They that

fall are

revenues to as tax

be considered of government

to generate

resources

It lS essential that the relative benefits and costs ansmg from the various subsidy programs be evaluated The two case studms provided dins given

below

tame

to firms

doubts registered

on the cost effectiveness with the

Board

of the subs1

of Investments

(BOI)


BREAKINGAWAY FROM THE FISCAL BIND and

to the NFA This paper

89

specifically

suggests

now being allocated to these programs put to better use elsewhere This paper rules

and

regulat10ns

govermng

product prices unnecessaraly to subsldLze the consumption severe

upward

t10nal price

BOI lncentsves

Since

and The

setting

of the country

m the

exchange

various

s mdustrlalLzatlon

to new and necessary

1967

the

to preferred

prepares

the

BOI

firms

Plan

29 presents provided

estimates by

the

fiscal

of thls function

cost

as

made the BOI

processes and

monl

with the

terms

foregone

due to the

of the revenue The

known

processes

of incentives

enterprises

BOI

m 1953

incentives

(IPP) annually

for avallment

tors comphance of BOI registered conditions of their reglstratlon Table

the

otherwise

of enterprises/products

apphcatlons

of tax

It was repealed

(EO) 226

As part

Prlorltles

apphcatlons

a number

many tlmes over since then lncentlves law came in 1987

admmlsters

industries

Investments

regnstratlon

incentives

the mterna

The first such law

granted

industries

was superseded of the investment

available

reglstered

petroleum

laws were enacted

strategy

which

wlth the issuance of Executive Order the Omnibus Investments Code is

the

rate and

tax lncentlve

Act (RA) 35 of 1946

its replacement latest revlslon

Since

of 011 and

011

war perlod

Repubhc

exemptlons

the

or lmphcltly be that the present

17

the post

as part was

exphcltly also argues

the resources

expose the government to pressures of these products during per10ds of

adjustments

of crude

that

of fiscal

and

incentives

to

industry rose almost fivefold in nominal terms m the last sux years from P2 2 bllhon in 1986 to P10 8 bllhon in 1991 Relatlve

to GDP

is not neghglble

the total revenue

Moreover

of GDP in 1986 to 0 9 percent

It grew

foregone quite

in 1991

from fiscal lncentlves

steadlly

from

But revenues

0 4 percent

foregone

from

17 Thls sectaon draws heavily from Manasan (1993c) 18 Manasan (1993c) compares the incentlves granted under EO 226 and those granted under Batas Pambansa 391 the leglslatlon in effect prior to the former


TabEe29 RevenueForegoneby Typeof Incentives (in pesos)

Taxdeduchons

째_

1986

1987

1988

1989

t990

1991

Average 19861991

110783 834

185279 437

199664 901

64 670 820

101 659 533

175584 411

837 642 937

Taxexempbons

1 028 905 786 4052 338 930 3 730 303 809 4 803 185898 6 044 317 587 7829241 961 27488293971

Taxcredits

1074482138 1664364987 3047531459 2064105465 2075448610 2824615398 12750548058

Total

2 214171 758 5 901983 355 6 977 500 170 6 931 962 183 8 221 425 730 10 829441770 41 076484967

Reallevel

2148429806 5332956858 5724423800 5243145135 5517920555 6210343519 30177219673

% toGDP

0 36

0 86

0 87

0 75

0 77

0 87

0 77

% to na_ona_government revenue

2 79

5 72

8 18

4 55

4 55

4 90

4 84

7 19

4540

2349

1805

1442

51 57

21 63

% to consolidated public sector Source Manasan (1993c) unpubhshed

> I_


BREAKINGAWAYFROM THE FISCALBIND BOI incentives

appear

91

to be more s_gmficant

to total

revenues

percent m 1991

of natlonal Revenues

of the

percent

of the consohdated

national

when measured

government

They

relative

represent

pubhc

Since the government

sector

deficit

has been scrounging

m 1987

1991

for new tax measures

every year to cover its growing fiscal deficit a quest:on whether the benefits arising from the fiscal mcentlve system its cost justified

Using fiscal mcent:ves on two grounds First

d_rectly counteract markets

and

genuine

:mperfect

wage duahsm and non tariff protection note

that

relatave relatave

the

as a tool for mdustrlal fiscal mcentlves may

market

fadures

informatlon

--e

g

mstltutlonal

pohcy was be used to

_mperfect

protectlon

structure

centers)

and

-- e g

I) penalizes

exports

manufacturing a more even

dlspersal of industries across reglons (because protected goods tend to cater to the needs of urban populations and mdustrles

capital

d_stortlons

to :mport substitutes 2) encumbers non to manufacturing sectors 3) dlscourages

of these

arises exceed

pohcy originating dlstortlons -- e g tariff and (Power 1989) In thls regard various studles

emstmg

only be accessed

2 8

government revenues m 1986 and 4 9 percent foregone from tax incentives amounted to 14 28

heavy

dependence

on Imported

through

the ports whlch

4) impedes

the development

inputs

fimshed because that

are concentrated

can

m urban

of small/medmm

try thls Is because large enterprises have the inherent m successfully securing favorable tarlff rates (Bautlsta

