One of the most important tasks that need to be addressed in order to achieve macroeconomic stabilization is to put order in the fiscal house. The large budget deficits incurred as a result of the fiscal stimulus during the global economic and financial crisis resulted in the need for fiscal consolidation.
At the same time, the reduction of spending for infrastructure and social services as a result of the government’s expenditure compression efforts in 2002 to 2006, has resulted in large financing gaps in these areas. These financing gaps, in turn, not only constrained the country’s economic growth, but also limited the access of the poor to the economic gains the country has achieved. The challenge in the medium term, therefore, is one of achieving fiscal consolidation, while at the same time substantially increasing the country’s investments in infrastructure, health, and education.
The overall strategy in the fiscal sector in the medium term is to increase tax effort to 15.6 percent of GDP. This is to be achieved through an annual incremental 0.3 percentage point annual rise in the collection effort of BIR, and 0.1 percentage pointfor the BOC. At the same time, non tax
revenue collection would be increasing equivalent to an average of 1.2 percent of GDP through governance reforms.
Correspondingly, the NG deficit should decline to a level of 2 percent of GDP by 2013 and must be maintained at this level until 2016. Also, beginning 2013, the consolidated public sector deficit must be brought down to 1.5 percent of GDP. The specific strategies and programs designed at achieving the abovementioned targets are detailed below.
Tax Administration Reforms
Before even attempting to introduce structural reforms into the country’s tax system, administrative reforms must be given priority. Numerous reform measures are being lined up to improve tax administration. These measures include the following:
1. Establishing a tax registry comprehending all taxpayers;
2. Using comprehensive third-party data to determine the potential tax base;
3. Maintaining a transparent and productive tax audit program;
4. Fully staffing the BIR and BOC with competent and adequately trained personnel;
5. Formulating transparent and consistent tax rulings;
6. Revitalizing the RATE, RATS and RIPS programs of government;
7. Establishing appropriate performance standards and evaluation;
and
8. Instituting a more effective system of rewards and penalties under the Lateral Attrition Law backed up by performance standards.
The overall strategy in the fiscal sector in the medium term is to increase tax effort to 15.6 percent of GDP.
Tax Policy Reforms
To complement the efforts to improve tax administration and to ensure that revenues are adequately protected, priority policy reforms need to be instituted, namely: the rationalization of the fiscal incentives system and the enactment of a fiscal responsibility law.
The rationalization of fiscal incentives will save revenues for the government by doing away with redundant incentives (e.g., those directed at investments that would have taken place even with the absence of such incentives). At the same time, rationalization will allow the government to direct the incentive system at the export sector so that its full potential can be realized.
A fiscal responsibility law is necessary to hasten the fiscal consolidation process and enforce fiscal discipline at all levels of government. The fiscal position of government should be kept on an agreed deficit path. Such a law is also necessary to keep the country’s debt at a manageable level.
With proper timing, other tax reforms need to be undertaken in order to improve the revenue take of the tax system while promoting equity and a level playing field for all stakeholders. Priority must be given to adjustments in the excise tax on alcohol and tobacco products, as well as the excise tax on petroleum. The use of the so-called PAYGO system as a collection handle must also be maximized.
The distortions of the tax system caused by the enactment of piecemeal exemption laws must be corrected. A reversal of these unnecessary tax exemptions must be pursued in order to restore the integrity of revenues and make the tax system more efficient and equitable.
Nontax Revenue Reforms
Fees and charges collected by government agencies have not been adjusted since a decade ago.
Consistent with the sound principle of cost recovery, these fees must be adjusted to cover the cost of administering government services.
Government must aggessively pursue the auctioning of its assets such as air frequencies and permits to develop renewable energy resources. GOCCs must also be made to contribute their fair share to the revenue effort by, among others, promptly remitting dividends.
Expenditure Policy Reforms
The key challenge in the area of expenditure policy is how to substantially increase productive expenditures, such as those for infrastructure and social services (e.g., education and health) – and catch up with the accumulated investment deficits in these areas – while at the same time aggressively reducing wasteful and inefficient expenditures.
Public expenditure on infrastructure, as a share of GDP, went down from an average of 2.4 percent in 1995-2000, to an average of 1.8 percent in 2001-2011. By comparison, China, Vietnam, and Thailand spent upwards of 7 percent, 8 percent, and 14 percent of GDP, respectively, on public infrastructure during the last decade.
Similarly, public spending on basic education was 3.4 percent of GDP in 1998, but decreased to 2.9 percent in 2002 and continued to slip reaching 2.2 percent in 2008. In other East Asian countries public expenditure on education averaged 3.9 percent of GDP in 2007.5
The key challenge in the area of expenditure policy is how to substantially increase productive expenditures, such as those for infrastructure and social services (e.g., education and health) – and catch up with the accumulated investment deficits in these areas – while at the same time aggressively reducing wasteful and inefficient expenditures.
