Financing Arroyo’s failures

A review of the Arroyo

administration’s fiscal policy1

The eight years of Mrs. Gloria Macapagal-Arroyo as the chief

executive of the Republic has been tumultuous, to say the least.
But on matters of fiscal policy, her administration has been
characterized by an almost consistent zeal in a mission to trim
the budget deficit – with the rhetoric persisting (albeit toned down)
even during an economic crisis, when the public needed the money
the most. Incidentally, her fiscal policy had also been a consistent
failure – in achieving a balanced budget, in addressing poverty,
hunger, and misery, and, in the context of the current international
recession, in preparing our national defenses to fight off waves of
Financing
global economic convulsions. Arroyo’s
.............................................................................................. failures

By the Freedom from Debt Coalition

S
o much is Arroyo’s preoccupation with the subject of budget
deficit, that during her first State of the National Address
(SONA) in 2001, she could not help but highlight that “from a
budget surplus in 1997 of more than a billion pesos under President
Ramos, my government inherited [from Estrada] a deficit exceeding
140 billion pesos.” She then took it upon her administration to trim
this figure, employing aggressive rationalization, expenditure cuts,
and taxation policy in the process – the primary strategies employed
by government to reduce budget deficits.

For Arroyo, the problem is not the policy we have of unquestioningly

paying our debts. Rather, it is the policy of living beyond our
means, i.e. spending above our revenues and borrowing to cover
our expenses. So consistent was she that seven years after her 87
first SONA, she is still preaching the same sermon of the scourge
 of deficit and deficit spending: “Deficit spending inevitably leads
to large government debt that necessarily requires debt servicing
which eats up the budget.”

This, of course, comfortably ignores the context of a humongous

stock of debts which we are paying year in and year out. As of
end-November 2008, the NG outstanding debt was pegged at
PhP4.236 trillion pesos. For 2009, this huge debt stock will cost
us PhP631.42 billion, roughly four times the entire budget for the
Department of Education. In this context, such a fanatical zeal
for achieving “balanced budgets” shows a completely lopsided
appreciation of the debt problem.

This paper aims to examine the fiscal strategies Arroyo employed

during her presidency – basically in comparison to the administrations
of her predecessors, but also and most importantly how they fit
to her overall outlook, methods, and practices on public finance
itself.

2008 Budget Proposal: (Almost) Living the

Financing (Balanced Budget) Dream
Arroyo’s
failures
Arroyo’s dream of a balanced budget was most pronounced in her
2008 proposed national government budget, where she counter-
posed the problem of resolving the budget deficit by resolving the
debt problem itself. To quote her: “The debt problem is over. The
budget is balanced at last.”

In her 2008 budget message, Arroyo claimed that the proposed

2008 National Government budget is a “balanced budget”, the
first time in ten years, and two years ahead of her own pre-set
schedule. The PhP1.227-trillion proposed budget program for 2008
is to be funded by about PhP1.236-trillion of projected revenues.
She declared this to be the ultimate solution to the debt problem,
which she claims is rooted in the continued practice of borrowing
for deficit spending.

The administration’s definition of a balanced budget is controversial,

88 to say the least, and has been attacked on all fronts by public
finance and accounting experts. But even as the experts deal with
the technicalities (such as whether principal payments for debts
can be considered as expenses or not), the definition is challenged
by a valid question: Can a budget which places utmost priority on
debt payments at the cost of social spending – notwithstanding the
fact that most of these payments are for illegitimate debts – be
considered “balanced” in the truest sense of the word?

Eventually, Arroyo failed to reach this target of a balanced budget.