Indus advantage Power and

Assoclates 1979 Pernla and Paderanga 1983 Tecson et al 1990) More recent studies {Medalla 1986 Medalla 1990 and Pante and Medalla

1990)

protectlon

rate

d:mmlshed the import

confirmed

that

(EPR) and

the

as a combined hberaltzatlon

Slgmficantly

alter

whde dlspermon

result

program

the inherent

both

average

of EPRs

of the

tariff

m 1980 bmses

the

1990

answer

out that

Phd_ppme neutrallzed perceNed

investment the blases

pointed system outhned

to favor I) mdustrles

the

specific

m the natlonal

and

dld not

structure

system effectlve new ones9 The features

m the past reinforced rather above Thus BOI mcentlves locating

sectors

program

the changes

of the protection

Is the BOI mcentlve w_thout introducing

It was

across

reform

A question Is then ralsed m offsetting these d_stortlons is no

effectlve

cap:tal

of the than were reglon


92

ROSARIOG MANASAN

(NCR) relative to other regions tlon In the BOI reglstratlon mdustrles

{because

cost associated from the BOI use

tend

larger

smaller

the

choice

Power

1989)

lncentlves

tend

they

on

rely

firms

with both and because

than

through 1990

smaller

to favor

tntenslve

{because process)

firms

Manasan factor

1) the

indicated

by the

(Tables tapered

concentrated National and

mtenslty

Statistics

years

Finally

et al

that

to labor

of BOI pro3ects

In the

BOI

because Manasan

capital

increased

labor

ratlo

as

between

the scale bias of BOI incentives the average size of BOI firms Is

as the economy

wlde average

Regions

firm size dunng

the location blas of BOI BOI firms remain more

Ill and

IV than

Office (NSO) census/surveys market

showed

relatlve

31 and 32) 3) while off dunng the period

m the NCR and

4) the export

rates

IPP (Tecson

also

incentives

capital

tariff

data demonstrated that these blases still remain Her findings include the

15 fold rise

twice as large

the period incentives

in the

capital

1986 1992 {Table 30) 2) although decreased m the last seven years about

the fixed

more

wlth hlgh

1990)

neutral

capltal

generally

included (1986

(1993c) based on more recent of the fiscal mcentlves system following

are

3) sectors

cheapen

to afford

and avatlment of incentlves blased incentives whmh BOI

whmh and

of industries

non

are less able

reglstratlon the capltal

ones)

to unduly

of inadequate decentrahza 2) large relative to small

firms

m the

{Tables 33 and 34)

blas of BOI incentives

declined

in recent

{Table 35)

The

second

lustlficatlon

for the use

of fiscal

incentives

is their

alleged importance in attracting foreign direct investments The changes introduced under the 1987 Omnibus Investments were ostensibly tive with

its neighbors

offers roughly on

the

put in place equal

to make

Manasan inducements

profitability

of promoted

the Philippines

(1993)

showed

m terms firms

(FDI) Code

more competl that

the

country

of the incentives (Table

36)

impact

However

the

results of a number of studies (Allen 1979 Lindsey 1981 MITI 1988 Rana 1988 and Lamberte 1991) that examined the importance of fiscal Incentives ion tended

m stimulating

to show

were more influenced growth

macroeconomm

that

FDI inflow m more

the location

by market stability

declsmn

fundamentals and

pohtmal

systematm

of foreign

investors

(size of market stability}

fash

than

GNP the


Table 30 Factor Bias of BOI |ncenbves

Code

Capztal Labor Rabo of BOI Registered FInTls 1986 1992 (In real terms)

Indus'w

1986

1987

1958

1989

1990

1991

1992"

12525 29889 5818 63639 70329

51684 227.21 8184 38139 73930

20386 9063 8088 164122 377128

63037 4829 30 20 99661 122.23

31 32 33 34 35

Processed fcods Tex'Ceweanng apparel andlealher mdustees Woodandwoodproducts Paperandpaperproduc_ _nbngandpubl_shtng Chemicals andchemcal products p_eum coalrubberfptasbc

11972 6364 40 23 -28099

9554 11678 3122 34875 15591

20316 7548 12996 34306 72208

36 37 38 39

Non-metalhc mineral products e_cept products of pe_oleum andcoal Basemetalproducts products Fabncated metalprodudgma_me_' equ=pment Mmcellaneous manufactured products Manufactunng Agnculture Electnc_y gasandwater Mlnlrlg andquarrying Public utJT_es

134887 -6I 29 42 18 6795 19827 49753

11753 66617 8008 2184 9769 17782 7639 23179

44995 74g0 t5859 5997 17979 12370 334180 26476 134862

Tounsm-onented pro_erv_ exporters Expodnders Infras_ct_re/lndus_al servces Research anddevelopment projects Totaf Source ofbascdata

I_

33330

91357 252018 179334 46308 154620 92043 22594 37639 t4048 5124 24 12 2533 26779 34133 51450 28270 18820 16764 18969 1227409 1569460 69477 66375 41217 32054 45411 25364 107987

