Showing posts with label Philippine public debt. Show all posts
Showing posts with label Philippine public debt. Show all posts

Friday, August 01, 2014

Fat Free Econ 55: The President's 5th SONA and Market-Oriented Reforms

* This is my article yesterday in interaksyon.com.
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Overall, the President's State of the Nation Address (SONA) was good. More statesman-like, less combative. He mentioned several liberal and free market-leaning policies, which is good and consistent with his party affiliation. But there was also an overall hangover belief that government can do and will do almost everything for the people.

Some liberal and free market reforms that the President mentioned in his address are the following:

1. More airline competition as a result of ICAO, European Union (EU) and US Federal Aviation Authority (FAA) upgrade of Philippine aviation security. Thus, more flights between Manila on the one hand, and Europe and the US on the other can be expected

2. More labor conciliation via Department of Labor’s Single entry Approach (SEnA), resulting in less strikes and industrial conflict, which will help attract investors.

3. More competition and less monopolization in Department of Public Works and Highways (DPWH) project contracts after the removal of letter of intent in public works bidding.

4. More competition in PPP projects like the Mactan-Cebu International Airport (MCIA) and NAIA Expressway. Winning bidders paid government a premium amounting to P14 billion and P11 billion, respectively.

5. Various infrastructure projects that will be undertaken by private developers at little or no cost to the government, such as (a) Tarlac-Pangasinan-La Union Expressway (TPLEX), (b) Metro Manila Skyway 3, (c) Kaliwa Dam, (d)  Laguna Lakeshore Expressway Dike, (e) LRT South and East extensions, (f) Busuanga Airport, and so on.

The President though made this opening statement which set the tone for the rest of his address: "It is as if you are watching two hundred TV channels at the same time. You need to understand not just what is unfolding before you—you also need to know what happened before, and where it could all lead.… you must have a response for every question, suggestion, and criticism—and you must have all the answers even before the questions are asked."

This is not so comfortable to hear because the President or the government is implying that they are playing God who knows everything and can provide answers to everything. It can be an invitation to central planning. I have no intention of attacking the President but would rather that he mentioned in his SONA, or in future speeches, things like the following.

1. More jobs were created by the private sector as the government has reduced business taxes and bureaucracies and other difficult/complicated requirements.

2. The projected power crisis starting next year can be addressed by DOE and other agencies stepping back from too many requirements and allowing more private power developers to come in with minimum restrictions and permits to submit.

3. Rice prices can go down by (a) deregulating rice importation and allowing more competition among legitimate importers and (b) reducing or removing the rice import tax of around 40 percent (previously 50 percent). The President mentioned that even rice importation, which should have been left to the private sector in a competitive environment, must remain: "This February, the NFA Council approved the importation of an additional 800,000 metric tons, in fulfilment of our buffer stocking requirement… This July as well, we approved the immediate importation of 500,000 metric tons of rice through open bidding. The NFA also has the standby authority to import an additional 500,000 metric tons to prepare for the effects of calamities on harvests and rice prices."

Government monopoly or full control of rice importation is so 80s or even early 90s, before the World Trade Organization (WTO) was created in 1996. We are stuck in a Jurassic philosophy that government must continue its rice importation monopoly. The protected groups in the government, both at NFA-DA and their accredited private importers, are the beneficiaries of this faulty policy. Rice should be as cheap as possible. If cheap rice should come from Vietnam, Thailand, Cambodia or India, so be it. Government should reduce or abolish the high import tax and abolish the NFA monopoly. The NFA can continue as a regulator but not as player and proprietor at the same time.

4. No need for a supplemental budget for 2014 to evade the DAP controversy. Additional budget request looks questionable. The total budget in 2013 was P1.88 trillion. This year, it is P2.41 trillion (P 1.61 trillion new appropriations + P 0.80 trillion automatic appropriation), or P530 B higher than last year's budget. This is not enough? Half a trillion peso increase in just one year and not yet enough?

Table 1. Outstanding Debt, Interest Payment and Total Expenditures (in billion pesos)


Sources: (1) Bureau of Treasury (BTr), http://www.treasury.gov.ph/statdata/yearly/yr_outstandingdebt.pdf.  
* DBM, General Appropriations Act (GAA) 2014  http://www.dbm.gov.ph/wp-content/uploads/GAA/GAA2014/Summary.pdf
** New appropriations P1,608.503 billion + automatic appropriations P796.029 billion.

It is true that the government’s interest payment burden has been declining. However, a P353-billion interest payment this year is no laughing matter. The public is angry at the reported P10 billion Janet Napoles plunder in over 10 years or so, but is indifferent to the P353 billion interest payment in just one year -- a big transfer of money from average taxpayers to rich institutions like private banks and bondholders, as well as huge government financial institutions like the SSS and GSIS.

5. Expanding the AFP’s pool of battle ships, navy cutters, jet fighters, combat choppers and other armaments, the huge resources to finance them should not come largely or entirely from additional taxes or huge borrowings, but from long-term lease or privatization of certain AFP/DND assets and properties.

6. Reforming the Bureau of Customs (BOC) and appointing officials who have more integrity is a good move. But as the ASEAN Economic Community (AEC) comes closer (more than one year to go) plus various bilateral and regional free trade agreements, the power of BOC to collect high import taxes and impose non-tariff measures that effectively discourage more international trade should be limited and restricted.

7. Extension of the no-timetable Agrarian Reform (AR) program or forced redistribution of certain private lands does not encourage early and big investments in agri-business and corporate farming. A Congressional bill of extended notice of coverage -- effectively an extended AR program -- should not prosper.

The President is a Liberal, not a socialist like Bayan Muna or Akbayan, nor a populist like the other political parties. Let us expect more liberal and market-oriented policies from him and his team in his remaining year.
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See also: 

Tuesday, July 29, 2014

Pork Barrel 12: Why DAP is Wrong

These are my notes about the Disbursement Acceleration Program (DAP) last week, posted in my fb wall.
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DAP is wrong. Not for constitutional issues (I leave that to my lawyer friends) but for fiscal and economic issues. Those "idle"  funds were not there in the first place; they were borrowed money. If DAP is P100 B and government borrows P300 B a year, then if DBM/Malacanang left those "idle" funds unused and unspent, then govt borrowing should be only P200 B or less.

