Financing Government Operations and Economic Expansions

19 April 2010

Speech-Economic-expansionAddress of Rep. Ferdinand “Bongbong” Marcos Jr.
General Meeting of the Financial Executives Institute of the Philippines (FINEX)
19 April 2010

First of all, thank you for inviting me to participate in this forum of the Financial Executives Association (FINEX), and for opening your doors to those of us who are standing for election in the May 10 election.

It is only fitting that the top executives of banks and other financial institutions and corporations in our country should hear the views on the economy and government of candidates for congress and top executive positions, because what we do, if elected to office, will obviously have great bearing on your companies and your industry over the next six years.

We cannot separate what happens in the corridors of government from what happens within your companies and in the economy as a whole. We are all, in our respective ways, responsible for the health of our financial system and our economy.

On your end, you are most concerned and interested in what the government, both national and local, does or intends to do because government is the single biggest income earner through its taxing powers, the largest single spender, and the largest single borrower. Any financial operation undertaken by the government, including the Bangko Sentral ng Pilipinas, can affect the level of liquidity and prices of goods and services, the purchasing power of the peso, the value of the peso vis-à-vis other foreign currencies, and the cost of money.

It is therefore essential that Government exercise great care and caution in managing its finances and setting the right economic policies in order to maintain monetary and financial stability.

I will focus my remarks on the subject of how government can improve its finances, achieve better fiscal health and spur the growth of the economy.

The Government Budget

One major concern of mine is that under current practices the cash operations of government do not truly reflect the fiscal health of the government.

The General Apprpriation for the operations of government is enacted into law annually by Congress. It is based on the budget of expenditures and the sources of financing, including receipts and proposed revenue measures, together with the proposed level of deficit, if there is any. The budget is a tool of the Executive Branch for the conduct of its financial operations.

The proposed cash budget may change as a result of developments, such as shortfalls in revenue, but in no way should they be manipulated just to show a healthy fiscal position.

At present, we should be concerned about certain practices that are questionable, such as:

1) Making the Government Owned or Controlled Corporations (GOCCs) pay in advance the dividends payable in the subsequent year to the National Government;

2) Making private corporations, especially the large ones, pay their income taxes in one fiscal year before they are due for payment in the next fiscal year;

3) Delaying the cash release of the internal revenue allotment (IRA) and other shares in the internal revenue collections to the LGUs;

4) Deferment of the payment to the GSIS of the share of the National Government in the premium of government employees’ retirement and pension; and

5) Deferment of the accounts payable to private contractors who have undertaken government projects.

The above practices have caused distortions and harm to the real fiscal health of the government in the effort to show a lower deficit and to illustrate that the government is on target in its projections. The implications are far-reaching.

First, in the effort to hide the actual shortfalls in revenue, the improvement of tax collection efficiency is sidestepped.

Second, the practice of advancing the payment of dividends and income taxes in one fiscal year impairs the accuracy of the appropriations of expenditures enacted into law in the subsequent fiscal year.

Third, the deferment of payments due in one fiscal year bloats the budget of expenditures of the subsequent years.

Fourth, the deferment of payment due to private contractors leads to the deterioration of the credit worthiness of the latter because of their inability to pay the loans they obtained from financial institutions.

And fifth, the results of the cash budget do not really reflect the actual situation of government financial operations on account of the hidden and questionable transactions that take place.

Because of lack of transparency, the actual results are misrepresented.

It should be recalled that back in 1998 payables to private contractors reached huge amounts in 1998. As a result, the government was forced to pay some P80 billion in 1999 in order to enable the private contractors to pay their loans and have their credit lines reopened. Consequently also, the government breached the P100 billion deficit for the first time.

And huge deficits have been the story ever since.

Efficiency of Revenue Collecting Agencies and Spending Agencies

I want to underscore next the inefficiency in government on both the revenue collection and spending ends.

On the national revenue side, it is estimated that at least 30% of what should be collected is not collected. If the leakage is plugged, total revenues will increase the funds available for (1) the delivery of services such as education, health care, etc, (2) increases in the salaries of government employees, military and police, and (3) capital expenditures for infrastructure. In addition, there will be more funds for IRA and shares in revenue derived from the extraction of minerals due the LGUs.

On the expenditure side, it is also estimated that some 30% of the 70% collected – or about 21% -- is lost due to overpricing and wasteful spending as a result of political patronage and unproductive use of the pork barrel.