103240

76099

247317 858,9106 8091

10517

18960

30848

59406

159939 66633

576528 951516 38573 5t 08 115438 30129 922916 19621 t 43018

:>

L'q

i

293.22 3881 523746 75043 t 178t5

Selected Stabsbcs onPmjects Approved underEO226bysoc_" 1986-1992 Board oflnvesbnents Realtermscomputed byd=_hng project costbycapdalIo_abonPiNforIheyear(base1985) Sectoral dc._s_cabon under" manufactunng isbasedonNabonal StatJsbCS Ot_ce s dass_¢abon whchfollows Pl_hpp_ne Standard Industrial C_ss_..,atlon (PSIC)

1992_sfromJanuary toOctober only Source Manasan (1993c)unpubhshed

i,,o I_


Scale Bias of BOI Incentives Code 31 32 33 34 35 36 37 38 39

Table 31 Average Number of Workers per Firm of BOI Registered

Industry Processed foods Texblewearing apparel andleathermdosbqes Woodandwoodproducts Paperandpaperproducts _nbngandpubhshm9 Cherncars andchemtca_ products pe,Voleum coalrubber/plas_cs No_metalhc mzneral products except products ofpetroleum/coal Basemet_producls Fabricated metalproducts/.mach=nery equ=pment Mccellaneous manufactured products Manu'_n9 Agnculture Eledczoty gasandwater Mlr_ andquany_n9 Pubicubhl_es

1986 8046 23394 8890 460O 26O0 79706 6955 26259 12788 4367

1997 12763 23828 22452 23275 8533 6567 'l,6800 27921 20197 20929 13434 38225 135OO

Tounsm-onented pro;_:lstservce exporters

1988

1989

1990

1991

1992"

9668 20784 9523 10555 12789 42662 29,00 47866 23226 22497 20040 58 11 15855 87 67

14526 214I0 12614 6305 9575 t 17O0 7800 19036 15708 16875 8563 1697") 24696 5522

6800 16459 8465 8148 6307 10353 120,00 16665 18290 14220 8,160 25740 5t8 95 7961

15926 16662 12463 58 90 8427 12666 16250 14790 10308 13177 12995 9088 19353 8295

40 15 156 334 '_ 3217 11496 11929 150800 10338 9835 13083 179I3 92 11 12t78 2042

1679

8450

t90 84

17569

3600

16508

OO0 0 71

2333 18O0

14734

3767 12871

1967 12580

Export kade_s Infrasbucture/in_s_=al sewces Research anddevelopment projects Total Source ofbascdata

23605

20073

F,rms 1986 1992

20755

15231

Se4'ected Stabstcs onProjects Approved underEO226bySector1986-1992 Board oflnvestmef_ Sectoral dizsslficabon under manufactunng Isbased onNa'bon_ Stabstcs Offices classlEcakon whet= follows Phthppme Standard Industnar Classlrcabon (PSIC)

1992=sfromJanuazy toOctober only ,Source. Manasan (19931:} unpublished

I_

F


BREAKING AWAY FROM l HE FISCAL BIND

95

Table32 Economy wideAverageNumberof WorkerperFirm 19861989

Code

Sector

1986

1987

31 32 33 34

Processed foods 11774 13627 Textile weanng apparel andleather=ndustnes 19361 21846 Woodand wood products 12734 14816 Paper andpaper products pnnt=ng and 5812 6061

35

Chemcals andchemical products petroleum11306

1988

1989

6419 9250 7184 4402

8086 12992 7824 5255

12689

9600

10334

10238

11171

6025

7633

13249 9064

14013 10105

8102 7435

11766 9376

10335 12018 9115 16486 31710 3102 5027 4670

9222 13504 10076 16444 34595 3306 5307 5241

7650 6280 7460 9363 88Z,4 8868 16647 12577 27913 19737 2366 3102 3421 4359 4996

14742 14196

14564 15201

9914 14420

11059 14331

19871

20081

5609

5958

pubhshlng coalrubbedplast¢

36

Nonmetall¢ mineral products except products ofpetroleum andcoal

37 38 39

Bas=c _talproducts I abncated metalproducts/machinery and equipment M=scellaneous manufactured products

Manufactunng Construction Electnoty gasandwater

Mining andquarrying _holesale andretailtrade Commun_social andpersonal sen/ices FJnanc=ng =nsurance realestateand business services Transportat=on communcahon andstorage Pubhceclucatu_nal medical dentalandother

services Agnculture GrandTotal Source

Source

--

7573

-8255

198619871989Annual Survey ofEstabl_hrnents (ASE)1988Census ofEstabl_hments (CE) National Stabstcs Office(N$O) Except foragriculture in 1986198719881989 andforconst_'uc_m=nlng andquarry=ng =n1989figures refertolargeestabkshments Manasan (1993c)unpublished


m

Z

m

_ _

" 1

96

=

_

ROSARIO

_

G MANASAN

m

_g

_

_ N


e,_ •_

N

N

_

SREAKING AWAYFROM THE FISCAL BIND

O.