In the end, she only managed to produce PhP1.202 trillion worth
of revenues. And, with expenditures reaching PhP1,271 trillion
(slightly larger than planned), her administration ended up with a
PhP68 billion deficit for 2008, the highest since 2005. In her 2008
SONA, Arroyo unapologetically blamed exogenous forces: “Malapit
na sana tayo sa pagbalanse ng budget. We were retiring debts in
great amounts, reducing the drag on our country’s development,
habang namumuhunan sa taong bayan. Biglang-bigla, nabaligtad
ang ekonomiya ng mundo... Whatever the reasons, we are on a
roller coaster ride of oil price hikes, high food prices and looming
economic recession in the US and other markets. Uncertainty has
moved like a terrible tsunami around the globe, wiping away gains, Financing
Arroyo’s
erasing progress.” failures

Arroyo’s appreciation of the need to respond to abrupt waves of

global economic turmoil via deficit spending ignores the fact that
in the first place, much of our expenditures are for debt servicing
and not for social investments. If Arroyo’s fiscal logic is pushed to
its conclusion, we can even say that her policy is to increase debts
(by way of increasing deficit spending) in order to pay for obligations
and mandates we can pay for because we need to pay our debts.
Let us look further into Arroyo’s logic.

Debt servicing and borrowings

In her 2006 SONA, GMA confidently declared that because of

her good fiscal management, “now, we have the money to pay
down our debt and to build up our country.” But it seems that of
the two [debt or social investments], debt servicing remains her
administration’s top priority. For her last full year in office, what is 89
 supposed to receive the highest budgetary allocation -- education
-- is merely a third of what the Arroyo government will be spending
on debt (PhP158.21 billion compared to PhP631.42 billion). The
situation for health is much more horrendous – it’s only 4% of what
we will be spending on debt (PhP27.88 billion). Even if you add up
the total proposed spending on education, health and agriculture
, this will still be less than interest payments alone by as much as

TABLE 1. Bicameral Conference Committee – Proposed

Spending for 2009 (in billion pesos)
Debt Service 631.42 Department of Education 158.21
Interest Payments 252.55 Department of Health 27.88
Principal
Amortization 378.87 Department of Agriculture 3.62
Note: Breakdown of totals may not sum up due to rounding of digits.
Proposed 2009 National Budget. Source: Budget of Expenditures and Sources of
Financing (BESF) Fiscal Year 2009. Department of Budget and Management (DBM).

PhP62.84 billion.

Financing It was not enough that debt got the lion’s share of the budget.
Arroyo’s
failures There have been allegations of over-prioritizing debt service, as
revealed by even the most fiscally conservative of politicians. Former
Senator Ralph Recto, for example, criticized the overstating of
foreign exchange assumptions as a means of padding debt service.
Before the bicameral committee decided on the 2007 budget, he
revealed that interest payments may have been padded by at least
PhP6.6 billion since it had been computed at the exchange rate of
$1=PhP53 instead of the more realistic $1=PhP50.

Where does the Arroyo government get the money to pay for these
debts? Former NEDA Director Felipe Medalla [2007] observed
that until 2003, servicing the public debt did not completely
compromise non-interest expenditures of government because
interest payments were largely refinanced. However, from 2003
onwards, the government increasingly serviced interest payments
out of its own revenues. The effect of using tax revenues for debt
servicing is to compress non-interest spending.
90
FIGURE 1. Refinanced Interest Payments

105.05% 113.39%

88.28%
95.26%
84.09% 71.70%

48.96%

20.89%
0.00%
1999 2000 2001 2002 2003 2004 2005 2006

ESTRADA ARROYO

Refinanced Debt. Source: The Philippine Economy: Recent and Future Trends by former
NEDA Director Felipe Medalla. Note: To get the refinanced interest payments, you first
obtain the primary surplus by subtracting the non-interest payment expenditures with
the revenue. You then take the ratio of primary surplus and the interest payments.

From 2002, when the government depended entirely on financing Financing

Arroyo’s
to pay off its interest expenditures, refinanced interest payments failures
dropped to merely 20.89% (2006). This means that only one-fifth
of the interest expenditures was financed through new debts. The
rest of the interest payments, therefore, the Arroyo government
paid from its revenues.

In deciding whether to pay for debt service or to allocate for

social services, the Arroyo administration unhesitatingly chose
the former. In order to maximize the appreciating peso due to the
massive inflows of foreign currency, the government prepaid at least
US$220 million of debt owed to the International Monetary Fund
(IMF) – allowing it to save about $50-100 million in the process – and
US$72 million to the Asian Development Bank (ADB). Clearly, the
Arroyo administration is striking while the iron is hot; it is paying and
pre-paying debts while the peso is strong and the country is awash
with dollars. This strategy is commonly employed by countries which
want to gain independence from IFIs and other foreign creditors, but
we know that this is not the case with the Arroyo government. 91
 There is an ongoing phenomenon in government policy of allocating
the majority of the country’s revenues to debt service, causing the
government to finance its deficit through loans. President Ramos
allocated a yearly average of 61.99% of the country’s revenues to
debt payments, while President Estrada allocated 70.22%. Arroyo,
on the other hand, allocated 97.69%.

