Core
Business World, 14 March 2012

Stung by criticisms of serious public underspending which contributed to the economy’s anemic growth, the Aquino III administration desperately tried to show faster disbursement of the 2011 budget. From a budget deficit of P96.3 billion from January to November, it soared to P197.8 billion at year’s end. For December alone, expenditures outstrip revenues by an unprecedented P101.1 billion. Impressive?

Hardly. The government spending spree during the final days of 2011 revealed some weaknesses in fiscal planning.

First, budget priorities were altered. The Aquino administration deviated from its original budget plan, a spending plan that was supposed to have been carefully crafted using zero-based budgeting.

Since there was slow progress in the construction of highways, school buildings, farm-to-market roads, and others, appropriated funds were realigned to other budget items. Subsidy, equity and agrarian reform (land acquisition and credit) became the beneficiaries of the slow public spending on public infrastructure.

HUGE BUDGET DEVIATIONS

The changes were huge. Congress authorized P20.5 billion as subsidy to corporations and local governments. Yet, actual subsidy was P45.8 billion, a deviation of P25.3 billion, or by 123.6%.

For equity contribution (for Bangko Sentral ng Pilipinas (?), and other public sector entities), Congress authorized P1.8 billion. But the Department of Budget and Management (DBM) spent P12.9 billion, a deviation of P11.1 billion, or by a whopping 628.4%.

For the Comprehensive Agrarian Reform Program — Land Acquisition and Credit, Congress authorized P4.0 billion. But DBM spent P7.9 billion, a deviation of P4.0 billion, hence doubling the original amount.

Implication: had DBM stuck to what was authorized by Congress, the budget deficit would have been P157.4 billion (actual deficit of P197.8 less P40.4 billion, the total deviation). The amount is roughly half of the original deficit level of P300 billion, and is closer to P150 billion, the level most analysts predicted.

This budget reordering raises several questions. Has the reordering of budget priorities improved the social worthiness of the budget? In other words, is society better off as a result of the reordering of budget priorities? Were more jobs created as a result of spending higher amounts for subsidies and equities rather than building roads and bridges and school buildings and so on?

Since the reordering of the budget priorities was humongous, have the fiscal authorities bothered to clear the same with Congress. Under the Constitution, the power of the purse belongs to Congress. The President proposes the budget, Congress authorizes, and then the President executes the budget.

Second, the final budget numbers confirm the severe public infrastructure underspending. A big part of what little has been allocated for public infrastructure remained unspent. The administration claimed the delays — more than one year — were necessary in order to clean up the bidding process. But the delay has opportunity costs.

The programmed spending for public infrastructure/other capital outlays was P241.7 billion, actual spending was P159.1 billion, or an underspending of P82.7 billion.

That’s not even an accurate picture of the extent of underspending of hard infrastructure. Lumping together public infrastructure with other capital outlays has blurred real performance. For example, naval vessels, military aircrafts, guns, cars, trucks, tables, computers and the like are capital outlays; they are not akin to roads, bridges, water systems, airports, seaports and others which help expand the capacity of the economy.

In the spirit of openness (making the budget understandable to the laymen), infrastructure should be reported separately from other capital outlays. In the 2011 budget, total public infrastructure for the national government was P152 billion, only 62% of the total infrastructure/other capital outlays. Where did the bulk of the P82.7 billion underspending come from, public infrastructure or other capital outlays?

Road maintenance works were delayed, too. The actual disbursement for maintenance and other operating expenses was P14.0 billion lower than planned budget. How much of these were supposed to go to road maintenance? Such funds are easy to disburse since road maintenance projects involve no right-of-way problems, they are easy to program, easy to identify, and easy to contract out.

REVENUE TARGETS MISSED

The third weakness is the low tax effort. Total revenues for the full year of 2011 were short by P51 billion. The Bureau of Internal Revenue missed its target by P16 billion or 1.7%. The Bureau of Customs missed its revenue target by a wide margin — P55 billion or by 17.2%.

As a result, tax effort (defined as taxes as percent of gross domestic product (GDP) barely budged — from 12.0 percent in 2010 to 12.2% in 2011. This is disturbing in two ways. First, the change in administration, from an extremely corrupt to an “incorruptible” one, has barely changed the bottom line. Second, this level of tax effort won’t be enough to finance an ambitious social and infrastructure spending program during the rest of Mr. Aquino’s presidency.

What has become clearer from these numbers is that tax collection efforts will continue to fall short of target unless the tax system is reformed. The tax base has to be broadened, largely by rationalizing the grant of fiscal incentives. The tax rates on cigarettes and liquor have to be increased. And the tax system has to be simplified. Improved tax administration could make a difference but is not going to be enough.

Hopefully, the Aquino III administration will do better this year than last year. In its desperate desire to show faster government spending, the quality of the budget has suffered. DBM authorities have ignored responsible budget rules enshrined in the Constitution, while Congress has failed to assert its power of the purse.

When will our leaders get serious and stop playing lip service to fiscal responsibility and accountability?