-

Q

Z

o-

CO

_ Z

97

o


98

___=

ROSARIO G MAN_

_._ |_

_.___ _ _ _


100

- _

_

g _

N

_

N

_NN_N_NN_NNN

N_NNNNN_NNN

N

ROS_O

m_

N

N

N

G _A_

N

_ f_g


Table34 (continued) 3 BookValueof FJxedAssets(inthousand pesos) (

1986 Total of whch MFG

Regions PhdcpJnes

__ 1987 Total ofwhich MFG

1988 Total ofwhich MFG

1989 1 Total ofwhch MFG

P.

285461564 75390697296549978 82533547255904245 98746866229390146 80580053 '=1

% D=slnbubon r Jr ill NCR IV V VI VII VIII IX X Xl XII

0 60 2 84 51 29 13 12

1 24 5 23 24 96 17 28

0 67 319 49 30 14 18

1 26 5 38 26 10 19 83

3 71 47 01 10 41

0 76 0 49 5 45 29 03 18 67

140 0 40 3 51 59 35 9 78

0 68 0 21 616 49 28 20 98

2 60 3 24 5 12 7 20 0 61 658 2 57 2 50

0 60 3 90 4 50 24 60 0 85 631 4 29 4 81

2 79 3 08 5 15 7 54 0 76 579 2 34 3 41

0 55 3 30 3 65 24 24 0 73 454 3 37 5 54

1 34 5 34 4 97 8 66 0 94 712 4 09 3 21

0 43 2 42 4 05 20 77 0 97 512 4 01 6 76

1 51 3 12 4 33 2 63 0 81 680 3 74 2 04

0 20 143 312 5 53 0 73 383 3 30 4 25

67 25

47 46

66 68

51 32

61 12

53 16

72 65

76 42

51 29

24 96

49 30

26 10

47 01

2903

59 35

4928

_:

Share f NCR Reg=on IIIandIV toTotal(inpercent) ShareofNCRtoTotal(in percent)

Sources ofbascdata Annual Survey ofEstal_tshments (ASE)19861987and1989 NabonalSta'osl_ocsOffice(NSO) Census ofEstab_shments (CE]1988Nat_onat SlaL._cs Otlice (NSO) Inallestabhshmerds inagnculturein 19861987and1988 Inallestabhshments (nagxlculture const,'u_andnunmg andquar_ng in1989 Source Man,san (1993)unput_tshed

_"


Table 35 Market B=asof BOI [ncent=ves Share of Export Acbv,ties m Total Number of Projects Project Cost, and Employment of BOI Reg=steredF=rms 1986 1992 A NurnberofProjects Totaldornesbcandexportproduct AgricuLture and fishery

1986

1987

1988

1989

1990

1991

1992

95

727

619

925

625

432

289

1

362

109

126

45

38

31

3

11

24

20

15

9

91

6

457

766

560

379

249

3

349 4

9 29

7 1

Mining Manufactunng Energyrelatedprojects Olhers

PercenttoTotal

Oomesttcproducers

1986

1987

1988

1989

1990

1991

1992

2 11

3 85

12 44

12 76

16 16

18 06

15 22

3 87

t8 35

24 60

31 t 1

44 74

41 94

1286

13 46

8 84

Agncuttureandfishery Mmmg Manufacturing Energyrelatedprolects Others

2 20

66 67

3 94

9 40

2 01 25 O0

77 78 93 10

42 86

_ o o

k_

If >z


Table35(conbnued)

I.,./

1986

1987

1988

t989

1990

1991

t992

Export producers Agriculture andfishery

9789 10000

9615 9613

8756 8165

8724 7540

8384 6889

8194 5526

8478 5806

Mrnlng Manufactunng

9780

3333 3333

5455 9606

5000 9060

2500 8714

3333 8854

9116

9799 7500

2222 1034

5714 10000

1987

t988

1989

Energy-related projects Others B Project Cost(inthousand pesos)

10000

1988

_:

._ z

1990

t99t

1992

Totaldomesbc andexport product Agriculture andfishery M=nlng

1753555 16616161 28793233 55354957 52721228 48927993 20539236 19885 8 244199 3 201510 4 005886 1 154091 1461300 3 136014 -30926 547066 5408434 10213579 2112049 403081

Manufactunng Energyrelated projects Olhers

1666767 207261 21901227 45617646 4 1353558 45354644 17000141 66903 7 877074 2 070751 295983 -128938 993275 13504


Table35 {continued)

&

Percent zoTotal 1986

1987

1988

1989

1990

1991

1992

1050 0 00

7 71 777

4288 5144

3028 5371

5081 6655

7775 3675

6782 2137

1104

9500

3827

2333

4453

7863

7563

0 00

5 38 091

5757 9328

3933

Export producers Agriculture andfishery

8950 10000

9229 9223

5712 4856

6972 4629

4919 3345

2225 6325

3218 7863

Mmln9 Manufactunng

-8896

4018 5 00

6351 6173

2881 7667

2553 5547

1276 2137

0 00 2437

Others Energyrelated projects

10000

9909 9462

736 4243

10000 6067

C Employment Generation

t986

1987

t988

t989

1990

1991

1992

24072

150231

128183

147353

96176

57782

38386

45

72490

21844

10789

4 190

4 938

5553

Domestic producers Agncu,ure andfishery Mining Manufactunng Energy-related projects Olhers