But if there is a case of over-spending on debt, there is likewise

a practice of over-borrowing. Borrowing during the Arroyo
administration always exceeded the budget deficit. The Philippine
government is so dependent on debt that financing the deficit has
just been one reason for borrowing. Another reason for borrowing
is to repay existing debt. The Arroyo government, its loudmouthed
claims notwithstanding, is borrowing even more than to simply
cover principal payments.

Table 2. Deficit Financing

Deficit Financing from 2001-2008 (in billion pesos)

Financing
2001 2002 2003 2004 2005 2006 2007 2008
Arroyo’s
Deficit -147.0 -210.7 -199.9 -187.1 -146.8 -64.8 -7.4 0.0
failures
Net Financing 175.2 264.2 286.8 242.5 236.0 110.1 84.5 17.8
Variance 28.2 53.4 87.0 55.5 89.2 45.3 77.1 17.8
Sources: National Government Fiscal Position CY 1999-2006, Bureau of Treasury, for
2001 to 2006 values; Budget of Expenditures and Sources of Financing (BESF), Fiscal
Year 2008, Department of Budget and Management (DBM) for 2007 and 2008 data.

The practice of borrowing more than what is needed increases the

country’s debt stock, and with it the debt-servicing requirement.
This should be clearer to Mrs. Arroyo than to other post-dictatorship
presidents. After all, she holds the record of being the biggest
borrower and biggest debt payer among presidents since Marcos.
In fact, her borrowings and payments are bigger than the combined
borrowings and combined payments of her predecessors. This is
true whether the amount is nominal or adjusted for GDP growth.
Expenditures: Reneging on the budget’s
92
Table 3. DEBT SERVICE AND GROSS BORROWINGS, 86-06
Aquino Ramos Estrada Arroyo
(86-92) (93-98) (99-00) (00-06)
Debt Service
(Interest + Principal) 596.069 776.420 433.239 3,465.228
Gross Borrowings
(Domestic + Foreign) 565.659 372.339 571.568 3,385.101
Source: Bangko Sentral ng Pilipinas

figure 2. debt service and borrowings, in real (1985)

prices, annual average (in billion pesos)
140.0
126.9
120.0 Debt Service (real)
Annual Average
Borrowings (real)
100.0 Annual Average
85.4
80.0
64.7
59.6
60.0 55.9 52.7

40.0
23.9
Financing
20.0 Arroyo’s
failures
0
AQUINO (86-92) RAMOS (93-98) ESTRADA (99-00) ARROYO (01-07)

promises

In Arroyo’s 2007 SONA, it was clear that one of the primary

purposes of imposing “fiscal discipline” is for “investing hundreds
of billions in human and physical infrastructure.” So let us take a
look at the other non-debt expenditures. While debt expenditures are
being padded, other expenses are being cut. Looking at the half-year
expenditure performance of the government in January to June of
2007, there had been an under-spending of about PhP37.9 billion.
Most of the under-spending was in the Others item which includes
allocations for education, health, social welfare and infrastructure.
It registered a PhP24.8 billion difference between the actual and
programmed allocation.
93
As of September 2007, programmed non-interest expenditures
 TABLE 4. January-June 2007 Spending Performance
(in billion pesos)
Program Actual Variance
All Expenditures,
of which: 589.2 551.3 –37.9
IRA 97.1 99.8 2.7
Subsidy 3.2 10.6 7.4
Others 333.3 308.5 –24.8
Spending Performance 2007. Source: Department of Finance.

exceed the actual non-interest expenditures by as much as

PhP14.78 billion (PhP644.358 programmed versus PhP629.578
actual). In other words, in order to keep her promise of managing
the deficit, Mrs. Arroyo is cutting down on non-debt spending.

