Fat Free Econ 47: Pork Scam vs. Public Debt Scam

* This is my article yesterday in interaksyon.com.

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MANILA - The government is setting aside P330-plus billion a year in interest payment alone for our public debt, and many people are not angry with that huge transfer of money from average taxpayers to rich lenders. The people are angry (and rightly so) of the alleged P10 billion pork barrel scam.

Let us compare the numbers and see why public anger is disproportionate to the money that is siphoned off from their pockets.

At the heart of public anger and discontent over the Napoles pork barrel scam is the huge lump-sum money allocated to legislators in both the Senate and House every year. This is a separate item in the National Expenditure Program (NEP) and beyond the amount allotted to various national agencies, government owned or controlled corporations (GOCCs) and local government units (LGUs).

Table 1. Priority  Development Assistance Fund (PDAF), in billion pesos

Source: DBM, NEP 2012 and 2014

Note the big jump of legislators’ pork barrel from the Arroyo to the PNoy administrations, 2010 vs. 2011 PDAF fund. 

The alleged P10 billion pork barrel fund that was coursed through Janet Lim-Napoles (JLN) over many years does not seem to be itemized. Below is an itemized table covering 2006-2011 but totaling only P3.13 billion.

Table 2. Amount dispensed to some legislators in the Napoles pork barrel scam

Source: Philippine Daily Inquirer, August 30, 2013

The public is angry because almost none of this amount went to clear projects that benefitted the poor, but were simply divided among the legislators (they allegedly got 70 percent), JLN and bogus NGOs, and some implementing agencies and COA auditors that allowed such irregular distribution of funds without publicizing it. It was the internal whistleblowers who divulged the scam and the legislators involved.

While the public fund siphoned to corrupt legislators and the JLN camp was indeed big, the amount is loose change -- in short, barya -- compared to the amount of money that leaves the public coffers yearly just to pay the interest on our public debt. Most people are not aware of the magnitude of such payment: around P332 billion a year on average from 2012 to 2014: P312.8 billion in 2012, P332.2 billion this year; and P352.6 billion next year.

Table 3. Principal and interest payment of Philippine public debt, 2012-2014

Source: DBM, Budget of Expenditures and Sources of Financing (BESF) 2014,Table B.20

Interest payments in 2010 and 2011 were also huge, P294.2 billion and P321.6 billion, respectively. So annual interest payment is about 14 times the size of the annual lump-sum pork barrel of legislators, and 32 times the share of the Napoles camp.

Table 4. Principal and interest payment of Philippine public debt, 2010-2011

 

Source: DBM, BESF 2012, Table 18

Another way of looking at it is that from 2010 to 2014, for every P100 in various taxes that we pay -- personal income tax, corporate income tax, excise tax and value-added tax (VAT) passed on to us consumers, documentary stamp tax, import tax, travel tax, vehicle registration tax, etc. -- about P23 of it is used to settle the interest alone on the country's debts. And only P77 will be used for salaries, offices, subsidies and projects of various government agencies -- local and national -- assuming that such services and subsidies are indeed necessary or are efficiently provided at the least cost possible.

Table 5. Interest payment as percent of tax revenues, 2010-2014

Sources: Interest payment, Tables 3 and 4 above; Tax Revenues 2010-2012, DOF, Fiscal Update Tax Revenues 2013-2014, DBM, BESF 2014, Table C.1

Pork Barrel 7: Presentation at Adamson University

This afternoon, I spoke at Adamson University on a big college conference, held at the university's theater, probably about 200-300 students in the audience. I am thankful to Ms. Pauline Brillantes, a young faculty member at the Department of Social Sciences, for inviting me to their big college event.

Since the audience are university students, I could introduce some basic conceptual framework and they would be able to follow. My presentation was 21 slides long, showing 16 of them here. The full presentation is at slideshare, here.

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See also:

Pork Barrel 4: Ten Q&A on the Pork Scandal, August 18, 2013

Pork Barrel 5: Abolish Pork Fund, or Shrink Government?, August 21, 2013 

Fat Free Econ 46: On Pork Barrel Aboition, August 25, 2013 

Pork Barrel 6: Spontaneity and Friedrich Hayek, August 29, 2013

Fat Free Econ 46: On Pork Barrel Aboition

* This is my article today in interaksyoncom.
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MANILA - From Countrywide Development Fund (CDF) to Priority Development Assistance Fund (PDAF) and now a reformed pork that has yet to be named. The legislators' pork barrel is not truly abolished but only reformed. 