Tota|dornesbc andexport products Agncuilure andfishery

I_

I_ I_-


Table 35 (conbnued) 1988

t987 1 111

1988 1 744

1989 5 927

1990 10 379

1991 2 903

1992 1 096

23 896

810

103 012

129425

81 607

4g941

29737

131

73 045 1 529

523 884

1 188 12

Mlnzng Manufactunng Energyrelatedprolects Olhers

PercenttoTotal

Domesl]c producers

t986

t987

1988

t989

t990

1991

t992

0 98

2 67

17 20

13 37

12 44

17 97

9 16

72 13

49 76

20 93

34 93

1217

7 73

12 88

5 25

Agriculture andfishery Uznzn 9 Manufactunng

0 99

57 90

4 47

6 77

2 98

77 06

96 38

18 51

90 27

99 02

97 33

82 80

86 63

87 56

82 03

go84

100O0

100O0

27 87

50 24

79 07

65 07

87 83

3 24

72 08

25 17

54 01

23 29

99 01

42 10

95 53

93 23

92 27

87 12

100O0

97 02

22 g4

3 62

81 49

14 82

100O0

Energyrelatedprojects Olhers Exportproducers Agncult_re andfishery Mznm9 Manufactunng Energy-related projects Others

Source ofbasic data Selected Stabsbcs inBO1-Approved Projects bySector 1986tolg_2Board ofInvesb_=nts Source_ Manasan (1993c) unpubtmhed

94 75

F_


Table 36 Internal Rate of Return of a Hypothetical Firm Under Selected Incentwe Schemes m ASEAN Countries 1988

Indonesta n=lO n=20

120

Malaysia n=lO n=20

PhBbppmes n=lO n=20

Singapore n=lO n=20

Thailand n=lO n=20

1 ReguJar taxes(noincentives)

90

103

111

103

115

t50

165

113

133

2 Taxholiday(m,n no ofyearsallowed)

NA

165

150

125

135

170

173

120

135

3 Taxhol_lay(max no ofyearsallowed)

NA

165

170

141

150

200

190

140

150

123

123

138

140

NA

NA

150

165

4 Dutyexempbon oncapital

135

153

5 (2+4)

135

153

194

174

175

170

170

173

165

170

6 (3+4)

135

153

200

193

193

184

200

190

190

185

NA

165

160

NA

NA

NA

NA

115

135

7 Exportal]owance onlya

NA

8 (2+4+7)

135

153

200

195

175

170

170

1725

170

175

9 (3+4+7)

135

153

200

200

195

t84

200

190

195

190 ;o

MemoItem Im u

025 b 015/025f035

012 040 + 005

No_e Theassumed _rcome si_eam used mthese calcufabons isthatwhich ymlds before taxIRRof 20 Assumes firmas100% exo(_ bTheanaly=s uses u= 35forIndonesia

02

0

02

035

033

035

i _.


BREAKINGAWAYFROMTHE FISCALBIND presence

of fiscal

mcentlves

Moreover

(hke Indones,

a) that wlthdrew

hurt

a move

by such In conclus,

teractmg

on

fiscal

cost

and

of the that

incentives

for exports

access

the

to ,nputs

drawback)

m attracting

at world

to ,mprove

the overall

government Nattonal

some

prices

deprecmuon

conslstently

The Nat,onal

Authority has

duty/tax the

3) setting

(NGA) has

been

a floor price

for palsy

a ce,hng

and through Because

a major

the ceiling

prices

of nee

loss

save the

avadment

role m marketing

the lead agency palsy

to protect

farmers

on nee import/export to engage

average

1987

not been

Umah

1989

very effectlve

the

and

that

prices

,nherenfly

prowdes d,rect sub to the NFA reached

1991

(Table

37)

Is thls

to the success of the NFA m carrying oLlt ,ts of a number of studles (Lantlcan and Un Clarets

imphclt

et al

m stabfllzmg

Clarete et al (T992) estimated est, mated three m11hon farmers from

income

of consumers

determined

,n an actlwty

of P1 2 b11hon m 1988

The

nee prices

by NFA s procurement

at the officlally

its monopoly NFA has

and

the welfare

are defended

stocks

nee

the Natlonal

m th,s area

1) stablhzmg

the

expense commensurate mandate? The results

benefited

and

of net

(NFA) formerly

entmls some losses the national government sldy to the NFA Natlonal government submdy

has

exemptlon

provtmon

Doing th, s could

price for nee to protect

d, sbursement

nevehr

However producers

on the 1991 mcentlves

played

tasks

The floor and

a yearly

the _t _s

to all fn'ms ,s recommended

chmate

Food Authority

the foUowmg

2) setting

and

Thus

Food Authority

and corn NFA

to warrant

system

be ehmmated

Also

based

m coun for indus

that prowde export

(through

investment

P4 bdhon

The government Grmns

those

be malntamed

carry over and accelerated

not seem

incentives package

partlcularly

that they were not

policy envlronment

FDI does

investment

BOI incentive

should

mdlcate

of countries

of the BOI mcentJves

in the overall

present

suggested

the experience

,ncentlves

the performance

the dlstortlons

trial promotlon

lOT

1992)