DBM Sec. Abad said at the Senate hearing last week that  "DAP is made on the principle, 'use it or lose it.'" DBM and Malacanang used it. Wrong. They should have "lost" it, by not spending it; in the process, remove the need for borrowing the same amount.

Sorry Sec. Butch but your arguments are faulty. If you "use" it for bleeding heart programs like giving free medicines to the sick and dying, drainage and bridges against flooding, then cutting borrowings, reducing the public debt stock and sparing the pockets of future taxpayers, and reducing current annual interest payment of about P330 B a year, is an even better bleeding heart goal.

Even if 100 percent of the programs funded by DAP are good, not a single centavo of it was stolen, it is still wrong. All the good and excellent programs that DAP funded could be funded by the regular budget, unless DBM will call the latter as “not good”. To cut borrowings is an even better, more bleeding heart goal, than continued fiscal irresponsibility. Of living beyond one's means. Of endless borrowings, with or without a crisis.

I argued in the past that the Freedom from Debt Coalition (FDC) is wrong in their campaigns. We can never have freedom from debt unless we have freedom from borrowings mentality and policy. Never.

Government should stop borrowings whenever possible. If projected revenue is P2 trillion, then spending should be P2 trillion and not P2.3 trillion because government will borrow P300 B. Better yet, spend only P1.8 trillion, use the P200 B surplus to pay back the debt. In times of crisis, borrow. In times of no crisis, pay.

The public debt can never be repaid by taxes alone. It is P5.6 trillion now. It is rising by around P350 B a year, with or without a crisis. The debt can be paid or at least drastically shrank by large-scale privatization + pay back via fiscal surplus. The P330 B a year interest payment alone is already huge and scandalous.

Fiscal irresponsibility works this way: All administrations say, "We are paying for debts and loans enjoyed by our predecessors. Might as well do it too. Spend-spend-spend now, let the future administrations and taxpayers worry where to get the money."

Pag sa households and micro level yan, someone who earns P50,000 a month and spends P55,000 a month, consistently, ang tawag dyan "gastador" or "maluho/magarbo”, “mayabang/hambugero", "iresponsable", "living beyond his means", etc. Pero pag gobyerno ang utang ng utang, "ok lang yan; it's for good projects naman eh" or "it's to fight poverty naman eh". People can demonize personal irresponsibility but not fiscal/government irresponsibility.

Also in the households, do not incur new spending if your resources are tied to old or recurring spending. Thus, do not buy a 2nd car yet if the 1st car can still service various household needs. This is not the case in government. They create new welfare program/s and subsidy/spending even if some old and existing welfare programs do not work as designed. Like the CCT, a huge multi-billion pesos subsidy program for the poor, without shrinking or terminating some existing subsidy programs that do not work. Basta lang gastos ng gastos, utang ng utang.

"Incurring debt is necessary to expand economic activity" is true if done on limited period. If done endlessly, wrong. In periods of no crisis, we should aspire not only for balanced budget, but budget surplus, pay some debt. In periods of crisis or emergencies (like the big earthquake of 1990, the Pinatubo eruption in 1991), borrow. Again, people can demonize personal irresponsibility but not fiscal/government irresponsibility.

The DAP controversy has also showed that political patronage has expanded from the traditional local and national politicians, to some NGOs and people's orgs (POs). Not the Napoles-type NGOs but old, grassroots, well-meaning NGOs. DAP has funded party or entirely, their programs for fisherfolks, poor patients, urban poor, indigenous people, women workers, the oldies, etc. Thus, DAP is good even if it may be unconstitutional or has violated existing laws and RAs. So long as it is our sector and NGOs that benefited, it is good.

Notice also that almost all governments around the world are fiscally irresponsible. Heavy and endless borrowing is in their DNA. Wastes and irresponsibility seems to be "built in" their system. Every year is a "crisis" or "emergency" year and thus, over-spending via borrowings is the default mode. The "idle" funds used for DAP presented a good opportunity for the President to think and act Liberal -- Liberate the taxpayers from endless burden of heavy and multiple taxation to finance government wastes and huge debt stock. But the President acted like any populist leaders where "each year is crisis year" with zero exception.
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See also:

Monday, February 25, 2013

Fat Free Econ 39: P57,000 Public Debt Per Filipino

* This is my article last Saturday in interaksyon.com
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The outstanding debt of the Philippine government has breached the P5 trillion mark sometime in March 2012. By the end of last year, the debt was P5.437 trillion. This means that on average, each of the 96-plus million Filipinos as of that period had a per capita debt of about P57,000. Not a good figure to hear.

Aside from the outstanding debt, there is also the guaranteed debt or “contingent liability” that is not part of the former yet, but if the indebted GOCC or GFI (government financial institution) cannot pay the debt guaranteed by the national government, it will migrate to the outstanding debt and hence, will be paid by the taxpayers through present taxes and fees, or by future taxpayers through new debts. At end-2012, guaranteed debt was half a trillion pesos.

chart 1



The P2 trilllion mark in outstanding debt was breached in 2000 or possibly in 1999 during the Estrada administration. Then the P3 trillion mark was reached in 2003 or on the third year of the Arroyo administration. The P4 trillion level was reached in 2008, and as mentioned above, the P5 trillion level was attained last year or on the second year of the PNoy administration.

The national outstanding debt is rising by about P1 trillion every four years on average, according to the Bureau of Treasury.

The distribution of the rise and fall of the total debt yearly is uneven. The first four years of the Arroyo administration, 2001 to 2004, were marked by a huge jump in the outstanding debt, which mainly implied heavy borrowing. Those years were also marked by political instability due to the various political scandals and impeachment moves against President Arroyo and the presidential elections in 2004.

The next three years were characterized by low growth or even contraction in the outstanding debt, only to pick up sharply again by 2008.

Changes in total outstanding debt (in billion pesos)*

chart 3

*Author's computation based on Bureau of Treasury data.

The big jump in outstanding debt in 2012 did not seem to look consistent with the high GDP growth that year, unless one will argue that such fast growth was made possible by heavy government spending in important social and economic activities, which is debatable.