Non-debt expenditures have consistently been under the knife with

the Arroyo administration. The 2006 spending performance, for
example, reveals that actual total expenditures were PhP54.6 billion
lower than what was programmed. The variance was actually caused
Financing by an underspending of PhP68.4-billion in “Other” expenditures.
Arroyo’s
failures Non-debt spending in 2005 also suffered a PhP50.3-billion cut. What
meager amount the Arroyo government allocates in the budget for
genuine social needs is still being pared down in order to make the
deficit numbers look good.

As the table below shows, the 2005 and 2006 savings on interest
expense generated by the Arroyo government did not go to basic
social services and social justice. The latter in fact were slashed
more radically than the savings on interest expense. In 2005, a
peso saved on interest expense was accompanied by a cut of
PhP2.72 in “Other” spending (non-interest spending such as basic
social services). In 2006, the cuts in social spending amounted to
PhP1.87 for every peso saved on interest expense.

Notice that Internal Revenue Allotment (IRA) is always beefed-up; so

94
table 5. 2005-2006 Spending Performance
(in billion pesos)
2005 2006
Program Actual Variance Program Actual Variance
All
Expenditures 963.2 942.2 –21.0 1,099.0 1,044.4 –54.6
Interest and
Net Lending 320.3 301.8 –18.5 348.3 310.2 –38.1
IRA 120.2 160.6 40.4 134.1 174.7 40.6
Subsidy
Others
and Equity 517.8
4.9 467.5
12.4 –50.3
7.5 610.5
6.1 542.1
17.4 –68.4
11.3

Spending Performance 2005 and 2006. Source: Department of Finance.

are subsidy and equity. This, one speculates, is to ensure support

of local politicos and the economic elite. Interest payments may
have gone down, but this was mainly because of, as Recto pointed
out, inaccurate estimation of the currency exchange rate.

The Arroyo administration has been spending much less on Social

Services than her predecessor, former President Joseph Estrada, Financing
Arroyo’s
in terms of percentage of NG spending. The share of her economic failures
services allocation dropped
considerably compared to
that during the last years
of the Marcos regime. In
contrast, the percentage
of her debt service interest
is very high, second only
to that of former President
Corazon Aquino who took
it as a policy to honor and
repay all debts of the Marcos
dictatorship.

This decrease in allocation

by the Arroyo government
95
 table 6. Sectoral Shares of National Government
Spending (in percentage)
Marcos Aquino Ramos Estrada Arroyo
(1981-85) (1986-92) (1993-98) (1999-00) (2001-04)
Economic
Services 36.2 23.1 25.5 24.2 20.6
Social Services 21.9 22.2 28.0 32.2 29.8
Defense 9.9 7.1 6.8 5.5 5.5
General Public
Services 16.1 13.7 18.3 18.1 17.1
Net Lending 4.3 4.4 0.5 0.5 0.6
Debt Service
Interest 11.6 29.5 20.7 19.5 26.8
Sectoral distribution of national government spending. Source: Prof. Benjamin Diokno’s
data on per capita spending, titled “Two Decades of Suffering”, used in his presentation,
“The Real State of the Nation”.

for social services is more evidently seen in the per capita and
per student spending of various administrations for health and
education, respectively. As the tables below show, the Arroyo
Financing
government is outdone by the government of Joseph Estrada in
Arroyo’s terms of per capita spending on health and per pupil spending.
failures

This is in direct violation of the spirit of the Philippine laws. The

table 7. Consolidated per capita health spending,

by administration, 1981-2004 (in 2000 prices)
Marcos Aquino Ramos Estrada Arroyo
(1981-85) (1986-92) (1993-98) (1999-00) (2001-04)
National
Local
Government 240 278 321 360 303
Government 203 247 160 159 119
Total 37 31 161 201 184

Consolidated per capita health spending in 2000 prices. Source: Prof. Benjamin Diokno’s
data on per capita spending, titled “Two Decades of Suffering”, used in his presentation,
“The Real State of the Nation”.

