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Saturday, March 09, 2024

Macroecon 24, Sir Gary Teves' proposals to reduce public debt

Sir Gary Teves was my former boss twice, at CPBO, House of Representatives in the 90s, then at Think Tank Inc. in early 2000s, his private consulting firm in Makati before he became Land bank President then DOF Secretary under the Gloria Arroyo administration. I did not join him in either LBP or DOF.

Yesterday he has a good article in PDI, 

Managing the national government debt
By: Gary B. Teves - March 06, 2024
https://opinion.inquirer.net/171655/managing-the-national-government-debt

... How can we reduce national debt? The government has to earn more revenues and/or decrease its spending to reduce our national debt. We recommend the following:

Step up efforts to improve tax collection efficiency.... We have the highest value-added tax rate (12 percent) but the lowest VAT efficiency rate (0.4) among our Asean peers.

In addition to the recently approved Ease of Paying Taxes Act, Congress should also consider pursuing amendments to the bank secrecy law to make the investigation and prosecution of tax fraud more effective.

The government should also implement a risk-based tax audit system which would allow the Bureau of Internal Revenue to focus on auditing high-risk taxpayers, or those who pay relatively low taxes compared to what they earn.

Pass priority tax reforms into law. The proposed VAT on digital service providers, excise tax on single-use plastics and pre-mixed alcoholic beverages, and package 4 of the Comprehensive Tax Reform Program, would help generate an estimated P32.4 billion in additional revenues for the government in 2024.

Engage in more public-private partnerships, sell select government assets, and privatize some government-owned and -controlled corporations. The recently approved bid of San Miguel Corp. (SMC) to improve the Ninoy Aquino International Airport is a good first step. The agreement requires SMC to pay the government up front and annuities a total of P80 billion, which could substitute foregone revenues from the scrapping of the proposed excise tax on junk foods and sweetened beverages worth P75.7 billion for 2024.

The government could sell assets such as those owned by the Bases Conversion and Development Authority in Clark and the Basay mining project in Negros Oriental. Privatizing the Philippine Amusement and Gaming Corp. and key facilities managed by the Philippine Ports Authority can also unlock additional revenues.

Remove the restrictive economic provisions in the 1987 Constitution to attract more investments, create quality jobs, and encourage technology transfer. More businesses mean more revenues from corporate tax and more jobs mean more revenues from increased personal income and consumption taxes. Additionally, technology transfer can help make the country more competitive and upskill and reskill the labor force, which would attract more job-generating businesses and further increase public revenues.

Pass key reforms to reduce government spending. We recommend for Congress to pass equitable and sustainable reforms to the pension system of military and uniformed personnel (MUPs). Unfunded MUP pension liabilities are now at P14 trillion, which is 45.8 percent higher than the P9.6 trillion recorded in 2019. Amending the bank secrecy law can also help reduce government debt as it would help the Bangko Sentral ng Pilipinas monitor corrupt and illegal financial actions.

Conclusion. Like a responsible family, our country should try as much as possible to live within our means. While parents strive to give the best for their children, they cannot always rely on borrowed money to pay for their family’s needs.

While borrowing can be a useful tool for necessary expenses and economic development, it is crucial to ensure that borrowed funds contribute to long-term growth. Maintaining a healthy debt-to-GDP ratio is a reflection of wise fiscal choices that safeguard the nation’s financial well-being in the long run.

I agree with many or all of his points, especially on privatization of many government assets. I will just add that he failed to mention the BSP's high interest rate policy as a "solution worse than the problem" it intends to solve of high inflation. 

High BSP int rates immediately raise the interest payment, which crowds out other public spending. Many potential investments also are not pushed through because of higher int. cost.

BSP (monetary authority) main concern is to "fight inflation" and interest rate policy is its main hammer.

DOF, DBM (fiscal authorities) main concern is fiscal consolidation, limit the budget deficit and high borrowings and sustain fast growth. And high interest rates adversely affect and push upwards interest payment on public debt domestic loans (about 3/4 of total public debt).

I think the midway solution bet the fiscal and monetary authorities is PH interest rates of around 5.5%, not the current 6.5%.

Indonesia has int rate of about 5.8% much of 2023, now 6%. Inflation rate was around 4% much of 2023.

Vietnam has interest rate of about 5.5% much of 2023, now 4.5%. Inflation rate was around 3.3% much of 2023. 

Philippines interest rate about 6% much of 2023, now 6.5%. Inflation rate about 6% in 2023.

ID, VN and PH are 3 ASEAN countries with high int rate, the other 3, TH, MY and SG have lower rates. VN points to a good balancing act.

Much of PH inflation is pulled up by food commodities. So whatever interest rate tinkering, people will keep buying food, whether in public market or SM or Rustans grocery or restaurants. The main causes of high food inflation and hence, overall inflation, are high farming costs related -- like expensive diesel to save the planet via diesel tax (from zero to P6/liter under TRAIN law of 2017). Plus  reduced rice land, corn land via more solar farms to save the planet.


It is time for BSP to step back and cut interest rates. The problem is in climate drama, not in Filipinos' high consumption of food commodities.
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See also:
Macroecon 21, Tax revenues, PH outstanding debt, February 17, 2023
Macroecon 22, Econ performance of Marcos Jr administration in year one, July 30, 2023
Macroecon 23, GDP forecasting and the forecasters, February 01, 2024

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