Nonetheless, the economic optimism should be seized by the Aquino government to drastically cut its borrowings and reduce the outstanding debt. Finance programs with existing tax revenues and encourage more private sector involvement and risk-taking in both hard and social infrastructure development.

In the normal life of the average citizen, debts and other obligations are paid during the good harvest years so that when the bad harvest comes, the debt stock is low or manageable enough. This convinces lenders that the borrower is prudent and responsible enough not to court financial disaster in the future due to ever-rising debt, whether or not harvest is good. In turn, the borrower is charged low interest rates and afforded longer payment terms and debt refinancing.

The opposition is expected to seize on this ever-rising debt, both total and per capita, as an election issue against the administration. And rightly so because to tell voters that even their young kids have a per capita debt of nearly P60,000 would evoke disappointment if not anger at the administration. The latter should therefore assure the public that this ever-rising debt phenomenon has to stop somewhere, and as soon as possible.

Let us hope that this year would be the start of a reversal of this ugly debt rise momentum.
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Here's the total public debt, 2000 to 2011, in Million Pesos. From the Bureau of Treasury (BTr, DOF).


See also:
Pilipinas Forum 23: On Debt Repudiation, December 16, 2011
Fat-Free Econ 24: Government Fat and Public Expectations, September 21, 2012 
Fat-Free Econ 35: World's 25 Largest Economies in 2012, January 02, 2013


Friday, September 21, 2012

Fat-Free Econ 24: Government Fat and Public Expectations

* This is my article yesterday in TV5's news portal,
http://www.interaksyon.com/business/43681/fat-free-economics-trimming-govt-fat-requires-changing-publics-expectations
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One of the major perks in government is that one can always live beyond one’s means, to spend larger than projected revenues or income, then just borrow like crazy as lenders are more than willing to lend because government has one huge pool of collateral who are sure to pay a stockpiling debt today and in the future: the taxpayers.

This moral hazard– a person, an institution, etc. can become complacent and irresponsible because someone else is going to pay for whatever mistake in decision, action or inaction made – is perhaps the single biggest explanation why so many governments around the world, rich and poor alike, are heavily indebted. The incumbent politicians shower various forms of subsidies and welfare programs to certain blocks of voters in order to be elected or reelected, and let the future administrations worry where to get the money for the over-spending and over-borrowing made in the past and the present.

The Philippine government suffers from this habit of living beyond one’s means, with or without an economic turmoil, with or without natural calamities, with or without an election. And thus, borrowing has become the rule instead of an exception.



High public debt means high interest payment for those liabilities. From 2010 to 2012, interest payment was almost P300 billion a year on average and comprised nearly one-fifth of the total national budget on average. Next year, some P334 billion will go to interest payment alone, especially for domestic debt.




We often hear that the country’s fiscal condition has stabilized, resulting in some credit ratings upgrade. The Philippine government, or companies which are based in the country, can borrow domestically or internationally and enjoy lower interest rates compared to a few years ago.
While there is truth to this statement, the fact remains that the government cannot avoid drastically cutting the need to borrow to finance a budget deficit, or stop borrowing even for one year. And while new foreign debt securities carry lower interest rates compared to those made a few years ago, the overall interest payment remains huge, if not rising. 

In the table below, only those debt securities that charge $50 million a year or higher are included,  and these items were all contracted for budgetary support or financing the deficit. Multilateral and bilateral loans like from entities like the ADB, WB and JICA, are mainly project loans.



While the fiscal condition of the Philippine government is not as severe as those in some European economies like Greece, Portugal and Spain, this is not an excuse for not doing certain reforms like drastically cutting borrowing and spending to what projected revenues can finance and sustain.

There are two important revenue measures that can be realized in the short term, meaning within one or two years, and can be used to cut borrowing and the public debt and hence, annual interest payments. These are (a) revenues from the hike in excise tax of “sin products” like tobacco and alcohol, and (b) privatization of the Philippine Amusement and Gaming Corporation.

Cutting the public debt by say P200 billion, at say 8 percent interest rate, would mean an annual savings of P16 billion. This savings can be used to finance certain programs that would require new borrowings. Unfortunately, the projected revenues from the proposed sin tax hike has already been earmarked or pre-allocated to finance universal health care of PhilHealth and the Department of Health. In the meantime, Pagcor’s privatization is not moving fast enough.

If these measures with huge potential revenues are not passed into law, then another alternative is simply to cut spending, especially in departments and agencies that have no clear contribution to improving the country’s productivity like the Department of National Defense. Or a cut in the budget of public tertiary education, the state universities and colleges and the corruption-prone Department of Public Works and Highways.

Governments will keep expanding along with its coercive powers if people do not assume more personal and parental/guardian responsibility, more civil society roles, in running their own lives, their households and communities.  Public spending and indebtedness will keep rising if it is deemed government’s “responsibility” to purchase small items like condoms and pills, and medicines and healthcare for adults who abuse their own body with over-drinking, over-smoking or over-eating.

Cutting the fat and pork in government spending can start by cutting the unnecessary expectations of the public on the roles and functions of government. 
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See also:
Fat-Free Econ 17: SONA, the Budget and Debt, July 22, 2012
Fat-Free Econ 23: Penang Workshop on Markets in Healthcare, September 10, 2012

Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012
Fiscal Irresponsibility 24: More on the PIIGS and European Debt, May 16, 2012
Fiscal Irresponsibility 25: Spain Panic, More Eurozone Woes, June 06, 2012
Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF, June 27, 2012

Wednesday, August 29, 2012

Health Spending 5: Raising DOH Budget for Childhood Cancer

A fellow member of our Coalition for Health Advocacy and Transparency (CHAT), James Auste, the head of the Cancer Warriors Foundation (CWF) has lobbied other CHAT members and CWF supporters, to lobby and write the Senators to demand:

1. Increase DOH budget for Acute Lymphocotic Leukemia (ALL) patient assistance program from P30 million to P100 million, to cover some 3,500 kids with cancer will be given proper care and treatment.

2. Increase DOH budget for non-communicable diseases (NCDs) from P70 million to P280 million for four
diseases: cardiovascular, lung cancer, diabetes,...