96
TRACY PABICO

table 8. Average National Government Spending for

Basic Education1981-2004 (in 2000 prices)
Marcos Aquino Ramos Estrada Arroyo
(1981-85) (1986-92) (1993-98) (1999-00) (2001-04)
Per pupil
spending,
2000 prices 3,027 4,478 4,959 5,830 5,467
Average National Government Spending for Basic Education. Source: Prof. Benjamin
Diokno’s data on per capita spending, titled “Two Decades of Suffering”, used in his
presentation, “The Real State of the Nation”.

Philippine Constitution puts prime on education above all spending.

According to Article XIV, Section 5.5 of the Constitution, education Financing
Arroyo’s
is supposed to receive the highest budgetary allocation: failures

Section 5.5. The State shall assign the highest budgetary

priority to education and ensure that teaching will attract
and retain its rightful share of the best available talents
through adequate remuneration and other means of job
satisfaction and fulfillment.

The table below shows that since 2003, the growth rate of
revenues for each year has outpaced the growth rate of non-
interest expenditures, except for 2007. This means that the
increase in revenues does not necessarily translate to an expansion
of government spending for the public except in 2007 when
economists and credit rating agencies began to publicly criticize
this practice. This trend is upheld in the proposed 2008 budget,
with the planned growth of revenues registering at 9.67% while the
proposed growth of non-interest expenditure is lower at 6.24%.
97
Clearly, the primary strategy to “balance” the budget is, virtually, by
Financing
Arroyo’s
failures

TRACY PABICO

98
 Financing
Arroyo’s
failures
Photos by TRACY PABICO

99
 table 9. Growth Rates of Non-interest Expenditures and
Revenues (in percent)
2003 2004 2005 2006 2007* 2008
Non-interest
Expenditure 1.64% 3.21% 4.78% 10.74% 21.21% 6.24%
Revenues 10.60% 10.47% 15.49% 20.03% 18.34% 9.67%
Variance -8.96% -7.26% -10.71% -9.29% 2.87% -3.43%
Growth rates of non-interest expenditures and revenues. Sources: Public Finance
and Fiscal Indicators, Bangko Sentral ng Pilipinas for 2003 to 2006 data; General
Appropriations Act of 2007 (Republic Act 9401) for 2007 data; Budget of Expenditures
and Sources of Financing (BESF), Fiscal Year 2008, Department of Budget and
Management (DBM) for 2008 data. *January to November 2007.

cutting back on non-debt expenditures, not pumping up revenues.

Clearly, non-debt expenditures such as infrastructure, social
spending, agrarian reform and the like are taking a back seat to
debt service under the Arroyo administration. This becomes obvious
when we look at the revenue growth rate. The targeted revenue for
this year, which is pegged at PhP1.23 trillion, is only 9.67% higher
than last year’s revenue. This is the lowest since 2003.
Financing
Arroyo’s Revenues: All that it takes
failures

But while cutting on expenditures is the key to her fiscal austerity,

she must also address where the money should come from. In
her 2007 SONA, Arroyo said: “With the tax reforms of the last
Congress, and I thank the last Congress, we have turned around
our macroeconomic condition through fiscal discipline, toward a
balanced budget.”

This brings us to the revenue generation strategy of the administration.

Since the fiscal crisis of 2004, the Arroyo administration has made
it a point to increase uncompromisingly both its tax and non-tax
revenues. From 2006 to 2007, revenues went up by as much as
PhP139 billion, with revenue effort rising from 14.91% to 14.92%2
over the same period. The projected revenue for 2008 is PhP117
billion more than programmed for 2007.

To accomplish this, the Arroyo government used an aggressive

100
table 10. National Government Revenue Program, by
source, 2006-2008 (in million pesos)
2006 2007 2008
Tax Revenues 859,856 973,576 1,108,889
Taxes on Net Income and Profits 376,992 419,633 477,552
Taxes on Property 1,114 1,276 1,471
Taxes on Domestic Goods
and Services 283,143 328,913 374,817
Taxes on International Trade
and Transactions 198,607 223,754 255,049
Non-Tax Revenues 119,781 145,185 127,339
Fees and Charges 30,979 34,904 40,502
BTr Income 74,446 55,089 57,275
Privatization 5,815 55,192 29,562
Total Revenues 979,637 1,118,761 1,236,228
Revenue Program, Including New Measures, By Source, FY 2006-2008. Source: Table
C.1. Budget of Expenditures and Sources of Financing, Fiscal Year 2008.

taxation measure, focusing on consumption taxes (R-VAT, or Republic

Act 9337), in order to beef up revenues. The Department of Finance
itself admitted that 70% of the revenues generated from R-VAT Financing
Arroyo’s
would go to debt service in the first six months of implementation, failures
with only 30% going to social services and infrastructure programs
[Hizon, 2006].

