Core
Business World, 7 May 2014

 

President Aquino III has embarked on a number of budget reforms. Some are serious and worthwhile though not too novel. Others are whimsical and clearly unworthy to be called reform. Still, others are politically motivated — they make good politics but do not necessarily lead to better allocation of resources.

Fourth, Zero-Base Budgeting (ZBB) was adopted but it was either (a.) not properly applied or (b.) not given a chance to work. ZBB is an ideal departure from a budget preparation system that provides new appropriations based on the year before and where the underlying assumptions are rarely questioned.Again, ZBB is also not a novel initiative; it has been around for quite some time.

ZBB has been criticized as too difficult to implement and very time-consuming. On the other hand, traditional incremental budgeting is simpler. For a developing country like the Philippines, where the bureaucracy is weak, and oftentimes corrupt, it makes sense to design a simpler budget system, as even first-world countries have problems implementing ZBB.

One author has claimed that “recent history has indicated that zero-based budgeting is very susceptible to political influence and pressures.” In recent years, it has largely fallen into disuse, at least outside the public sector.

WAS ZERO-BASED BUDGETING DONE RIGHT? SERIOUSLY?

If ZBB were done right, it should lead to the convergence of actual spending to the planned budget. But that didn’t happen in 2011 (the first year ZBB was applied), 2012 and 2013. In fact, there were large deviations from planned spending to actual spending in such items as personal services, infrastructure and other capital outlays, subsidy and equity contribution to government-owned and controlled corporations (GOCCs).From 2011 to 2013, deviations on personal services spending range from -6.8% to -7.7%; for infrastructure and other capital outlays, deviations range from -13.7% to -34.2%; for subsidy, deviations range from 32.4% to 123.4%; and for equity contribution to GOCCs, deviations range from 616.7% to 914.3%. One might ask: was the application of ZBB real or contrived?

Recent events may partly explain the large differences between actual spending and planned budgets. Stung by criticisms that the Aquino administration was snail-like in moving projects and disbursing funds, the Department of Budget and Management (DBM) adopted a policy that Budget Secretary Abad called “spend-it-or-lose-it.” The policy allowed the DBM to impound appropriations (arguably, an illegal act) if the agency was not able to spend its budget by the third quarter of the fiscal year.

Again this raises the issue of the effectiveness of the ZBB approach. If the national budget were prepared using ZBB, then the DBM staff should have carefully scrutinized every single item or activity contained in the 2011 budget.

Why rearrange the Congress-authorized budget in the second half of the year if the budget was well prepared? The “use-it-or-lose-it” policy gives a woefully wrong signal to agency heads — that budgeting should not be taken seriously.

Another issue here is the credibility of the budget process. Why spend so much time, money and effort preparing a budget when the DBM can impound, confiscate, and hoard the budget in the middle of the year? And to think that appropriations for some maintenance items and capital outlays have a lifetime of two years.

The budget may be seen as a contract between the Executive Department and Congress that it would deliver some levels of government services for a given amount of appropriation. When the budget of an agency is impounded in the middle of the year because the agency failed to spend (or obligate) the authorized budget, it limits the agency’s ability to deliver services it committed to Congress.

Assume that for X appropriation, Department XYZ promises to provide Y level of output. By impounding part of the budget, say by half, so that the effective budget of the Department XYZ becomes X/2, then the likely output should be reduced by half. In the next budget season, how will XYZ Secretary explain to Congress his failure to deliver on his commitment?

SUPPORT TO GOCCs WAS UP, NOT DOWN

Fifth, the Aquino III administration failed to deliver on its promise to decrease budgetary support to government-owned and -controlled corporations (GOCCs). On the contrary, it has risen, and actual disbursements exceeded appropriations.President Aquino III promised that: “… allocations to GOCCs, in terms of equity and subsidy contribution and net lending, will decrease by 40.7%, from P39.3 billion in 2010 to 223.3 billion in 2011, in view of the need to rethink government support of questionable GOCC programs, particularly those implemented by such agencies as the NFA (National Food Authority), Light Rail Transit Authority, Metro Rail Transit Corp., and other GOCCs whose programs/projects are still under evaluation.”

But what’s the reality? Instead of decreasing, the President’s proposed expenditures for GOCCs soared. Worse, actual expenditures consistently exceeded what the President proposed and what Congress authorized for disbursement.

In 2011, the President proposed a P20.5-billion subsidy to government corporations; actual disbursements was P45.8 billion, or a 123.9% deviation from the original planned spending. The planned subsidy to government corporations rose to P31.8 billion in 2012 and to P45 billion in 2013. But actual expenditures exceeded planned spending by P10.3 billion or by 32.4% in 2012 and by P21.3 billion or by 47.3% in 2013.

The deviation in equity contribution was even more staggering. During his first three years in office, Mr. Aquino proposed modest equity contribution to government corporations: P1.8 billion in 2011, P2.1 billion in 2012 and P1.3 billion in 2013. But actual spending was way out of line: P12.9 billion (163.2% deviation) in 2011, P21.3 billion (914.3% deviation) in 2012, and P11.5 billion (784.6% deviation). These huge deviations negate the strong presidential public policy commitment to reduce budgetary support to GOCCs. They also suggest flawed budget planning.

Sixth, Mr. Aquino III promised to raise enough revenues to finance the budget; he failed. Tax effort, that is, tax as percent of GDP, has remained flat: 12.1% in 2010, 12.4% in 2011, 12.9% in 2012, and 12.2% in the first three quarters of 2013.

In recent Philippine history, the highest tax effort was registered at 17.0% in 1997. The tax system was doing well before the 1996/97 tax reform program, but after the reform, tax effort went south. Why fix the tax system when it isn’t broke?

The failure to boost tax effort to around 16% would severely limit the government’s ambitious spending program. The International Monetary Fund and other international financial institutions recommend revisiting the existing tax system. Administrative reforms won’t do the job.