When you combine it all, the total waste of national government resources reaches 51%, leaving less than half (49%) of taxpayer money for productive use.

When you add to this the leakage in almost all LGUs arising from graft and corruption, the amount lost is staggering. We should therefore not wonder why government is ineffective and economic development is sluggish in our country.

OFW Remittances

A third vital area of concern in national finances is OFW remittances.

When first conceived in 1973, the overseas employment program was envisioned as a stopgap measure to alleviate the domestic employment problem and as a response to employment opportunities that opened up in oil-rich countries.

Today, it has become institutionalized as the country’s biggest source of foreign exchange. OFW remittances now account for one-sixth of GDP.

The situation is the result of the country’s failure to provide for more domestic employment and absorb the growing labor force through a more competitive manufacturing, agriculture and export sectors.

At the same time, our country is absorbing a tremendous social cost for the deployment of over 10 million of our people overseas – separating them from their families and loved ones.

The contribution being provided by our OFWs to the economy and the nation would be even more dynamic and far-reaching if, instead of just depending on them to keep our country afloat, we were to embark on an aggressive effort to develop the domestic economy and spur the growth of local industries and agriculture.

Imagine a situation where we have both – a more productive and competitive economy here at home and a dynamic OFW community contributing a substantial portion of GDP. In such a situation, we would become an economic powerhouse in our part of the world.

Restructuring the Economy

How then can we make this possible?

I believe the key is restructuring our economy to focus again on industries where our country and our people have a competitive advantage. And these are: agriculture, tourism, shipping. mining with environmental safeguards, IT and related services, BPOs and call centers, and infrastructure development and construction.

These industries and sectors have the highest multiplier in terms of employment, income and increased national output. They will also be effective in decongesting highly urbanized centers and thus contribute to population dispersal. And with the expansion and growth of these sectors, they will in time help to moderate the exodus of OFWs because more of them will be encouraged to work here at home once the jobs are available.

Agrcultural development in my view is absolutely essential because food security is vital to national survival. And 33% of our people continue to depend on agriculture for a living.

To finance expansion and growth of agriculture and the other sectors, we should embark on a single-minded effort to generate more direct foreign investments in the economy. As is the case with other emerging economies, this is the key to growth for our country.

$75 Billion FDIs, 10 Million Jobs

Significantly, last week, the Joint Foreign Chambers (JFC) offered their own recommendations for the Philippine economy that strikingly dovetail with our own thinking about our economic prospects. They said that it is entirely possible to generate $75 billion in FDIs and 10 million new jobs over a span of 10 years, if certain reforms are adopted by the next administration.

And they cited seven big potential winners in the economy: agribusiness, BPO, creative industries, infrastructure, manufacturing and logistics, mining, and tourism.

I think domestic and foreign thinking coincide on the Philippine potential for dynamic growth and the importance of foreign investments. There’s also much congruence as to the policy reforms that are needed in order for us to leap forward.

What has been missing all this time is the political will to pass the needed policies, and the government to zealously implement them.

At present, we can barely manage to draw $2 billion FDIs a year, as compared to the tens of billions moving annually to China, India, Indonesia and other emerging economies. Today, about $200 billion in foreign investments are flowing annually into East Asia, and the sum can only get bigger over the long term as the world comes out of the recession.

I believe this is preeminently the time for us to make our country and our economy a truly investment-friendly destination. We must adopt all the policy and institutional reforms necessary to make this possible.

Policy Priorities in Senate

Overall therefore, in talking about finance, my policy priorities, if elected to the Senate, are the following:

First, I attach high priority to improving the fiscal health of government through measures that will raise the tax collection efficiency of government and ensure the more productive use of government resources.

Second, I will push for a comprehensive policy and program to increase dramatically the inflow of foreign investments by transforming the Philippines into a more attractive investment destination.

There is no reason why a democratic government like ours can not match in efficiency the socialist government of the People’s Republic of China and the democratic government of India. At the end of the day, what really matters is effective governance.

There is no reason why we should continue to live with a situation where 51% of every taxpayer peso is lost to graft and inefficiency. I believe that with greater transparency and fiscal prudence, government resources can be made more productive.

There is no reason why, given our economic potential, we should not be able to attract the foreign investments needed for our rapid development. If India, China, Thailand and Indonesia can do it, so can we.

The call of the hour then is to put in place those reforms that will make our government more fiscally responsible, our economy more attractive to foreign investments, and our industries more competitive in the global economy.

I thank you.