suggest

the price

that the NFA

of palsy

and nee

that less than 10 percent of the ,n the country could have actually

NFA subsldy

on palay

and

that

only


IO8

ROSARIOG MANASAN

about

two percent

country

could

of the

have

est:mated

benefited

10 mflhon

households

from the :mphclt

m the

NFA rice submdy

Table 37 NFA Losses t986 to 1991 (In bllhon pesos) Year

BeforeGovernment

Government

AfterGovernment

Subsidy

Subsidy

Subsidy

1988

1 779

1 100

0 679

1989

1 785

1 720

0 065

1990

1 026

0 900

0 126

1991

2 761

0 996

1 769

Total

11417

4 716

6 734

Source ClareteRamon Let al Securing Food Security Performance Assessment andFuture Directions fortheNFADecember 1992

Finally

C1arete

subsldy

program

receaved

by nee

from

the h:gh

et al showed

was

substant:ally

producers

cost

that

and

recurred

the

hlgher

total than

consumers

m the

cost

the actual

The dlfference

admmastratlon

of the

They pointed out the possabdlty of a bloated overhead hshed that m 1991 the NFA spent PI 52 to dehver subsady to farmers and consumers NFA s losses continually exceeded Thas mdzcates support

imphclt

the NFA had

its current

of the current added

that

to nat:onal

to the 1991

percent

expendltures

than

submdy comes subsldy

They estab every P1 of

draw

on ats equity

to

pmntmg

to the unsustamabd:ty

wathdrawals

from NFA s equity

are

then the sum of exphcat

and

subsldy

{Table 37) expendltures

hlgher

to effectavely

NFA amounts

the level of research

NFA

ahke {Table 38) In recent years naUonal government subsady

thus

If these

government

subsldy

b11hon m 1988

operataons

s:tuat:on

of the

to a yearly

Thas figure dunng

as more

the per:od

on irrlgatmn

average than

of P1 8 60 tames

and Is about

36


BREAKINGAWAY FROM THE FISCAL BIND Given

thin perspective

109

one can argue

that the momes

currently

spent on nce/palay on research and

price support through the NFA is better spent lmgaUon areas that are shown to have high

returns

terms

m relative

(David

et al 1992)

Table 38 Cost of Delivering NFA Subsidy 1991 (In b,ll,on pesos) Tradingloss LESS Subsmdles tofarmers

2 532 0 595

LESS

0 408

Subsidies toconsumers

Costof dehvenng subsidy

1 529

Source Clarete Ramon Let 8/ Securing Food Security Perfo_Tnance Assessment andFuture DiredJons fortheNFADecember 1992 Petroleum In the last

product

pricsng

two years

the price

of o11 m the world

exchange rate were fmrly stable These need to adopt a slmpler more transparent

market

and

petroleum products prlcmg mechanism One does not have far back into the past however to find out that the present is not sustainable

especlally

cost of oii is increasing In the months leading failed to adjust w_th rlsmg

petroleum

world

price

m a sltuatlon to the

1990

product of crude

the

developments masked the and more flemble off and

where

Gulf cnms

prlces

the landed

peso

the government

m a timely manner

off because

to look set up

of the strong

in step popuhst

protest As a result the natlonal treasury became P4 5 bflhon poorer since it had to effectively submdlze domestlc consumpbon of petro leum

products

dunng

Under the present

that system

prices of dflTerent petroleum and after pubhc

perlod

hearings

the government

products As such

fixes wholesale

and retail

based on pet_bons of off compames upward

adjustments

m petroleum

product prices become hlghly pohtlclzed Given tins perspectlve latmg off and petroleum product pricing is n-np_ratlve

deregu


110

ROSARIOG MANASAN De Lucla and Associates

of the pricing change hlghhghts nos 4 and

(1990} succinctly

outlines

the character

that _s necessary thls paper particularly 5 0) tying ex refinery prices (before taxes)

more closely with internatlonal pnces (u) brmglng the structure of retml prices (including taxes) more m llne with International relative prices

and the reailhes

complementary

of local demand

regulatory

msunng

that pnce

making

the

actions

changes

regulatory

(111)using

to stimulate

can be made

pnce

change

retail

prices

and

competition

(w}

_n a more tzmely manner

process

and

rules

{v}

absolutely

transparent -for both suppher and consumer pnces (emphasls supphed) (Vl) msul_ng that financial prices at a minimum cover full economlc tax revenues

costs

{wl) msunng

some

degree

of stability

of other

Several analysts proposed various ways of moving away from the extremely regulated pricing reglme prevmhng at present Intal (1987) suggested the use of a variable tax m tandem with a bamc tax on crude set