The pork barrel system can truly be eliminated, but that would mean a significant shrinking of the Executive branch -- in budget, subsidies, size of the bureaucracy and regulatory powers. Because an activist and really independent legislature will disallow unnecessary spending. Are the people ready for this scenario?

The President announced last Friday that he is abolishing PDAF. A reformed budget for legislators’ special fund will be set up subject to the following guidelines:

1.       Projects to be funded to come from a specific menu of qualified projects;

2.       Disallowed are soft projects: fertilizers, seeds, medicines, medical kits, dentures, funding for sports fest, training materials, and other such items;

3.       Disallowed are temporary infrastructure, dredging, de-silting, re-gravelling, or asphalt-overlay projects;

4.       Funds cannot be disbursed to NGOs and certain GOCCs, such as ZREC and NABCOR, both of which, along with others, will be abolished;

5.       Funds must be limited to the district or sector of the legislator who sponsored it;

6.       All items will be subject to open and competitive bidding, with all bid notices and awards posted on the Philippine Government Electronic Procurement System (PhilGEPS); and

7.       For transparency, each will be disclosed in the DBM and related agency websites, as well as the National Data Portal of the government.

This means legislators’ pork barrel system will continue but (a) limited to hard projects like new roads, (b) coursed through line departments, and (c) pass through competitive bidding.

Pork barrel a compromise

Legislators’ pork barrel is a compromise allowed by the President so the former would support certain spending and revenue-raising measures. Aside from the explicit pork barrel -- which is a separate item in the National Expenditure Program (NEP) -- there is also an implicit pork in the form of “budgetary insertion” by legislators. They can cut the proposed budget of certain agencies they do not like, then increase the budget of another agency that is friendly to them, with the implicit arrangement that the legislators, or even some Congressional staff, will get a portion or the entire amount of such hike in the agency's budget.

The national budget hit P1 trillion six years ago, while the P2 trillion is upon us this year. The P3 trillion budget will be reached in 2016 or 2017. The public debt stock is rising by around P400 billion a year. Interest payment is rising to P313 billion in 2012, P333 billion this year and P352 billion next year.

This expansion of public spending, borrowing and debt payment -- as well as new or higher taxes -- was made possible because the legislators had allowed it, because they have a "share" of that huge spending, through pork barrel and Congressional insertion. If we disallow the legislators their “share” or claim to the national budget, they will become activist and more independent minded, and they will disallow such uncontrolled expansion in spending, borrowing and taxation by the Executive branch.

Breeding grounds for cronyism, patronage

Many government-owned or controlled corporations (GOCCs) and government financial institutions (GFIs) are breeding grounds for cronyism and political patronage. Some big supporters and financiers in previous elections who cannot be given Cabinet positions are appointed as president or board directors in GOCCs and GFIs. For instance, the National Food Authority (NFA) is among the perennially losing GOCCs and deficit generators.

If these GOCCs are to be scrutinized by an activist and really independent Congress, most likely they will be stripped of their funds and privatized, or at least be significantly shrunk as they contribute more to losses and hence, more public borrowings or more taxes. To avoid this, legislators are given their own share of pork so they will allow continued waste and inefficiency in the Executive branch.

The Bottom up Budgetting (BuB) system or related schemes have allowed NGOs, people's organizations and civil society organizations (CSOs) to "insert" their own favorite projects, their own “pork" in the budget. It is P8 billion plus this year and P20 billion next year. LGUs too have their own projects inserted in the budget, on top of their IRA and locally-funded projects.

If legislators are to be true to their mandate to scrutinize and disapprove certain huge budgetary requests and endless subsidies, the national budget will shrink. But many people who clamor for "pork abolition" do not want that either. They want their own subsidies and pork retained or expanded while stripping legislators of their share in the loot.

"Freedom from debt" requires "freedom from borrowing"

Most people who demand a "spend-spend-spend" policy are not aware that previous overspending has resulted in over-borrowing, so the interest payment is a big penalty on the public. To get a P10 billion increase over the previous year's budget for the favorite department, people may jump with joy. But to pay P350 billion in interest on debt does not bother them.