The administration also undertook aggressive privatization

measures, including the 120-hectare Food Terminal Inc. (FTI) in
Taguig City, estimated at about PhP15 billion; state-owned assets
such as the Philippine Telecommunications Investment Corp.
(PhP25.2 billion); the 20 percent stake in Philippine National Oil
Company-Energy Development Corp. (PhP16.6 billion); the remaining
stake in PNOC-EDC (PhP32 to PhP36 billion); the 4.6 percent stake
in Philippine National Bank (PhP998 million); and the stakes in San
Miguel Corp. (PhP50 billion) and Manila Electric Co. (PhP10 billion).
The government also sold a 54-hectare property at the old Iloilo
Airport, valued at PhP1.2 billion.

This only expresses the administration’s commitment to trim

the government, as it believes that too much government is not 101
 “prudent” and “crowds out” private initiative. We need only look at
the data on privatization proceeds to confirm this.

The Arroyo government is selling off whatever it can in order to

pick up the slack in its tax revenues – the targets of which it has
FIGURE 3. PRIVATIZATION PROCEEDS (IN BILLION PESOS)
60.000
55.192

50.000

40.000

30.000
29.562

20.000

9.428
10.000
4.183 4.646
1.173 2.430 5.815
5.660 0.591 0.567 0.420
1.717
0.000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
RAMOS ESTRADA ARROYO

Financing
Arroyo’s Privatization Proceeds (1996-2008). Sources: National Government Revenues, Bureau
failures of Treasury for 1996-2006 data. Revenue Program, Including New Measures, By Source,
FY 2006-2008 (Table C.1. of Budget of Expenditures and Sources of Financing, Fiscal
Year 2008) for 2007-2008 data.

not been able to meet. The problem here, however, is that one can
only sell one’s asset once. Privatization is clearly not a sustainable
way of generating revenues. The only way to sustain revenues is
by collecting taxes from those who earn more and have more,
by reducing corruption and smuggling, and by improving tax
administration.

Relying on privatization is essentially an attempt of the Arroyo

government to mask its failure to reach its tax targets. The January-
September 2007 revenue performance, for example, shows that the
government is PhP24.72 billion away from its January-September
target, with tax shortfall reaching as high as PhP56.02 billion.

No wonder Bureau of Internal Revenue Commissioner Jose Mario

102 Buñag was sacked in early 2007 for failing to meet the BIR’s
table 11. Revenue Performance (January-September
Program Actual Variance
Revenues 836,978 812,257 -24,721
Tax Revenues 738,995 682,975 -56,020
BIR 566,902 521,920 -44,982
BOC 164,988 152,957 -12,031
Other Offices 7,105 8,098 993
Non-Tax Revenues 97,983 129,282 31,299
BTr Income 43,656 57,201 13,545
Fees & Charges 29,034 29,560 526
Privatization 25,293 42,393 17,100
Grants 0 128 128
Expenditures 890,953 852,267 -38,686
o.w. Interest Payments 246,595 222,689 -23,906
Surplus/Deficit -53,975 -40,010 13,965
National Government Revenue Performance (January to September 2007). Source:
Department of Finance.

collection targets. If we will remember, this is not the first time Buñag
failed in his target. Revenue data for 2006 show that the BIR had
a shortfall of at least PhP23.42 billion (see revenue performance Financing
Arroyo’s
table below). failures

This is only evident of the lackluster tax performance of the Arroyo

administration, which actually registered the lowest tax effort since
1988 (a mere 11.53% in 2004). Revenue effort was also low
that year, pegged at 13.47%. This has since risen to 15.00% as
projected in 2008, but is nowhere near the revenue effort during
1994, pegged at 19.86%. Compared with neighbors like Thailand,
Malaysia and Indonesia, with average revenue efforts from 2001
to 2005 ranging from 17.1% to 22.8%, the Philippines rates very
poorly indeed.