I replied that I support more government funding for (a) pediatric diseases, including NCDs for children like childhood cancer, (b) infectious or communicable diseases like leptospirosis, dengue and malaria, (c) people with physical and mental problems, both children and adults.

But I do not support more government funding for NCDs for adults. Why should the rest of society pay for diseases of people who over-eat, over-smoke, over-drink, over-sit? Lifestyle is a choice, not inherited.

Legislators, Congressmen/women and Senators, receive all types of higher budget request from:

(a) Departments and other Agencies themselves which suffer budgetary cut at the Department of Budget and Management (DBM).

(b) NGOs, media, other civil society groups lobbying for additional budget for their respective sectors (ie, health NGOs asking for higher DOH budget, education NGOs asking for higher DepEd and SUCs budget, etc.).

(c) Rent-seekers and contractors lobbying for bigger budget of agencies that will get their services (ie, suppliers of jet fighters and battle ships seeking higher DND budget, road contractors seeking higher DPWH budget, etc.),

(d) Foreign aid or multilateral bodies like the WB and ADB pushing for new loans that will require local counterpart funding.

(e) Other sectors and interest groups.

One will hear all types of justifications and even alibi from these sectors, interest groups and lobbyists. They know that they are indirectly competing with each other as taxpayers' money is not a bottomless pit, so some tend to shout or lobby louder than the others.

But legislators are also under pressure where to get the additional funding other than the usual, never say die "more borrowings, more borrowings, more borrowings". The annual budget deficit (expenditures larger than revenues) is around P300 billion a year, and that is also the similar amount of new borrowings each year. Our public debt has become so huge that we pay about P350 billion a year on average on interest payment alone. Utang lang ng utang, let the future administrations and taxpayers worry about those debts later.

So legislators would tend to ask, "kindly help us identify where to get the additional money and we will give your request." Good. And here are possible sources of additional money for one's favored sector or department.

1. Higher rates for existing taxes and fees, like the proposed increase in excise tax for tobacco and alcohol products, higher excise tax for mining revenues, etc. Or a proposal to hike VAT from 12 to 15 percent. Or DFA hike in passport fee, NBI hike in NBI clearance fee, DOTC hike in motor vehicle registration tax, etc.

2. New taxes and fees, say an excise tax on junk food and bottled water (now more expensive than oil).

Please note that those taxes and fees refer only to national government agencies. The local government units (LGUs) can also increase their respective taxes and fees, like the community residence tax, real property tax, business permit tax, etc. They can also create new taxes like the proposed dog ownership tax in Pasay or Paranaque, or increase penalties like penalty for dog shit on the streets, penalties for men who walk topless on the streets, etc.

3. Privatization, like privatizing PAGCOR, some military facilities or camps, some state universities, etc.

4. Shrink the budget of other agencies and rechannel the savings to one's favorite sector or department.

If one will go for option #1 like the proposed sin tax hike, malabo na, not practical. So many sectors are already salivating at the huge money that will come from it -- the universal healthcare (UHC) of PhilHealth and DOH, the condoms and pills of the RH bill, the pork barrel of legislators themselves, etc.

If option #2, it is a highly sensitive issue and next year being an election year, politicians would rather borrow like crazy than create new taxes that can spell defeat for them at the precincts.

If option #3, I myself will go for it. Prioritize PAGCOR privatization, I think up to P200 billion can be realized from it. There is a bill by Sen. Ralph Rector on this, but I think it's not moving fast enough.

If option #4, I will also support it myself. My favorite is to drastically cut the budget of the Department of National Defense (DND)-AFP. I am actually in favor of abolishing the AFP itself as I believe we have no threat of external aggression in the sense that foreign armies will invade Metro Manila and the rest of the country. The bigger threat here is internal -- those thieves and carnappers, killers and murderers, kidnappers and rapists, extortionists and terrorists, corrupt officials and plunderers, many other criminals. The noise over the WPS/SCS is hyped mainly by the rent seekers and suppliers of jet fighters and battle ships, some legislators and the DND guys themselves. I read that one battle ship from Italy will cost about P6 billion each, and the DND plans to buy two ships soon. Not included there are bombs, missiles, ammunitions, training of personnel, oil consumption, replacement of parts, that will cost several billions more.

The Philippine Military Academy (PMA) should be privatized. Our subsidy for those guys is P500,000 per student per year, or P2 million per student over four years. The same with the National Defense College of the Philippines (NDCP), which has a subsidy of about P1 million per student, and those masteral "students" are not exactly poor.  They are mid-level or senior level government officials, congressmen, governors, mayors, etc.

So if people have to write to those Senators and Congressmen, their request will have a better chance of being granted if they can pinpoint where to get new money or savings.

My suggestion, go for option #4. Target the DND, or the state universities and colleges (SUCs), or DPWH.

Then over the next few years, target option #3.
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See also:
Health Spending 1: Wastes in US health spending, June 23, 2011
Health Spendng 2: DOH, Public Health Budget, June 18, 2012
Health Spending 3: Obamacare and Huge Tax Hikes, June 30, 2012
Health Spending 4: Global Aid on Health, 1990-2011, August 28, 2012

Sunday, July 22, 2012

Fat-Free Econ 17: SONA, the Budget and Debt

* This is my article yesterday in TV5's news portal,
http://www.interaksyon.com/business/38127/fat-free-economics-sona-the-national-budget-and-debt
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On his third State-of-the-Nation Address on July 23, President Benigno Aquino III will present a P2-plus trillion budget for next year. The budget is among the most important features of a SONA. It is a direct way of the President saying, “I want to achieve these goals next year and please authorize me this money.”

The P1 trillion budget mark was breached in 2006 and the P2 trillion mark will be set next year, or a span of just seven years. Here are the budget data from 2006 to 2012 taken from the Department of Budget and Management’s Budget of Expenditures and Sources of Financing on years indicated.

Interest payment has been the single biggest item in the annual budget. For the past seven years including 2012, an average of P22.60 out of every P100 went to interest payment alone.