5 In the health sector, the country’s public expenditure per capita on health was US$39 in 2006, compared to the median of US$88 per capita expenditures for comparable East Asian countries. Overall, the Philippine NG spending on social safety net programs was a mere 0.3 percent of GDP in 2007 and 0.8 percent of GDP in 2008, which is less than half of the mean expenditure on social welfare programs of 1.9 percent of GDP in a group of 87 countries.
In order to address this challenge, the Plan envisions the implementation of several major public expenditure management reforms not only to help narrow the fiscal deficit over the medium term but also ensure that resources are allocated to priority investments, such as human capital and infrastructure. Toward this end, expenditure reforms that have been introduced in the recent years will be strengthened and in some cases, revitalized, in order to improve resource allocation and build results-orientation into the government service. Among these reforms are the following:
1. Medium-Term Expenditure Framework (MTEF). The continued adoption of the multiyear budgeting system (the MTEF) will improve the predictability of funding, and integrate policy with resource allocation. The main components of the MTEF are the Paper on Budget Strategy (PBS) and the Forward Estimates (FEs).
• The Paper on Budget Strategy will link budget allocation with the national agenda of the government to identify the priority areas for spending, and to incorporate the sectoral and regional implications in the dimension and distribution of the budget; and
• Forward Estimates (FEs) are the estimated annual costs of ongoing programs and projects.
These will help ensure the continuous funding of program requirements beyond a given fiscal year, and help provide a sound basis of future years’
budget trends. In order to adopt more rigid and realistic FEs, the government will pursue automation that is linked to existing budget application systems and to the PDP and PIP.
2. Organizational Performance Indicator Framework (OPIF). This enables the channelling of resources to where it best produces the desired results and outcomes, as indicated by agreed upon performance indicators.
The implementation of the OPIF will be cascaded to the operating units of the agency, in order to sustain the restructuring of government expenditures to the priority sectors.
The linking of the OPIF and Performance Management System-Office Performance Evaluation System (PMS-OPES) being spearheaded by the Civil Service Commission, will allow the institution of a performance-based compensation system. strengthen fiscal discipline in the public sector by prescribing principles of responsible fiscal management, establishing control mechanisms on spending, and adopting preventive measures against the erosion of the tax base of the government. One of its prominent features is ensuring that proposals to grant fiscal incentives or permanent increases in national government expenditures must be offset by permanent increases in revenue or permanent reductions in other expenditures.
4. Government Rationalization Program (RP). Executive Order (EO) No. 366 issued on October 4, 2004 aims to build a smaller bureaucracy and improve public service delivery through the strategic review of the mandates, operations, organizational structures, functions, programs and activities of national government agencies; the elimination of overlapping or duplicating functions;
and the focusing of government efforts and resources towards its core or vital functions. Given the current progress
The Plan envisions the
implementation of several major public expenditure management reforms not only to help narrow the fiscal deficit over the medium term but also ensure that resources are allocated to priority investments, such as human capital and infrastructure.
in rationalizing half of the agencies in the Executive Branch, its continuation is expected to lead to the elimination of 12,549 regular positions, saving the government some PhP2.4 billion in annual salaries and compensation.
5. Procurement Reforms. Significant progress was made in reforming the procurement system through the passage in 2003 of Republic Act (RA) No. 9184 or the Government Procurement Reform Act. Aside from standardizing and modernizing the procedures in government purchasing, the law also requires the use of the Philippine Government Electronic Procurement System (PhilGEPS) by all government entities, which serves as the sole portal hosting sources of information on all government procurement. From 2011, the following functionalities in the PhilGEPS will be implemented: (a) virtual store for electronic purchasing;
(b) expanded supplier registry as a centralized electronic database of all manufacturers, suppliers, distributors, contractors and consultants registered in the system; (c) introduction of charges and fees to sustain operations and maintenance of the system; (d) e-payment system to enhance the functionality of the virtual store;
(e) e-bid facility for electronic bid evaluation of all types of procurement for goods, infrastructure projects and consulting services; and (f) uploading of the individual Annual Procurement Plan (APP) of each government procuring entity. Public procurement in the country shall continue to adapt to improvements in modern technology through introduction of future functionalities in the PhilGEPS that will facilitate service delivery, transparency and competitiveness in the public procurement system
6. Stronger Internal Control System (ICS). Along with procurement reforms, the internal control system of government entities is being
strengthened to reduce waste and corruption. The DBM, in partnership with the Office of the President-Internal Audit Office has issued the National Guidelines on Internal Control System (NGICS). The NGICS serves as a guide to departments/
agencies in redesigning, installing, implementing and monitoring their respective ICS, taking into consideration the requirements of their organization and operations.
A government Internal Audit Manual (PGIAM), consistent with the NGICS, will soon be finalized in order to assist the government in establishing fully functioning internal audit offices in the public sector.
The government will find more ways to further strengthen public expenditure management with the following expenditure reforms and initiatives:
7. Zero-Based Budgeting (ZBB) Approach. Anchored on the good governance thrust of the Aquino administration, the Department of Budget and Management (DBM) led the review and evaluation of ongoing programs and projects through the ZBB approach in preparing the 2011 Budget.