We will never have "freedom from debt" unless we adopt the "freedom from borrowing" mentality. Public education among other social sectors are among the most inefficient and wasteful. When you provide books and education for the poor -- from elementary to college and even graduate studies -- the result should be productive people able to help themselves out of poverty. Only one generation of useful and effective spending and poverty should have been controlled many decades ago. But this never happened. The inefficient, wasteful and even corruption-laden service delivery was made possible, was never questioned or controlled by the Legislative branch because lawmakers benefited from such wasteful public spending.

A corrupt and wasteful legislature can tolerate a corrupt and wasteful Executive branch. And many people -- ordinary citizens, businessmen, consultants, academics, etc -- have huge supply or consulting contracts with, or foreign aid-assisted projects implemented by the Executive branch.

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See also:

Pork Barrel 4: Ten Q&A on the Pork Scandal, August 18, 2013

Pork Barrel 5: Abolish Pork Fund, or Shrink Government?, August 21, 2013

Fat Free Econ 44: Deregulate Weather Forecasting, July 10, 2013

Fat-Free Econ 45: Newton's Laws of Motion and Traffic Congestion, August 11, 2013

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

The Interest Payment Burden

(Note: this is my article for People's Brigada News last weekend)

The President submitted its proposed 2011 budget to Congress last week. It is a staggering P1.645 trillion budget, that will constitute some 18.2 percent of the projected gross domestic product (GDP) next year.

If we include the total budget of local governments as they have revenues of their own aside from the transfers they receive from the national government, the consolidated or combined budget of the whole government bureaucracy should be at least 21 percent of GDP.

National Government Expenditure by Recipient Unit, In P Billion

Recipient Unit : 2009 / 2010 / 2011

1. National Govt Agencies: 815.3 / 927.6 / 964.6
2. Local Govt. Units: 272.9 / 297.5 / 300.0
3. Government Corporations: 67.1 / 39.3 / 23.3
4. Creditors/Interest Payment: 278.9 / 276.2 / 357.1

Total Budget: 1,434.1 / 1,540.6 / 1,645.0

Source: DBM, Budget of Expenditures and Sources of Financing (BESF), Table B.9

The interest payment for our public debt, both domestic and foreign, will be a big burden next year. The P357.1 billion will comprise 21.7 percent of the total budget next year, much higher than the 19.5 percent ratio in 2009 and 17.9 percent ratio this year.

Here is another way at looking at the above table. The increase in total budget from 2010 to 2011 is P105 billion. The increase in interest payment from 2010 to 2011 is P81 billion. Meaning P4 out of every P5 increase in total expenditure was accounted by increase in interest payment alone.

The only consolation in the budget next year is that subsidies to government corporations has drastically declined to only P23 billion, or only 1/3 of its level in 2009. But we should aim for zero subsidy for those government corporations. They are supposed to be net contributors to the total revenues, not net subsidy-seekers. This should be an important argument why many of those government corporations should be privatized soon.
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A related paper I wrote last June 29, 2010

Public Debt and Government Failure

On the roundtable discussion by IBON Foundation today in UP Diliman, "Global public debt troubles: the next phase of the global crisis?", I will argue that the current public debt woes of many governments around the world is a clear case of government failure.

What do you call a person or household who earns P20,000/month but spends P23,000/month (or higher) on average? Gastador, mayabang, iresponsable, engot...? I think all of the above.

So what do you call a government that earns 1 trillion (whatever currency) but spends 1.2 trillion, and the budget gap is repeated every year for several years or decades? Irresponsible, braggart, bleeding-heart,...? All of the above?

The Economist magazine last week (June 24 issue) also has a good interactive map and graph of the consolidated debt of key rich countries. Well, all G7 member countries, no exception, all Gof them are heavily indebted, especially Japan and UK.

Among G20 countries which met in Canada only over the weekend, ALL of them except Saudi Arabia, are running fiscal deficit (revenues lower than expenditures) and resort to lots of public borrowings. Many of them have been running fiscal deficit for the past decade or more.

Government failure is difficult to solve as the usual remedy by many politicians is to create another bureaucracy or to expand existing ones, that will look into the wastes, inefficiency and robbery that happened in other agencies. That is why it is important to remind governments and their politicians and bureaucrats, to stick to their more important function of protecting the citizens' right to life, right to private property, and right to liberty. Then let go of other functions that are better left to market players in a competitive environment.