The direct implication is that the old and endless argument that “government does not have enough money” is simply not true. Government does have plenty of money, but more than a fifth is used to pay its debt. So if government wants to reduce its interest payment and use more money for various services, all it has to do is to drastically cut its annual borrowings. Better yet, stop borrowing even for a year, learn to live within its means and surprise itself that it can survive even without new borrowings.

The second biggest item in the annual budget is subsidy to local government units– the provincial, city, municipal and barangay governments. Over the past seven years until 2012, this item constituted 16.6 percent of the annual budget. And the LGUs are not totally dependent on this transfer. They also have the power to create and collect local taxes, fees and fines, so that total government spending, national plus local, is huge.



One may wonder how the government has accumulated the debt. Below is the direct explanation: each year, expenditures were always larger than revenues, with or without economic turmoil, with or without elections. The culture of over-spending, of waste and fiscal irresponsibility, is present in all administrations until the current one.







The good news is that it is possible to have zero deficit and zero borrowing even for a year because this nearly happened in 2007, when the deficit was only P12.4 billion or 0.2 percent of gross domestic product.

We have seen the direct cause of rising public debt. The table below will show how the debt has stockpiled over recent years. The P2 trillion debt mark was reached in 2000 (the last year of the Estrada administration) with a P2.17 trillion debt. In just three years, the P3 trillion mark was broken with a P3.36 trillion debt in 2003. That should be one of the biggest “achievements” of the Arroyo administration.

But in fairness, the Arroyo administration also cut its borrowings in the succeeding years so that the P4 trillion barrier was reached five years after, with a P4.22 trillion debt in 2008.



The PNoy administration breached the P5-trillion debt mark in March this year. The latest data from the Bureau of Treasury shows a P5.15 trillion debt as of May 2012.

Some sectors always harp on their apology and justification that “more borrowing is fine so long as our capacity to pay is there, if not improved.” Really?

If our capacity to pay growing debt has indeed improved with rising economic activity and GDP size, then how come the government is biting on high interest, long-term loans? If one is not desperate for more borrowings because its capacity to pay debt is improving, then one should shun and avoid those high interest loans. But this did not happen. See the table below from DBM’s BESF 2012.


One loan account alone, $1.5 billion 9.5 percent GB 2030 charges us $142.5 million or P6 billion a year assuming a P42:$1 exchange rate. And we will keep paying at this rate, principal amortization not included, until 2030.

The second loan account charges a lower rate of 7.75 percent per year, but $116 million is almost P5 billion a year on interest alone. We are paying P11 billion a year on interest for these two loans alone. This is larger than the 2012 budget of P8.66 billion of the Department of Justice and its five attached agencies. Or a bit lower than the 2012 budget of P13.36 billion of the Supreme Court and the lower courts nationwide.

So if we are to make one wish in the President’s SONA, here is mine: Drastically cut, if not stop, borrowing even for a year, force the entire government bureaucracy, from Executive to Legislative to Judiciary, to live within their means. If not in 2013, perhaps in 2014.

Come on Mr. President, surprise us, surprise yourself and your political detractors. Mrs. Arroyo nearly did it in 2007. You can do it too. Just cut the fat and pork in many government bureaucracies, programs and projects.
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See also:
SONAnyms and Anthonames, July 25, 2009
The President's SONA, 2010, July 26, 2010
The President's SONA 2011, July 24, 2011
The President's SONA 2011, part 2, July 26, 2011

Fat-Free Econ 12: Privatizing PAGCOR, June 08, 2012

Friday, June 15, 2012

Fat-Free Econ 13: P2 Trillion of Election Spending and Taxes

This is my article today in TV5's news portal,
http://www.interaksyon.com/article/34803/fat-free-economics-p2-trillion-of-taxes-new-debts

The main preoccupation of governments almost anywhere is to spend-spend-spend, tax-tax-tax. Since tax revenues are often not enough, they resort to borrow-borrow-borrow. And a vicious cycle of over-spending and over-borrowing, of fiscal and governmental irresponsibility, is set into motion, acquiring its own life, sustained year after year, administration after administration.

This is seen in many countries in Europe, North and South America, and Asia, including the Philippines. Our government’s gross debt stands at 40 percent of GDP. While this looks bad, there is good news to it somehow, because it used to be 60 percent of GDP about a decade ago.

The PNoy administration has hinted that its proposed budget next year will reach P2 trillion, up from this year’s P1.82 trillion. This means the government will need nearly P2 trillion of taxes and fees from us, the difference to be sourced from new borrowings, what else.

Many of us would wish that with what is going on in Europe and the US - where a huge public debt burden is dragging the rest of the economy into financial uncertainty - the Philippine government should exercise fiscal restraint and limit spending to what existing revenues can support so that there will be little or no need to contract new debt

Our problem is that next year is another election year. Politicians in power, from national to local, would spend and spend just to buy and bribe votes, and worry about the spike in debts and possible tax hikes later. Such is the tragedy of governments and democracy.

Below is the over-spending record of the national government over the past 11 years. Budget deficit means expenditures are larger than revenues, a typical attitude of living beyond one’s means and charging the difference to new borrowings.



The main culprit for such overspending and the need for new borrowing, is government debt itself. Interest payment constitutes 20 percent of the annual budget. Here is a quick view of the biggest departments and expenditure items this year and the past two years.



DepEd, DPWH, DND and DILG, interest payments, internal revenue allocation of LGUs and various benefits to the million-plus national government personnel - they are the largest expenditure items this year.

Coming up very fast in terms of high growth in spending are DA, DOH and DSWD. When the local government code was enacted in 1991, these three agencies were among those whose several functions were devolved and decentralized to the LGUs. Thus, their share in national government spending has declined 20 percent 10 years ago. Recently though, there was a trend of “recentralization” as national government spending for these three departments has been rising fast.

The bulk of new spending in 2013 would include expanding the conditional cash transfer (CCT) program of the DSWD, from P34 billion this year to roughly P45 billion next year. The DSWD budget is projected to rise from P49 billion this year to P67 billion next year. Since the CCT is mainly a dole out program with some “conditionalities,” it is clearly a big tool for electioneering and legal vote-buying next year. The administration will of course object to the term “legal vote buying” but that’s what it really is.