Complementing the MTEF and the OPIF, the ZBB approach is geared towards assessing the continued relevance and priority of programs; ascertaining whether the program objectives and outcomes are being achieved; identifying alternative or more effective and efficient ways of achieving the objectives; and guiding decisions whether the resources for the program or project should continue to be provided at present levels, increased, reduced, or discontinued.
In succeeding budget processes, the government shall widen the scope of the evaluation of the major programs or projects under the ZBB approach to build up capacity, and to institutionalize program evaluation in the government.
Initial findings and recommendations from the conduct of ZBB exercises during the preparation of the 2011 Budget include:
• Termination of programs no longer delivering intended outputs and outcomes;
• Holding of the funding for some programs pending removal of bottlenecks in project implementation and procurement;
• Expansion of well-performing programs to alleviate or mitigate critical gaps in social and economic services;
• Recommendation on the implementation of difficult reforms in GOCCs;
• Stricter controls in the use of lump-sum funds following master plans and government priorities;
and
• Deactivation of selected agencies and GOCCs.
In succeeding budget processes, the government shall widen the scope of the evaluation of the major programs/
projects under the ZBB approach to
build up capacity, and to institutionalize program evaluation in the government.
8. Transparency and Accountability Safeguards in the Budget Process.
The overarching goal is to enhance transparency and enforce accountability in government operations by incorporating general and special provisions in the General Appropriations Act (GAA). Under the 2011 GAA, all departments and agencies, including those enjoying fiscal autonomy, are required to post their approved budgets on their websites and the status of their programs/projects starting 2011. Special provisions in the budgets of agencies and GOCCs with key programs and projects require the posting of the details of program beneficiaries and locations of projects on their websites for better information and appreciation of the public. This practice also allows the public to verify agency outputs vis-à-vis targets.
9. Public Financial Management (PFM) and the Government Integrated Financial Management Information System (GIFMIS).
This initiative aims to harmonize and integrate the budgeting, accounting, and auditing systems of the government. Reforms in the PFM
2011 2012 2013 2014 2015 2016
Fiscal Balance (% of GDP) -3.2 -2.6 -2.0 -2.0 -2.0 -2.0
Inflation rate (%) 3.0-5.0 a/ 3.0-5.0 b/ 3.0-5.0 b/ 3.0-5.0 b/ n.a. n.a.
Exports (US$Bn) c/ 55.3 – 55.8 62.5 71.3 81.3 94.3 109.4
Growth rate (%) 9.0 – 10.0 12.0 14.0 14.0 16.0 16.0
Imports (US$Bn) c/ 71.5 – 72.1 85.1 100.4 118.5 141.0 167.8
Growth rate (%) 17.0 – 18.0 18.0 18.0 18.0 19.0 19.0
Table 2.5 Selected Fiscal, Monetary, and External Medium-Term Targets
a/ Approved under DBCC Resolution No. 2009-10 dated 27 November 2009.
b/ Approved under DBCC Resolution No. 2010-3 dated 09 July 2010. The BSP shifted from a variable annual inflation target to a fixed medium-term inflation target of 4 ± 1 for 2012-2014.
c/ Approved by the Monetary Board on 24 March 2011.
system will make it more transparent, accountable, and performance-oriented. A Memorandum of Agreement (MOA) has been executed between the DBM, Commission on Audit (COA) and BTr to develop the GIFMIS.
10. Contingent Liability Management (CLM). Considering the fiscal impact of realized contingent liabilities (CL) from existing BOT and GOCC projects that are guaranteed by NG, a joint ICC-DBCC resolution will be issued to strengthen CLM through the preparation of the CLM Plan by implementing agencies, training for value analysis/
value engineering and CL assessment, evaluation by the DOF of CL for every financing/procurement option, and full disclosure of required budget for CL that will become real liabilities and will thereby need funding.
11. Timely Approval of the Annual Budget. Addressing the urgent needs of agencies in a timely and predictable manner is the main reason that the government pushes for the passage and approval of the GAA before the fiscal year starts. To be able to do this, the government revised its budget schedule in anticipation of early budget preparation activities to give ample time for the DBM and the agencies to conduct consultations with sectoral groups, civil society organizations (CSOs), and Regional Development Councils (RDCs). The new schedule, coupled with improved budget documents submitted to Congress, will facilitate the budget legislation process, hence ensure timely enactment of the annual budget.
12. Rationalization of GOCCs and GFIs. To better streamline the budgetary support given to GOCCs/
GFIs, the government has embarked on instituting reforms to reduce their financial vulnerability and improve
service delivery. The DOF and the DBM are collaborating in the passage of a law to strengthen oversight functions on GOCCs/GFIs, and to create a Government Corporate Council that will effectively manage and supervise the operations of these entities. Administrative and legislative measures will also be proposed to amend or restructure GOCC charters. A review of the compensation granted to board members, officers, and employees of GOCCs and GFIs will also be undertaken to control costs of personal services in GOCCs and make compensation equitable relative to that in the National Government.