Crossroads (Toward Philippine economic and social progress)
Philippine Star, 26 December 2012

Good tidings for the nation on Christmas 2012 will further bring promising economic news for 2013 and beyond. Toward the third year of Benigno Aquino III’s six-year presidency, concrete signs of the national economy’s growth prospects and better living standards appear to be in our future.

Even given these harbingers of good fortune notwithstanding, it is still essential to remind everyone, especially our leaders, that other important reforms are needed to realize, accelerate and sustain the process of quality economic growth for the nation.

Upgrades and upward growth revisions. The bright signs are significant. First, favorable assessments have come all year long from independent economic and sovereign credit monitoring institutions.

The credit rating companies – Fitch, Moody’s, and Standard & Poors (S & P) – are unanimous in their footing about the country’s prospects. They have all judged the Philippine sovereign credit rating to be just one notch below investment grade.

This is important because such ratings reduce the country’s cost of borrowings and benefits the whole economy. Moreover, 2013 promises to be the year when the investment rating could come – barring untoward circumstances.

The World Bank, the International Monetary Fund and the Asian Development Bank all have raised their forecasts for economic growth for the country. In fact, the World Bank has just made a recent upgrade of its assessment. It announced that it expects Philippine growth rate to go to six percent this year, up from its five percent growth projection announced only in October this year..

All these of course have been validated by the breakthrough performance of the Philippine Stock Exchange index which has risen 30 percent year-to-date.

Major economic reforms are approved. Three major pieces of legislation were passed by Congress that are very meaningful for the country’s economic prospects. The international community – both the multilateral economic development institutions like the World Bank and the credit rating agencies – are no doubt watching what has been happening on the legislative front.

As soon as the legislative battles appeared to have been won, the World Bank issued its upward revised forecast of growth and S & P its new credit rating of “positive” from “stable” on its BB+ rating which is actually just one notch below “investment grade.”

(a) The national budget. The budget approval process is the first important breakthrough legislation that this government has achieved. This is now the third year in a row under President Aquino that the budget legislation as proposed by the administration has been approved before the start of the new fiscal year.

Normalization of the budgeting process with Congress fully cooperating is a major accomplishment of the Noynoy Aquino administration. The national budget is the country’s most critical economic legislation on a year to year basis.

This is a huge departure from the tenuous fiscal expenditure program of the previous administration of Gloria Macapagal Arroyo when the national budget was simply a continuation of the previous year’s budget by way of Congressional tolerance. Because of persistent questions that plagued its political legitimacy, the previous administration could not get Congress to approve its budgetary proposals.

(b) Excise tax reform: ‘sin tax’ law. The approval of the excise tax reform further strengthens the consolidation of the fiscal position of the government. This tax reform deals with alcohol and tobacco excises, more popularly referred to as ‘sin taxes.’

This law will raise P36 billion in the first year (2013) and the tax collection is projected rise to P64 billion by 2017. Roughly two-thirds of the new revenues to be raised will come from tobacco taxes and the rest from alcohol.

A major principle of this tax is that it will achieve a unitary rate by 2017. The differing rates of taxation which arose out of protective tax provisions for domestically produced products will be phased out, in compliance with international commitments. (The Philippines lost its case before the WTO tribunal.) Under the WTO charter, industry protection is allowed through import tariffs but is disallowed for domestic excise taxation.

A more important reason for fiscal purposes is that the new ‘sin tax’ law re-introduces the idea of tax indexation to the excise tax design. When the excise taxes on these products were revised in the late 1990s (Estrada’s presidency), the tobacco lobby succeeded in removing the indexation feature and the taxes were fixed in money terms per physical measure (cigarette packs).

As a result, taxes from tobacco deteriorated over time as inflation took place. And the country’s tax effort began a slide downward. With the indexation feature, tax revenues as a ratio to GDP will be kept stable, and that the tax effort will not deteriorate at least on account of these excise taxes.

(c) Reproductive health (RH) law. The RH law (which is likely to be signed this week) is a game changing legislation concerning social development in the country. Its passage was nearly endangered by the strong campaign of the Catholic Church hierarchy against it.

It is to the credit of President Aquino that he used his leadership position to get the Congress to approve it. Without his support, the bill would have languished.

This landmark legislation will move the Philippines to the ranks of modern Catholic countries in Europe and Latin America that have also great awareness of family planning and welfare. With the RH bill, it is possible for the number of children per family to be according to the size as desired by the parents.

The law will permit the government to have a more direct role in dispensing the appropriate RH services to families that need it. It will foster better sex education that is based on scientific and informed knowledge rather than on medieval fantasies and ignorance.

Although the RH bill will be able to help those families and women who might otherwise have no means to help themselves, its impact on the demographics of the nation will be felt only as we reach 2020, some seven years from now.

With this landmark legislation, the country’s effort toward raising the quality of economic growth is on firmer ground.

More reforms are needed. Even as these actions achieve forward stride for the country’s development efforts, important economic reforms are still needed.

On top of the list that I hope President Aquino will embrace are: amend the restrictive economic provisions in the Philippine Constitution and introduce greater flexibility in the labor market front. These are major topics that I have written passionately about in this column.

Both these reforms will produce wonders for an efficient and faster conquest of unemployment, underemployment and extreme poverty – the pestilence that continues to haunt the country.