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The Other Legacy

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[Photo of Benigno Aquino III]President-elect Benigno Aquino III may have inherited his parents' legacy, but he will also be inheriting the previous administration's problems

RP President-elect Benigno Aquino III has so much to be wary of and more to do when he assumes office on June 30: a swollen national budget shortfall and corruption in this poor country.

Aquino, 50, pursued the presidency on a reformist platform of eradicating corruption and easing fiscal woes in a nation marred by illegal government transactions and legitimacy issues.

The ongoing concern for the Philippine government is the budget shortfall, despite institutional efforts to raise tax collection and attempts to pass legislation that will shore up revenues. The past Congress passed more laws giving tax holidays and income tax exemptions despite warnings from finance managers that these would erode government revenue. Budget shortfall hit a record 298.5 billion pesos  last year, exceeding  the target shortfall of 250 billion pesos. The 2009 figure represents nearly 4% of GDP.

Official estimates show that the Philippines, Asia’s largest sovereign issuer of foreign debt, is expected to post a budget deficit of 307.5 billion pesos by yearend. First quarter deficit was recorded at 134.2 billion pesos, breaching the 110.9-billion-peso forecast and bigger than the P119.7 billion deficit recorded in the same period in 2009.

Don't Mess With Taxes

State officials said tax reforms are necessary but spending should be sustained to fund social and economic programs. On the other hand, more spending would exert more pressure on deficit woes.

The Arroyo administration’s proposed solution is to increase value-added tax to 15% from the current 12%, along with a slash in income and corporate taxes. This would partially ease the cost of doing business in the Philippines, considered one of the highest in the region.

But Aquino is not likely to heed this call. Speaking before the country’s top businessmen in January, Aquino said burdening citizens with new or raised taxes will not help them cope with the crisis and would swell the ranks of the poor.

"In addressing the looming fiscal crisis, good governance and the drive against corruption are critical components in our strategy,” he said. “We will refrain from imposing new taxes or increasing tax rates.”

Curbing graft and corruption, and reforming revenue-generating agencies like the Customs and Internal Revenue bureaus would result in higher collections without raising taxes, Aquino said.

But this policy could prove ineffective on its own. Economists say the government must also review tax rates and streamline tax policies to get funding for government projects especially in infrastructure. Lack of infrastructure in the countryside has kept away investors, and has kept many provinces poor.

Low revenues also pose a threat to development; one that an Aquino administration will have to face. Collections have been falling, from a high of 17% in 1997 to a worrisome 13% in 2009. If the level of tax collection efficiency had been at the same level as in 1997, the government could have raised an additional 414 billion pesos, enough to cover the revenue shortfall. Aquino has said, however, that tax rates will have to be raised if reforms fail.

Pass the Pesos

While international credit agencies welcomed Aquino’s prospective electoral victory, he needs more than 12 years of being in Congress and an Economics degree to run the Philippines for the next 6 years.

The official forecast for this year is a GDP growth rate of 2.6-3.6%, a promising figure that could pull the Philippine economy up. Observers say, however, that economic growth should trickle down to the poor. That means more funds for agriculture, subsidies to urban settlers, and more jobs.

Government figures indicate that at least 4.7 million families, or 26.9% of the total number of Filipino families, were poor in 2006, up from 4 million poor families recorded in 2003. That figure represents a majority of those living in poor rural areas.

More Filipinos have grown optimistic that the quality of domestic life will improve under a second Aquino administration, an independent survey revealed recently. The new regime, it is hoped, will lead the country to prosperity. But this has yet to be proven. Aquino should do his homework and validate the trust of at least 13.8 million voters (as of press time) who chose him on May 10 in the country's first fully-automated elections.

Print ed: 06/10

 

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