Arroyo’s imbalanced priorities

103
 FIGURE 4. TAX AND REVENUE EFFORT (83-06)
25.00%

20.00%

15.00%

10.00%
Tax Effort

Revenue
5.00%

0.00%
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001

2002
2003
2004
2005
2006
Marcos Aquino Ramos Estrada Arroyo

Tax and Revenue Effort. Source: NSCB for GDP, BSP for Tax and Revenue proceeds. Note:
To get Tax and Revenue Effort, divide Tax and Revenue proceeds with GDP.

Financing The main impetus for having a balanced budget is clearly the implicit
Arroyo’s
failures recognition of the problem of debt. By avoiding deficit spending,
the administration would be able to lessen its reliance on borrowing
– the primary root of the debt problem according to the existing
government paradigm. However, since only interest payment on the
debt is in the budget, the government would still have to borrow to
pay for principal amortization.

A balanced budget would necessarily mean that we have to raise

more revenues. But with the government’s poor performance when
it comes to collecting tax revenues, it will most likely rely on (a)
consumption taxes which are easiest to collect, (b) privatization, and
(c) raising revenues by the Bureau of Treasury, more likely than not
through padding or getting interest from borrowing its own treasury
bills. Failing to meet revenue targets would thus mean cutting
back on expenditures, since payment for debts is automatically
appropriated. As we have shown, there has been a deceleration of
growth in non-interest spending.
104
The government, pushed by its own self-imposed administrative
constraints towards a contractionary economic policy and a
conservative fiscal policy, does not recognize the problem of
automatic payments as the primary cause of budget deficit. No
wonder it proposes instead an austere spending program which cuts
social spending. This solution, while it may satisfy creditor standards
of correct fiscal governance, will have serious developmental
ramifications due to lack of government investment in physical and
social infrastructure. FDC insists on solving the debt problem, not
through palliative measures of expenditure compression or through
cannibalistic measures of selling public assets, as in privatization,
or eating up people’s purchasing power, as in aggressive imposition
of consumption taxes. Rather, we must attack the source of the
whole debt quandary itself.

And as proven by the experiences of the Arroyo administration,

such a dream in the face of a policy to automatically pay huge
debt service will never be realized. In fact, for the proposed 2009
budget, National Economic Development Authority (NEDA) Secretary
Ralph Recto himself said that the country’s budget deficit this year
could range from P200 billion to P257 billion if tax collections and Financing
Arroyo’s
revenues from privatization proceeds fall short of target. Given failures
limited revenues, the only feasible way to raise money is through
debt.

Clearly, the root of the problem is the government’s policy of relying

heavily on creditors to finance social projects highly susceptible
to corrupt practices – a policy which, ironically, would have been
unnecessary had the government chosen to allocate more to
social services than debt payments. In fact, there is no shortage of
cases of loan-financed projects going to waste due to inefficiency
or corruption.

The solution would be to stop this policy at once. It is true that

especially in times of crises, we should allocate more to building
our socio-economic infrastructure. But this should be undertaken
with drastic reductions in debt servicing by 1) knowing what we
should pay and not pay through a Congressional Debt Audit which
will be able to screen out illegitimate debts, 2) paying ourselves 105
 first, investing in social welfare and in the domestic/local economy
through the repeal of the Automatic Appropriations Law on
debt service, 3) immediately discontinuing the elitist practice of
shouldering private sector debts through sovereign guarantees,
and 4) and putting debt-creating activities such as bilateral loan
agreements with export credit agencies under full public scrutiny
and participation.

notes
1
The article is largely derived from and a rewritten version of FDC’s
“Sustaining the Momentum of Debt and Underdevelopment: Debt and the
Proposed 2008 National Government Budget” (December, 2007).

2
Using projected nominal GDP (low) as contained in the BESF 2008 and the
programmed revenues for 2007

Financing
Arroyo’s
failures

106