Reducing the fiscal deficit and reforming the tax system

The Honorable Jose Isidro N. Camacho
Secretary, Department of Finance
July 18, 2001

About six months ago, I recall being seated in a hotel ballroom very much like this one, as one of your fellow Makati Business Club members listening to then newly-installed President Gloria Macapagal-Arroyo talking about the four core values that will govern her administration. These are 1) the need to win the battle against poverty within the decade; 2) the need to improve our moral standards and provide a foundation for good governance; 3) the need to have a new politics of party programs and process of consultation; and 4) the need to lead by example. I remember telling myself then that these are all very interesting concepts but how will these really help the economy.

I never realized that six months later, I will have to stand in front of the same crowd and will now have to answer this question myself. Worse, I now have to answer this question as one of the government managers dealing with a battered economy under very difficult circumstances.

From a fiscal surplus in 1997, we now have a target of P145 billion deficit which one newspaper even prominently but I can assure you, mistakenly reported as P180 billion. Even up to now, we still uncover government payables or contingent liabilities that add to the burden. The leading world economies are experiencing slowdowns that are pulling our exports and capital inflows down. Moreover, we have also experienced upheavals from the arrest of the former president and the subsequent May 1 incident, the May 14 elections, and more recently the Abu Sayyaf hostage-taking and the perceived increase in urban kidnapping. All of these are testing our confidence level as manifested by the volatility of our local currency.

As one who comes from your ranks, I can sincerely advise you not to despair or lose hope, for as business people, investors, and/or creditors, we know that a key ingredient to a successful business is good management whether in good times or bad times.

This is where the four core values of President Arroyo have taken meaning for me. These core values have defined for me the leadership or management quality that his administration offers.

Winning the fight against poverty within the decade is the long-term vision of the President. The fulfillment of this vision, on the other hand, requires the formulation of suitable programs in the various sectors, and more important, on the persistent implementation of these programs. As it is often said, success is 20% planning and 80% implementations. It is in this 80% where the three other core values come into play to ensure success.

Applying the highest level of moral standards, practicing good governance and leading by example are mantras that our president lives by and imposes on all of us in her management team.

I will elaborate on this management style later, as I am sure that you also came here to see if there is a gameplan to implement to begin with.

Your government's gameplan can be broken down into four sections. These are: first, the macroeconomic measures and concerns; second, the agricultural modernization founded on social equity; third, the social bias to balance economic development; and fourth, justice and enforcement of law and order. Given my position, I will briefly describe the second, third and fourth sections, and share more details on the first.

A. Agricultural Modernization

More than 50% of our population is dependent on the agricultural sector. With its modernization, we believe that as much as 1 million jobs can be created in agriculture and agri-business. For this reason, the government is committing to implement the agricultural modernization fund act by allocating P20 billion a year for this purpose.

B. Social bias to balance economic development

The social bias consists of both short-term and long-term measures to provide the safety nets for the poor as we simultaneously work on enlarging our economic pie. The provision for housing particularly for the urban poor, emergency employment for out-of-school youth, micro credit for small businesses and cheap rice through the rolling stores of the National Food Authority are some of the immediate measures. In the medium to long-term, programs to cut the costs into half of often-used medicines by the poor, the promotion of national health insurance, rice sufficiency, and the decongestion of the Metro Manila population through transportation infrastructure are some of the time-bound deliverables.

C. Justice and Enforcement of Law and Order

Economic development cannot be sustained unless there is justice as well as law and order. As you have seen in recent days and weeks, the President has demonstrated a firm and decisive stance to peace and order and related issues. Last May 1, we have seen her call the Armed Forces of the Philippines to assist in restoring peace in Metro Manila. More recently, she has ordered a massive offensive against the Abu Sayyaf and its supporters. She has also created the National Anti-Crime Commission which links the police, the NBI and the Armed Forces in combating criminality. The reorganization of the Philippine National Police has also been effected. Time-bound targets in dealing with the Abu Sayyaf and urban kidnapping have been set. Truly, the president has acted in the role of commander-in-chief more aggressively than the military establishment itself. For long-term security and peace and order, the administration is pushing for the implementation of the AFP modernization program which never got implemented in the last six years since its enactment as well as the professionalization and the modernization of the PNP. Peace and efforts in Mindanao and with the National Democratic Front have also been initiated with some measured success.

Macroeconomic Measures and Concerns

Let me now go over our economic program that has been set to motion. Our economic philosophy is centered on maintaining strong fiscal discipline, promoting high standards of good governance and initiating a range of market-oriented reforms. The economic philosophy is grounded on the idea that the fundamental way to win the war against poverty is to create jobs. This requires investment capital that will be attracted by an environment of free enterprise, available domestic capital, adequate infrastructure, and a streamlined government.

One of the key aspects of our economic program is fiscal discipline. Notwithstanding the economic slowdown, we are maintaining our national fiscal deficit target at P145 billion. We are doing this through a combination of cost-cutting measures and a revenue-generating initiatives.

On the expenditure side, we have been quite successful in cutting expense items without hurting basic services. The May year-to-date expenditures show a positive variance compared to target by close to P10 billion. This is quite a feat when one considers that the Year 2001 expense budget is the re-enacted budget which is flat from Year 2000.

On the revenue side, BIR revenues are underperforming by about P11 billion as of end of May and are expected to be P20 billion below the year's target. This has been affected by both the sluggish economy as well as perceived resistance to the changes being undertaken by Commissioner Rene Bañez in the BIR. As expressed by the president many times, this will not deter us from moving forward with the reforms in the BIR and we fully support the programs of Commissioner Bañez. Fighting, graft and corruption has no price.

Fortunately, we are achieving better-than-expected results in the other revenue components. The Bureau of Customs has turned the corner and, over the last six months, has met its revenue target. Non-tax revenues from government fees, the Bureau of Treasury Income and Grants have also generated more than their projected levels. Together with a more vigorous privatization effort including the pursuit of securitizing future revenue flows give us the confidence to meet our stated target.

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