based

ell and

on the

refined

petroleum

followlng

products

conslderatlons

government the overall

the mcontlves to conserve energy cost structure of various industries

essentlally

a price

crude

off pnce

Oli price

according

off from some

One

of the

operates

contrast

The

mowng

options

long run

Fund

only subject

to the current

when

the world

m the flexible

of the current price

crude rate are

world

price of

reference

(1990} proposed

is reformulating

(OPSF) into a real stablhzatlon

to i'uced and

system

of the

and the impact on The variable tariff Is

tax rises

The changes

De Lucia

tax is

needs

It goes down when world

to the dexnatlons

the O11 Price Stablhzat_on that

tax

is hlgh or is increasing

determined crude

stablhzatlon

is low or is decreasing

The baslc

revenue

transparent

One way of doing

fund

procedures

in

this is to set up a

trigger price mechanism whereby retail price changes automatlcally to bring them in hne w_th mternatlonal prices once the OPSF hits the lower or upper

range

The other optlon rinsed De Lucla pointed where structure

out that

the Oli market is ohgopohst

small consumers

of a fixed band was absolute

price deregulatlon

this may not be rentable

is small by mtematlonal with slgmficant

are ill reformed

and/or

banners

However

m the Phthppmes

standards to entry

the supply and

have hlgh mformatlon

many costs


4 Conclusion

While it is possible to jumpstart the economy by slackening fiscal and monetary restraints

in the immediate term the economy cannot

afford

Thus

has

to continually to respond

deficits

to the

wlth growth

as the fiscal sector will likely fiscal

run large

challenge

in the medium is buffeted

be trapped

deficits

fiscal

fiscal deficits

of "reconciling

term

it take

steps

lower

fiscal

This is not an easy

by competing

claims

in the WClOUS cycle

unless

the government

of low growth

to improve

ance to reduce further selected government to reallocate government spending more

task

The government and

its revenue

high

perform

expenditure items and efficiently It should be

emphamzed that as a rule more revenues and less spending both be needed However the potential gmns from the former greater place

than

from the latter

in recent

years

opportunities

because

was dominated

for incremental

Nonetheless

the fiscal adjustment

_t should

by expendlture

budget

be stressed

cuts

are

that budgetary

cuts

will are

that took Thus

the

extremely

hmited

allocation

can still

be improved While

significant

in the last SLXyears preceding secnons increasing paper hUe

gmns

tax revenues

also identJfied enhancing have

important

to increase

been

at present

certain

However

structure

have

achieved

m tax mobihzation

more remmns to be done The analysis in the pointed out that the biggest opportunity for

negative

hes m tax administration

structural some

revenue

revenue

changes

of the impact

proposed This

from administralnve

that

The

are also reve

changes makes

m tax it doubly

innovations


112

ROSARIOG MANASAN

The revenue potential of user charges is not yet fully exploited m the Phthppmes Many analysts argued that user charges increase efficlency and raise revenues at the same time Also the concern that

user

charges

services

will hm_t the access

is misplaced

cost

sharing

state

owned

of the poor to critical

the paper

or cost recovery

argues

programs

pubhc

for more aggressive

partlcularly

m LGUs

and

enterprises

Recent nance

Thus

and

years

were

other

operating

marked

by dramatlc

expenditures

reductlons (MOOE)

m mature

and

capltal

out

lays While this was done to achieve fiscal stablhty in the short run the economy if it is to grow m a sustained fashion cannot afford such

unabated

dechne

infrastructure myopic

as it leads

which

in the end

Given seek has

rewew

premature

deterioration

value

its spending

more money

prlorit_es

its appropriate

can be spent

government doubts

reglstered

most

part_clpatlon on the cost

on Is

of capltal must

peso scope

stock

on capltal increasingly

It spends

In thls regard role and

that spending

to be spent

the government out of each

given changing technologles Also the government has

sources

particularly

on malntenance

posttlon

a blgger

to reconsider

sector ment

raises

to the

spending

scnmplng

necesmtates

Its dlre flnanclal to secure

then

m capital

Moreover

It must

the government vzs--ws

the private

and level of economic develop to reassess how its hmtted re

efficiently IS called

and for

effectiveness

effectlvely In this

in areas

regard

of the submdles

with the BOI and to the NFA for rlce/palay

thls

where study

glven to firms price

support

Th_s study also argues that the deregulation of the o11and petroleum product pricing Is imperatlve if future subsldles are to be avoided It is essentlal

that

made absolutely consumer changes a timely

prlces

the regulatory transparent and

m the exchange manner

that

price and

changes

change

automatic in dornestlc

rate and international

process

and rules

for both suppher prices prlce

be and

fully reflect of crude

odm


B1bhography

o

Blenvemdo

_ustoms

P Jr

and

Erhnda

M Medalla

and Tax Admlmstratlon

)IBM Government Thomas _outheast

"Direct Asia

Paper

Streamhnmg

Project

Investment

A Study

"Streamhnmg

prepared

for the PIDS

1993

of Japanese

of Motlvatlons

Enterprmes

m

Charactenst_cs

and

kttltudes ECOCEN Study No 1 Bangkok Economlc Coopera 1on Center for Aman and Pamfic Region 1973a "D_rect Investment of United States Enterprises m _outheast

