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.

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

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