Fiscal Policy and the Challenging Economic Environment

In the face of the increasingly alarming global economic crisis, the Philippine government, as the institutional embodiment of the sovereign authority of the Filipino people, is challenged to fulfill its constitutional mandate to protect the general welfare.

Debates over what government must do to save the economy are happening almost everywhere, from public offices and school classrooms to wet markets and barber shops. It is argued that it is through its fiscal administrative power that government attempts to resuscitate the dying economy.

Public fiscal administration generally refers to the formulation, implementation and evaluation of policies and decisions on taxation and revenue administration; resource allocation, budgeting and public expenditure; public borrowings and debt management; and accounting and auditing (Briones 1983:2).

The hope of seeing real economic progress seems to be dependent on the success of the whole fiscal policy process. Fiscal policy derives its meaning and direction from the people’s aspirations and goals which are said to be embodied in the Medium Term Philippine Development Plan.

“The basic task of the Medium Term Philippine Development Plan…is to fight poverty and build prosperity for the greatest number of the Filipino people. We must open up economic opportunities, maintain socio-political stability, and promote good stewardship-all to ensure a better quality of life for all our citizens. We will focus on strategic measures and activities that will spur economic growth and create jobs. This can only be done with a common purpose to put our economic house back in working order” (Arroyo 2004).

But the big question is: how does government carry out its fiscal administrative function to really cushion the Filipinos from the adverse effects of the onrushing global financial crisis?

The Fiscal Policy as a Political Process

Lying at the heart of public fiscal administration are the fiscal policies shaped by the socio-economic and political interaction of internal and external policy environment. Internal policy environment includes the decision-making agencies of government such as Congress, the Office of the President and its support agencies, the National Economic and Development Authority, the Department of Budget and Management, the Department of Finance, and the Commission on Audit, among others. Internal environment also includes the private sector, interest groups, non-government organizations and people’s organizations in the society.

The external policy environment, on the other hand, encompasses foreign interest groups composed of international financial institutions like the World Bank (WB), the International Monetary Fund (IMF), and the Asian Development Bank, among others. Moreover, external policy environment includes the international agreements and economic cooperation such as the General Agreement on Tariffs and Trade (GATT), World Trade Organization (WTO), Asia and the Pacific Economic Cooperation (APEC), the Association of Southeast Asian Nations (ASEAN), the Organization of Petroleum Exporting Countries (OPEC), and institutions that extend Official Development Assistance (ODA), among others (Cuaresma 1996:46).

Professor Leonor Briones of the U.P. National College of Public Administration and Governance claims that “these foreign interest groups prefer to maintain a low profile in local fiscal politics. They do not have to come out in the open anyway-the WB-IMF has regular consultations with Philippine officials due to the enormity of the Philippine public debt; the MNC’s [multinational corporations] are represented by local dummies, and the foreign creditors by their Filipino proxies. In the open political contest, these foreign interest groups express their preferences by financially supporting their politicians. Where the local technocrats and bureaucrats are more significant in fiscal policy administration, they attempt to influence their nomination and appointment.” (Briones 1983:97)

This only means that the financial health of the country is at the mercy of the international financial creditors and policy bodies that issue our fiscal prescription. While it is often argued by scholars that the field of public administration must not be political in its very nature, fiscal administration as its sub-field is not free from political maneuvering as it is operating within the political system.

From the scholarly view of Professor Briones, fiscal policy has four major functions: (1) the allocation function, (2) the distribution function, (3) the stabilization function, and (4) the development function.

The major fiscal instrument in the allocation function of fiscal policy is the national budget. In general, a national budget is the financial plan of the government for a given fiscal year, which shows what its resources are, and how they will be generated and used over the fiscal period. The budget is the government’s key instrument for promoting its socio-economic objectives. The government budget also refers to the income, expenditures and sources of borrowings of the national government that are used to achieve national objectives, strategies and programs.

In developing countries like the Philippines, gaps between the rich and the poor are insurmountable. Thus, distribution of income and wealth is a serious problem. The distribution function might have serious implications for tax and expenditure policies. Recently, a report came out saying that the Department of Finance (DOF) planned to jack up the sales tax or value added tax (VAT) to 15 percent from the current level of 12 percent to raise much-needed revenue to plug the country’s ballooning budget deficit which hit a record P298.5 billion last year (Agcaoili 2010).