More CCT actually means that previous government programs to "fight poverty" were ineffective or outright failures. Education and books for the poor, healthcare and medicines for the poor, housing and water for the poor, irrigation and credit for the poor, etc. These are supposed to have improved the condition of the poor, but they did not. So they invented this direct cash transfer to the poor. Soon with the RH billl, the government will also have condoms and IUD for the poor. What’s next, iPads for the poor?

Perhaps a big question to ask is, Is there room to retain, if not shrink, government spending in the next few years?

If the government is serious in controlling the burden of public debt and interest payments, the answer is “yes.” But since the government is not serious, or even dishonest in controlling the debt problem, its answer is “no.”

Many advocates of more and bigger government say that the Philippine government’s spending is actually “small” compared to many countries around the world, like its neighbors in Asia. See the numbers below.



What is wrong with the above numbers for the Philippines and other governments?

Our numbers represent only spending by the national government that are financed by taxes and mandatory fees. Spending by the local governments – barangays, cities/municipalities, and provinces – as well as spending by government corporations (PCSO, PAGCOR, etc.) are not included here.

If these expenditures are included, it is safe to estimate that overall and consolidated Philippine government spending would reach about 24 percent of GDP. That is not “small.” It comprises nearly one fourth of the total production of goods and services in the economy.

Reducing the fat in government spending and fiscal irresponsibility is a tough job to do and campaign for ordinary mortals (a.k.a. average taxpayers in the private sector). But we have to start somewhere. We need to help educate the public that more and bigger government spending, regulations, restrictions and taxation, are not good, are not productive. They siphon resources from private pockets and savings to politicians and bureaucrats’ spending whims.

Many social and economic services are better served and met by assigning more personal and parental responsibility to the people, not more government responsibility. The latter is a convenient excuse to justify endless government waste and greed. We have to learn to say “no” to such wasteful government advances and coercion somehow, somewhere.
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See also:
Fat-Free Econ 1: Macroeconomics for Micro Concerns, March 08, 2012
Fat-Free Econ 2: Determinants of Private Consumption Expenditures, March 14, 2012
Fat-Free Econ 11: GDP Growth and Private Sector Role, June 02, 2012
Fat-Free Econ 12: Privatizing PAGCOR, June 08, 2012


Fiscal irresponsibility 17: Cut Spending and Borrowing, September 19, 2011
Fiscal Irresponsibility 25: Spain Panic, More Eurozone Woes, June 06, 2012

Friday, December 16, 2011

Pilipinas Forum 23: On Debt Repudiation

As of end-September 2011, total debt of the national government was P4.87 trillion. This is P206 billion (or 4.4 percent) larger than its year ago level. See the Bureau of Treasury (BTr) Press Release last December 09.


As of October 2011, there were 38.5 million employed Filipinos. This means that each employed Filipino, young and old, fully- or under-employed, is indebted by P126,515.00. And it's not even personal or household debt. It is government debt, to be passed on to each taxpayer in this country. That's how great, sensitive and welfarist the government is.

And there's more debt: contingent debt, mainly guarantees by the national government which can become part of the outstanding debt stock if the guarantee recipient (a government corporation or financial institution, etc.) cannot pay its debt. This is P583 billion as of September 2011. And that's how great, sensitive and welfarist the government is.


More than seven years ago, we have a lively exchange of ideas on the question: Is repudiation of public debt a good option? That was in pilipinasforum@yahoogroups.com, an online discussion group which I formed and co-moderated since 1999. The voices of "repudiate the debt" are still with us until now, coming from different sources. So perhaps these exchanges will help clarify the issue.

This is more than 20 pages long, so get your most liked snacks. Special thanks to Dr. Butch Arroyo, my batchmate from UP School of Economics in 1984, for his elaborate discussion of the subject. Butch is an Economics Professor at the Johns Hopkins Univ. in Washington, DC.
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On Debt Repudiation
March 2004

About debt repudiation, I am attaching below Butch Arroyo's posting in PF about the subject. He posted this in reaction to a privilege speech given by Sanlakas party-list Cong. JV Bautista, arguing for "selective debt repudiation".

Sunday, September 11, 2011

Fiscal irresponsibility 16: On government bail outs

The recent US bail out was meant to save corporate irresponsibility of some favored or crony corporations like BA. And to some extent, government irresponsibility like Freddie, Fannie and FHA. A fiscally irresponsible government is capable of using taxpayers' money to bail out corporate irresponsibility, personal irresponsibility, and its own fiscal irresponsibility.

The on-going European bail out is meant to save clearly fiscally irresponsible governments -- like Greece, Ireland and Portugal;, and soon, Spain, Italy, France, UK,... So it's a government to government bail out.

So on both sides of the Atlantic, its a problem of BIG governments getting big debts and big troubles. The biggest market player -- the taxpayers -- are out to bail out big governments, their big debts and their big troubles.

I and many other free marketers NEVER supported govt bail out of failing private companies, whether rich or poor country government. It was the statists and lovers of BIG and more government who endlessly advocate more govt intervention, including bailing out failing private companies.

Bail out of private companies is almost always government cronyism. Cronyism is not a monopoly of poor country governments like the Philippines. Rich governments like the US also have cronyism. Lehman maybe was a crony before, but at the height of the financial meltdown, it was no longer a crony, they allowed it to sink. But BA and others are cronies.

If people re looking for someone to blame in the on-going economic and financial turmoil, let them blame the statists, blame Paul Krugman, blame Obama and Bush and other architects of endless borrowings, of government living beyond their means. The free marketers have been advocating the opposite of what these people mentioned have been doing.

Over here, the main subject of discussion is not corporate bankruptcies or corporate debts, but BIG Philippine government debt, big annual budget deficit, big interest payment, which siphons off money away from more productive spending. If people will contest my above statement of "big deficit, big interest payment" then consider this: Interest payment alone, excluding principal amortization: P294 billion in 2010, P357 billion in 2011, P333 billion in 2012. Are these small numbers?

When the plan to impose a VAT on both expressways (NLEX and SLEX) was floated, some motorists already wanted to start a civil war. By how much would the DOF get from such move? I read about P1B per year.

