n the first two months of 2005, the national government operated within the limits of the 2004 budget, which was a mere reenactment of the General Appropriations Act of 2003. Last 15 March,
President Arroyo signed into law Republic Act 9336, the General Appropriations Act of 2005, without any line item veto, preserving House Bill 3154 intact, as passed on third reading by the House of Representatives last year.

Compared to the adjusted 2004 national budget of P861.6 billion, the P907.6 billion general appropriations measure for 2005 is bigger by only 5.3% — just enough to compensate for last year’s inflation rate of 5.5%. On a per capita basis, the budget increased by only 2.2% to P10,648 from P10,419.

President Arroyo said her proposal is only a core budget that will be covered by existing revenues. The national budget was framed on the basis of the following assumptions for 2005: 5.3-6.3% GDP growth, 4.0-5.0% inflation rate, 7.5-8.5% 91-day Treasury bill rate, P54-56/US$ exchange rate, and US$32.72 per barrel of Dubai crude oil.

LION’S SHARE

Interest payments in the 2005 national government debt are projected to rise 15.6% to P301.7 billion from P260.9 billion actually spent in 2004. This programmed amount still excludes some P18.8 billion in maturing interest payments of the National Power Corporation, arising from the national government’s assumption of P200 billion worth of Napocor’s liabilities at end-2004.

Principal payments on the national government’s debt are excluded from the budget. Combined with interest payments, however, their share to revenue collections is projected to slightly contract to 82.5% from 86.2%. The reduction provides little comfort since the national government’s debt stock rose to 78.7% of GDP (P3.8 trillion) in end-2004 from 78.0% of GDP (P3.4 trillion) in end-2003.

Including a programmed net lending to government corporations of P7.6 billion (from P5.7 billion actually spent in 2004), the debt service burden accounts for a little over a third of the 2005 budget or 34.1%, an uptick from last year’s share of 32.2%. Net of debt service burden (net lending and interest payments) and internal revenue allotment (now considered as part of automatic appropriations), the government has only P446.7 billion left to spend for this year, merely 0.7% up from P443.6 billion last year.

COMPRESSED SPENDING

By expense class, current operating expenditures (personal services and maintenance and other operating expenditures) will still comprise 92.1% of the budget (P835.5 billion from P792.9 billion). Personal services will shrink to 31.9% of the budget from 33.3%, despite a 0.7% level increase to P289.2 billion from P287.4 billion. On the other hand, maintenance and other operating expenditures will expand to 60.2% of the budget from 58.7%, along with an 8.1% level increase to P546.3 billion from P505.5 billion.

Net lending will rise to 0.8% from 0.6% (P7.6 billion from P5.5 billion). The share of capital outlays to the budget will be cut to 7.1% from 7.3%, despite a 1.9% level increase to P64.5 billion from P63.2 billion.

By sectoral allocation, the share of social services in the budget will be reduced to 28.0% from 28.8%, despite a 2.6% level increase to P254.3 billion from P247.9 billion. As mandated by the Constitution, education remains the top budget priority. The government set aside increased funding for hiring 10,000 teachers, building 7,500 classrooms, addressing the shortfall in desks and chairs by 30%, attaining a 1:1 book-to-student ratio per subject in grade school and high school, ensuring clean water supply, providing assistance to students and teachers in private schools and access for 58,085 students to tertiary and vocational education. The social sector budget likewise provides funding for new treatment and drug rehabilitation centers, premium subsidy for indigents under the National Health Insurance Program, the KALAHI-CIDSS program (the government’s flagship program for poverty alleviation), the DOH Murang Gamot Project, and revitalization of the mining industry.

Economic services will also be cut to 17.5% of the budget from 18.1%, despite a 2.3% level increase to P159.2 billion from P155.6 billion. The economic services budget will back up the President’s Economic Reform and Job Creation Program. Funds for agriculture will cover programs under the Ginintuang Masaganang Ani, development of agribusiness lands, implementation of projects to transport agricultural goods from Mindanao to the rest of the country, the continuing agriculture and fisheries modernization, support for the use of hybrid seeds, construction of tramlines, construction of seaweed processing plants, acquisition of lands under CARP, and financing programs that include entrepreneurial skills for farmers and fisherfolks.

Funds for trade and industry will focus on the creation of opportunities for three million entrepreneurs. Funds for tourism will enhance tourism complexes in Cebu-Bohol-Camiguin-Siargao, Metro Manila, Boracay, Clark-Subic, Cordillera, Ilocos, and Davao. Funds for power and energy will cover the Rural Power Project of the National Electrification Administration and the Barangay Electrification Project of the Department of Energy. The government also programmed to reverse the decline in infrastructure spending, allocating P56.5 billion for 2005. Priority projects include highways connecting RORO ports, roads and rail system to decongest Metro Manila, and the Clark highway. The allocation for science and technology will cover the E-Government Fund to meet the requirements of major ICT projects of the government.

General public services too will shrink to 15.5% of the budget from 15.9%, despite a 2.5% level increase to P140.6 billion from P137.3 billion. The general services budget provides for the professionalization of the Philippine National Police, construction of police stations, upgrading of salaries of jail wardens and firemen, the Judicial Reform Program, automation of the electoral system, implementation of the Government Electronic Procurement System, rationalization of the bureaucracy, pursuit of the peace process, negotiations with the CPP/NPA/NDF, and the development of the Autonomous Region for Muslim Mindanao.

Defense spending will likewise be axed to 4.9% of the budget from 5.1%, despite a 0.8% level rise to P44.2 billion from P43.8 billion. The defense budget includes funds to pursue the modernization of the Armed Forces of the Philippines to enable it to respond to terrorism and other threats to national security.

MORE REVENUES AHEAD

Despite the seriousness of the “fiscal crisis,” nothing came out of proposals to further cut the legislator’s pork barrel allocations and to freeze increases in the internal revenue allotments (to P141.0 billion instead of P151.6 billion) for 2005.

Although none of the eight priority revenue measures were implemented last year, the fiscal deficit fell below the P197.8 billion (4.2% of GDP) ceiling to P186.1 billion (3.8% of GDP). Next year’s fiscal deficit target is now cut to P180.0 billion (3.4% of GDP) from the original target of P184.5 billion (3.6% of GDP), notwithstanding the impact of absorbing part of Napocor’s debts.

Fiscal authorities expect additional revenues of P15 billion from the sin tax law, hike in duty on petroleum products (P5 billion), and administrative measures (P5.0 billion from the Bureau of Internal Revenue and P3.5 billion from the Bureau of Customs).

Former Finance Secretary Juanita Amatong earlier hoped that with the passage of a consolidated VAT revenue measure to raise another P60 billion, the fiscal deficit could go down to as low as P160 billion. When this happens, the fiscal deficit will have been wiped out even before 2010 – the medium-term target in the government’s fiscal roadmap – and the country’s credit ratings will have been upgraded.

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