Business World, 14 October 2014



During his final 18 months in office, President Aquino III should push for a core of budget reforms that would prepare the Philippines for the future. It is natural to assume that a sitting president would not willingly give up some perks of the Presidency, no matter how inconsistent they are with the requirements of a well-functioning democracy.

Thus, during his entire term, President Aquino III did not lift a finger to subject huge off-budget sources of funds — the Malampaya Fund, the PAGCOR President Social Fund, and the PCSO Welfare Fund — under the budget process. These funds were disbursed without congressional review and approval. These funds were unquestionably his own slush funds.

There are other budget anomalies. An increasing part of future resources have been earmarked for specific purposes, tying the hands of future presidents and Congresses in the exercise of their respective spending and authorizing responsibilities. Congress continues to create new programs without identifying sources of financing, an act of fiscal irresponsibility.

The annual budget does not seem to work within a medium-term fiscal framework; its priorities change from year to year.

In reforming the budget to make it more relevant and responsive for the future, President Aquino III has to assume the worst: that the next president might not belong to his circle of friends. Like him, they will be unwilling to give up powers that are inconsistent with good budget practices.

It then becomes Mr. Aquino’s responsibility to prepare an entirely new budget regime: responsible, accountable and responsive. And he has to reform the budget system during the remaining days of this six-year term. Here’s the core of such a new budget system:

First, subject all “off-budget funds” to the usual budget process. Hence, the next president should give up the PAGCOR President’s Social Fund, the Malampaya Fund and the PCSO’s Social Welfare Fund. He will continue to manage these funds and other off-budget funds but they will be subject to congressional review and approval.

Second, whittle down earmarking to its barest minimum. Earmarking unnecessarily adds inflexibility to the efficient allocation of public funds. There is no strong economic justification for it. It is resorted to by governments that are politically weak and with little credibility.

One example of earmarking is a provision in the recently approved sin tax reform law which mandates that 85% of the estimated extra revenues of $6.03 billion over five years will be earmarked by government for improving health care provision in the country.

Earmarking is economically costly. It results in loss of macroeconomic control over public finances. It limits the ability of the President and Congress to respond to changing economic conditions.

Earmarking limits future Congresses in their exercise of the power of the purse. As an increasing part of government revenues is earmarked, it reduces the amount of “unrestricted” funds that the Executive and the Legislature will decide on.

Earmarking unduly complicates the budget process, tax administration, and monitoring for compliance. Ideally there should only be one fund to which all government resources will go and from which all appropriations will emanate.

Earmarking will increase lobbying and political pressure to increase spending even for potentially lower priority areas from earmarked revenues.

Finally, earmarking has adverse distributional impact: why should the smokers (generally the poor) subsidize the expensive medical procedures for all (including but mostly the rich)? Health care is not totally free in the Philippines, as it involves a large out-of-pocket expense.

Third, pass the Fiscal Responsibility Act. This is not new. Mr. Aquino promised its passage in his first State of the Nation Address (SONA) in July 2010. The fiscal responsibility bill was first proposed by the Aquino III administration on Nov. 4, 2011. The bill seeks to temper the erosion of tax revenues. It will prohibit new spending authorities not supported by new sources of revenues.

On July 2015, Mr. Aquino will deliver his final SONA. Cab we expect the fiscal responsibility bill to see the light of day by then?

Fourth, pass the Budget Impoundment Control Act (BICA). This is consistent with the constitutional assignment of fiscal responsibilities for the Executive and Congress. It will strengthen the recent Supreme Court decision declaring some aspects of the Disbursement Acceleration Program unconstitutional.

Mr. Aquino should not find it difficult to support the BICA proposal. He sponsored a bill supporting BICA in the face of what appears to be presidential abuses of power by the previous administration.

Real budget reforms should be unbiased, forward-looking, and transparent. All the above budget reform proposals satisfy these criteria.