When the plan to remove altogether the MRT subsidy was floated, some train commuters already wanted to start a civil war. How much is the MRT subsidy, P5B/year.

Such "marginal" tax revenues or subsidies can already spark high public discontent, how much more with P300B+ per year on interest payment alone? And that's one of several functions of government -- to accumulate more public debt, to give endless subsidies with no time table, to give endless pork barrel to more politicians.

And some guys think that letting go of endless fiscal irresponsibility, of going back to the market and more personal responsibility, is a bad thing. Bleeding heart formulation, but makes no sense.
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On July 15, 2009, I wrote this:

Bailout money and the US bureaucracy

Below is one update of where a portion of the bail-out money went -- to the ever-expanding government bureaucracy in Washington DC. The additional groth of the bureaucracy goes something like this:

First, create a new set of bureaucracy to assess and decide who should get how much and when.

Second, the bureaucracy will monitor who spent the bailout money well and who wasted it.

Third, the bureaucracy will explain to US Congress and the public that the bailout went well, cover up the wastage if necessary.

Fourth, since they did a good job, the bureaucracy should stay forever whenever possible. Stimulus 2 may be necessary to "sustain the momentum" of stimulus 1.

The taxpayers? They should be thankful of the bureaucracy and the administration in the white house and capitol hill. In recognition of a well-done job, taxpayers will pay ever-higher taxes and fees, and wait for another borrowings for stimulus 2, another borrowings for stimulus 3 (for health care reform), and so on.

Below is the news report.

10 Cities With the Most Job Postings Per Capita

By Liz Wolgemuth Mon Jul 13, 11:03 am ET

Among the 50 largest cities in the U.S., one stands out for having the most abundant job postings per capita: Washington, D.C. The nation's capital boasted 133 postings per 1,000 residents in the second quarter of 2009, according to a report by Indeed.com, a broad job search engine that combs company and association websites, job boards, newspapers, and blogs for postings. That Washington took the top spot is no great surprise, as government hiring has held up during the recession.

The runner up is Baltimore, Md., which is aided by its close proximity to Washington, but also boasts an economy fueled by recession-hearty industries like healthcare and higher education. Baltimore's unemployment rate was 7.2 percent in May, well below the 9.4 percent national average that month.

Here's the top 10 list--pulled from Indeed's list of 50 largest metro areas ranked according to job postings per capita in the second quarter of this year (last quarter's ranking is in parentheses) :

1. (1) Washington, D.C.
2. (2) Baltimore
3. (3) San Jose, Calif.
4. (7) Austin
5. (6) Hartford, Conn.
6. (9) Seattle, Wash.
7. (8) Salt Lake City
8. (11) Denver
9. (5) Boston

10. (4) Las Vegas (Note: Charlotte, N.C. shared the same number of postings per capita as Las Vegas)

The city capturing the bottom spot on Indeed's list is Detroit. See the full list: http://news.yahoo.com/s/usnews/20090713/ts_usnews/10citieswiththemostjobpostingspercapita

Monday, August 08, 2011

Fiscal irresponsibility 15: Philippine government budget 2012

The House of Representatives of the Philippines is now on its second week of budget hearing for the 2012 budget. The public is assured of another round of fiscally irresponsible spending, of expenditures larger than revenues, then government borrows like crazy to finance the budget deficit -- this year, next year and more years to come.

My sister's auditing firm, Alas, Oplas and Co. CPAs, has a good economics and finance blog. I shall use the tables there but I will have a different interpretation of those numbers. The primary source of data is the Department of Budget and Management's Budget of Expenditures and Sources of Financing 2012.

Here are the various macro economic assumptions when the DBM, DOF, NEDA, Bangko Sentral (BSP) and other agencies prepared the budget. Note the wide range of the Peso/$ exchange rate for 2011 and 2012, from P42 to P45 to a $. They are anticipating wide swings in the exchange rate this year and the next.



Note also the wide range in the LIBOR, from 0.5 to 1.5 percent. When they prepared the budget until late last month, the deep uncertainty in the US debt ceiling debate was still on, and the rating downgrade of US debt from AAA to AA with negative outlook, was not yet factored in. These developments plus the continuing debt crisis in a number of European economies will have upward impact on global interest rates.

Fiscal irresponsibility of the Philippine government continues. From one administration to the next, including the current one. The rise in the budget remains higher than revenues, resulting in seemingly endless budget deficit each year.



The national government's budget was P1.47 T in 2010, P1.64 T this year, and P1.82 T in 2012. The projected budget/GDP ratio should be around 16.5 percent, excluding budget by local government units (LGUs). If their combined budgets are included, this ratio may go up to around 20 percent of GDP.

A high interest payment as a result of high public debt remains one of the biggest items in the budget, along with salaries of several million government personnel. P294.2 B last year, P357.1 B this year, and P333.1 B next year, or an average of P328 B per year in 2010-2012.

There is something suspicious in the flat or even decline in the budget of other departments and agencies outside the main Executive branch. If the total budget has increased but certain agencies suffered some spending cuts or stayed at similar level, and interest payment will have a slight decline next year, where will the money go?

There is a "magic" appearance of huge items like the “Personnel benefit funds” and “Retirement benefit funds” in the 2011 and 2012 budgets; they were zero in the 2010 budget. So a huge amount for personnel salaries, bonuses and retirement was somehow detached from regular agency budgets. Possibly to make some of them look kawawa or pitiful and hence, must not suffer budget cuts in Congress. This should be another proof that the bulk of the budget is for paying the salaries, perks and benefits of more than four million government personnel, from local to national agencies.

Here is the total debt service spending, interest payment + principal amortization, from 2010 to 2012. Note the difference in figure in interest payment this year. It should be P357 B this year, but listed only as P321.6 B in this table. I do not know the explanation for this. Perhaps a typographical error on the part of DBM, or some realignment of items.

Nonetheless, the figures show that the ratio between interest payment and principal amortization looks like 3:4 or 4:5, which is a big number for interest payment. If government borrows more each year partly to pay maturing old debts, and paying huge amount in interest, why continue with this practice? Why continue the fiscal irresponsibility? Because the politicians and government bureaucrats themselves are irresponsible?