The report makes the fiscal debates even more heated as the issue of stability, another function of fiscal policy, is now the subject of concern. Often, government resorts to increasing taxes to have the means of public spending or avoid budget deficit. But it is known to many the myriad tradeoffs it can create.

People often hear in the news the fiscal plans created by government all in the name of “development,” another function of fiscal policy. Perhaps, this word is the most overused, if not abused, word in the political arena.

Development is multi-faceted. The word itself is nice to the ear. But it is a “very expensive commodity” in the words of Professor Briones. In order to translate development into reality, financing is, of course, needed. In harmony with other measures, fiscal policies are expected to generate resources in order to finance development activities (Briones 1983:55). In loan-dependent countries like the Philippines, generating resources means borrowing more and paying even more.

Over one third of our national budget goes to debt servicing. With the widening fiscal deficit, the national government’s debt now amounts to P4.42 trillion, accounting for more than half of its GDP and more than three times the government revenues if creditors were to call the debts in. The Philippines relies heavily on domestic and foreign borrowings to bridge its fiscal gap, which is expected to hit a record P325 billion this year (abs-cbnNEWScom).

The Challenging Economic Environment

Borrow more. Tax more. Pay more. It is a vicious cycle. It is without a doubt that the Philippines, the then mighty tiger in Asia, has transformed into a desperate pussycat roared by the giant financial institutions to which we are heavily indebted. The Filipino people become victims of immoral and debilitating conditionalities imposed by the IMF and the international financial oligarchy.

The economic situation becomes even more difficult as the world is facing what many economists describe as the worst economic crisis in history. The credit crisis in the US has accelerated the rate of financial meltdown all over the world, making the international lending institutions more eager than ever to force heavily indebted countries like the Philippines to extract a pound of flesh from their people. The national government’s total indebtedness has ballooned as a result of sudden and sharp currency depreciation during this critical time of global economic uncertainties.

In response to minimizing the impact of the global economic downturn, the Philippine government embarks on measures aimed at stimulating positive performance in all sectors of society. Former Socioeconomic Sec. Ralph G. Recto, for example, proposed stimulus package intended to keep the economy afloat. As a consequence, Economic Resiliency Plan (ERP) was put in place to supposedly manage to sustain economic growth by fiscal policy adjustments alongside the implementation of pump-priming programs and vital projects and activities.

The former NEDA Chief simply argues that the government intends to battle the present crisis by increasing spending through what he calls stimulus package-a fiscal and monetary strategy that is very Keynesian in nature. The ERP basically entails “ensuring resources through better revenue collection; enhancement of cash liquidity, access to credit and low interest rates; and more effective spending. It seeks to ensure stable growth, save and create jobs, provide assistance to the most vulnerable sectors, ensure low and stable prices, and improve competitiveness in preparation for the global economic rebound” (Recto 2009).

This stimulus package, however, is a mere pain reliever. It doesn’t cure the cancer, which is the crisis itself. A major surgery operation, therefore, is needed.

Think out of the Box: A Fiscal Strategy for the General welfare

“There’s life after the IMF.”

These are the words of then President Nestor Kirchner of Argentina when he defied the predatory financial institutions that imposed belt-tightening measures on his people.

The newly elected Philippine President Noynoy Aquino must do the same. He must have the courage to disassociate himself from the deceptive legacy of “honor all debts” policy of his mother. The traditional government action plan for debt management such as bond exchanges, maximizing the use of ODA, guarantees for GOCCs, and more borrowings, will not create lasting economic growth.

The Philippines, as an independent nation, with all dignity and courage, must therefore declare a moratorium on foreign debt payments. This will allow our country enough time to rebuild and expand our productive physical economy.

Through this fiscal strategy, the country can channel huge amount of its annual budget, instead to debt servicing, towards effective educational system, efficient healthcare system, and sustainable scientific research centers focused on food production, health maintenance, and industry. Consequently, this will encourage real investment into agro-industrial and manufacturing sectors and ensure a genuine path towards development.