Asm

_ttltudes

ECOCEN

ion Center

A Study

for Aslan

of Motlvataons

Study and

No 2 Bangkok Pacific

_Dlrect Investment ;ast

Asia

.udes _enter

A Study

ECOCEN for Aslan

Iournal

Report

Vol

Development

Inc

Mobd_zatzon

gram (LDAP)

USAID/Phlhppmes Bank

Dac_fic Countnes Manila tlsta Romeo M John Promotwn

Local

Studies

Coopera

Enterprlses

m South

Charactelnstacs

I and (ARD)

II

Asian

and

Wall

Street

Actwns

Asmstance

for Pro

1992 of Developing

Aslan Development Bank H Power and Associates

1979

AtU

Cooperatlon

Essential

Development

Key Indzcators

Pohc_es m the Phdlppmes

."or Development

and

1973b

of European

of Motivations

_GU Revenue n Development

Economlc

Region

Study No 3 Bangkok Economlc and Pacific Region 1973c

"The ASEAN 1979

_cmtes m Rural

Charactermtacs

Makatl

Phfllppme

Asmn

and

1992 Industnal Institute


114

ROSARIO G MANASAN

Ble]er Mario and Mohsm S Khan Government Pohcy and Private Investment m Developing Countries Internatmnal Monetary Fund Staff Papers Vol 31 No 2 1984 Bureau of Customs (BOC} BOC Annual Report Manila Bureau of Customs various years Bureau of Internal Revenue (BIR} BIR Annual Report Manila Bureau of Internal Revenue vamous years Chhlbber Ajay and Sweder van Wljnbergen "Pubhc Pohcy and Private Investment m Turkey PPR Working Papers Pubhe Economics WPS 120 Washington D C World Bank 1988 Clarete Ramon L et al _Secumng Food Security Performance Assessment and Future Dwectmns for the NFA Report submit ted to the Department of Agriculture and the Government Corporatmns Momtormg and Coordinating Council December 1992 Commmslon on Audit Annual F_nanczal Report of Local Govern ments Quezon C_ty Commmmon on Audit various years Cororaton Caesar "Pubhc Sector Defic,t and Domestic Debt Heavy Burden of Phlhppme Economic Growth Unpubhshed 1993 Crown Agents 'Bureau of Internal Revenue Informatmn Systems Strategic Plan Report submitted to the Bureau of Internal Revenue 1992 Dav,d Crmtma Ehseo Ponce and Poncmno Intal Jr _Organ,zmg for Results The Phlhppme Agricultural Sector Working Paper Series No 92 08 Makatl Phihppme Institute for Development Studles 1992 de Dins Emmanuel and Assocmtes Poverty Growth and the F_scal Cnszs Makatl Phfllppme Instltute for Development Studles and Internatmnal Development Research Center 1993 de Jantscher Mflka Casanegra Carlos Silvan1 and Graham I-Iol land "The Audlt of VAT In Value Added Tax Admm_stratme and Pohcy Issues edlted by Alan Trot Washington D C Inter natmnal Monetary Fund 1991 delos Angeles Marian "Pricing Enwronmental Resources The Case of Forestry Water and Air Resources Unpubhshed 1993


BREAKINGAWAYFROMTHEFISCALBIND

115

de Lucia and Assomates "Proposed Off Price lation in the Phlhpplnes Issues Options ommendattons

Report submitted

Dornbusch Rudlger and Stanley York McGraw HIll 1990 Economlc

Intelhgence

Hslao

Cheng

sahty 106 Intal

1985

ventlon

Mamla

Lamberte

Ms_no

Investment

Juhus

the Financial

nes No Studies

90 0S 1990

Lantlcan

Fiordehza

ketmg Trade Lmdsey

Center

1987 and

1988

Unnevehr

for Pohcy

Phfilpplnes

and

opment Manasan Return Analyms

Studies Rosario

Development

Studies

Contribution

"Foreign

II Makati

of Multmatlonal No

Direct

81 06

Investment

In Survey

Phlhppine

Quezon

Instltute

m the

of Pluhppme for Devel

1982 G

"Impact

Factor Prices of Incentives

of BOI Incentives

and Relative Factor under the Omnibus

1981 (PD 1789) and Investment Staff Paper Series No 86 01 Development

Group

and Agricultural

1987

Valencia

Research

Se

and Mar

Working

Economy

A Revlew of the Literature

Development

Paper

for Development

Pohcy

l_ce

of Pohcles

_Pdce Prlclng

Agricultural

"The Development

Ernesto

85

Foreign

Working

InsUtute

Firms m the Philippines D1seussion Paper City University of the Phlhpplnes 1981 and

Dkrect

An Assessment 1986

of the Philippines

Charles

Cau

7 (1981)

Off Prlce Inter

30

Phihppme

on the Phdzppme

Laguna

University

Sector,

Makatl

In UPLB

Issues

Income

1991

and Launan

Policy

Pohcy

Money

Savings

Relampagos

Affecting

1992

Economzcs

September

New

(EIIB) "Tax Evasion

Government

Financial

Unpubhshed

and

and

Redefining

Chromele `Frlvate