Finally, this table is a bit disturbing. The national government debt stock is rising by around P400 B each year: P4.21 T by end-2009, P4.64 T by end-2010, P5.05 T by the end of this year, and P5.52 T by the end of 2012.

The government's quick and shallow explanation for this would be that while the absolute amount may be big and getting bigger, but compared to GDP that is also getting bigger each year, the relative share of debt/GDP will stabilize, if not slightly declining.

I say that this is a shallow explanation because a rise in GDP, which is mainly a result of the toil and hard work of people in the economy, mostly from workers and entrepreneurs in the private sector, should not be used as justification for the government to continue its irresponsibility and stupidity in further hiking public indebtedness. Each peso, each dollar of government debt, will have to be paid by the current and future taxpayers. Many of the politicians and bureaucrats who contracted those new loans will be long retired or dead when those debts would mature and will require ever higher interest payment.

BIG governments, whether socialist or democratic/republican/nationalist/populist capitalist, are dangerous. Their main goal is to expand the state and its various coercion. A collateral damage of such continued state expansion and coercion, is the decline in individual freedom. Soon, people will pay more taxes to pay for the wastes and robbery of the past governments, and spend little for the private education, healthcare, housing, clothing, travel, etc. of their kids and family.

Tuesday, July 05, 2011

Foreign Aid 13: Freedom from Borrowing

Among the most abused, also hypocritical term in public finance in the country, is "freedom from debt." For instance, there have been many attempts in the past by members of the House of Representatives to "dishonor the automatic appropriation for debt payment" so that "unjust loans" will not be paid. There is also an old but still big association called the Freedom from Debt Coalition (FDC).

If we look around, there is no counterpart group called Freedom from Borrowing Coalition (FBC) :-)

Seriously, one will NEVER have freedom from debt if one's mentality is to borrow as much as possible to finance each and all subsidy and welfare programs that one can think of. Thus, it will be a rising public debt situation. Like what is happening now in the Philippines, the US, Japan, the PIGS (Portugal, Ireland, Greece, Spain) and many other European countries,

To have freedom from debt, one must have freedom from borrowing mentality and policy.

See the most recent public debt data for the Philippines below. I got this table from the Bureau of Treasury website, National Government Debt, March 2011.

See that, P4.7 trillion of outstanding public debt as of March 2011, which was almost P248 billion larger than its year ago level. If we include contingent debt of another P525 billion as of the same period, that's more than P5 trillion of public debt. Or P500+ billion x 100.

A friend suggested that public borrowings are justified so long as they are done the "right way." Well, if we listen to the various government agencies which lobby for ever bigger budget each year because they want to make a difference in the lives of the poor, all borrowings are done the "right way." And if we also listen to the debt pushers (similar to drug pushers) like the WB and ADB, all loans from them are done the "right way."

I believe that by simply NOT borrowing more for whatever bleeding heart program, government simply living within its means, that act is already poverty-reducing. Why? See the next table, I constructed from a table in the DBM's Budget of Expenditures and Sources of Financing (BESF).

For this year, of the P1.645 trillion total obligation of the national government including transfers to local governments (internal revenue allotment or IRA), P357 billion or 21.7 percent will be for interest payment alone.

This means that ALL the other agencies (education, healthcare, agriculture, public works, justice, social welfare, police, local governments, military, etc.) will have to fight it out for the remaining P78 out of every P100 total budget.

So if the government can resist borrowing P300 billion (the average budget deficit per year recently), at say, 6 percent annual interest rate, we will spare ourselves of P18 B per year in interest payment alone. What to do with the P18 B savings? Government can spend for the poor, instead of borrowing more to spend for the poor. That's the estimated savings for not borrowing for just one year alone. If the government will stop borrowing for the next 10 years, meaning the entire government bureaucracies will learn to live within their means, then there will be lots of savings. And the FDC can self-destruct as there will be real freedom from debt as a result of freedom from borrowings policy.

Another friend commented,

The other side of this is poor tax collection (tax administration). 78-85% of professionals do not pay or pay poorly their tax obligations (that includes me), somehow, government has to bridge that gap by .... borrowing. Only QC has the will & the means to collect from professionals, even sari-sari stores are taxed through indexing.

I think the law on personal income tax is a joke. Who are the people who do not pay or underpay income tax?

- hold-uppers, kidnappers, thieves, smugglers, plunderers, other criminals, both in the private sector and in government like legislators, mayors, military generals, ex-presidents, etc.
- people who work in foreign aid, multilaterals, bilaterals (UN, WB, IMF, ADB, WTO, USAID, JICA, CIDA, etc.); these people are by law, exempted from the mandatory withholding tax system
- jeepney/taxi/tricycle drivers, ambulant vendors, public market or tiangge-tiangge stall vendors, etc.;
- many self-employed professionals (physicians, lawyers, accountants, showbiz folks, etc.), many businessmen

The bulk of individual income tax collection falls on the fixed income earners. So the law on personal income tax is a joke, a really bad joke for fixed income earners. Ironically, some of the strongest opponents for the reduction, if not abolition of income tax, are those who work in the multilaterals like the UN, WB and IMF because according to them, the government will "suffer revenue losses". Duh.

It is important that government bureaucracies should learn to live within their means. If the people and taxpayers perceive them as lazy or inefficient or thieves, so that many people avoid paying taxes as much as possible, they must accept that. If total revenue collection is only P1.3 trillion, then spending should be only P1.3 trillion, not P1.6 trillion because government will borrow P300 B.

Of course I do not stop at "good governance". For me, a lean, small and limited government that is focused on promulgating the rule of law is good governance.
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See also:
Foreign Aid 6: IMF is Engineerable and Abolishable, September 05, 2006
Foreign Aid 7: Wolfowitzoellickation of the WB, May 30, 2007
Foreign Aid 8: Abolish the IMF, August 08, 2007
Foreign Aid 9: WB Wants Hike in Gasoline Excise Tax, July 10, 2009
Foreign Aid 10: Why We Don't Need It, February 15, 2010

Foreign Aid 11: People Mobility and Aid Hypocrisy, September 21, 2010
Foreign Aid 12: WB Corruption of Civil Society, March 23, 2011