De La Salle University - International Studies Department Conference on the Role of Regional Cooperation in fulfilling Philippine Development Vision: Inclusive Growth, Infrastructure Development, and Human Resource Enrichment
9 March 2018 | 9:00-9:30 | Fairmont Hotel Makati
Secretary Benjamin E. Diokno, Ph.D.
Department of Budget and Management
To my colleagues in government, friends in the academe, students, participants from civil society, good morning.
As Budget Secretary, I am primarily concerned with fiscal policy, particularly on spending. But as one of the economic managers in the administration, and an economist by training, I am usually asked to give lectures and answer questions beyond fiscal policy or the national budget. Today I have the pleasure of kicking off this conference by giving an overview of the current state of the Philippine economy. I am happy to oblige as I have come to accept that it comes with the territory.
Allow me to begin by addressing three of the most frequently asked questions recently: inflation, peso depreciation, and balance of payments. After all, our fiscal program are anchored on movements and projections on these macroeconomic fundamentals.
First, on inflation. Inflation has remained manageable over the past decade, with headline inflation settling at 1.8 percent in 2016. Last year, headline inflation averaged at 3.2%, consistent with the government’s target of 2-4% inflation over the medium term. This year-on-year increase is no cause for concern. Inflation is the sign of a growing economy. As long as we’re within government’s target range, we are fine. We should also trust the BSP - they have the necessary monetary policy tools to respond to the rise in inflation.
Some have expressed their concerns over rising prices in the past couple of months. There is a confluence of factors behind rising inflation aside from the actual effects of the implementation of our new tax reform program: profiteering of some firms whose goods and services are not actually affected by TRAIN, peso depreciation, as well as increases in the price of oil in the global market.
The government promises to be vigilant in monitoring price increases. We are optimistic that inflation rates will stabilize by the second half of this year. In the meantime, we have released the cash allocation necessary to fund cash grants that will help our 10 million poorest households recover from the transitory effects of TRAIN.
Another issue that is always brought up is the peso depreciation. Take note that Foreign Direct Investments from January to November 2017 of 8.7 billion dollars exceeded our full year target for 2017 of 8 billion dollars. However, as a result of normalization post-global financial crisis, there was a reversal of foreign portfolio investment flows. Loan repayments also contributed to the decline of the peso. Despite this, our external position remains strong. The peso’s movements are in line with those in the region.
As of December last year, our Gross International reserves stood at US$81.5 billion, covering more than 8 months’ worth of imports of goods and payment of services. This piece of information should placate alarmists who raise red flags in the peso’s gradual depreciation. The BSP has the competence and huge Gross International Reserves (GIR) to smoothen the fluctuations.
I say the same thing to those who worry about the reversal in our Balance-of-Payments (BOP) position, as we have gone from surplus to deficit. The deficit is less than 1% of GDP and it is largely due to the huge import requirements of our aggressive Build, Build, Build program.
Besides, our exports are picking up. Along with OFW and BPO remittances which contribute around $50-60 billion dollars annually, this will offset further increases in imports.
Lastly, foreign direct investment (FDI) inflows will continue to mitigate the current account deficit.
For many decades, the Philippines had seen wild swings of boom’s and bust’s brought forth by various crises, whether political or economic in nature. However, what’s striking is that since 2010, the Philippine economy has grown at a rapid and sustained pace above 6%. This growth momentum was sustained last year as full-year growth reached 6.7%. We remain one of the fastest growing economies in Asia, coming after China with 6.9% and Vietnam with 6.8%.
More importantly, we can say that Philippine growth is now more diversified and sustainable. Economic expansion is increasingly being driven by investments on the demand side and industry on the supply side. One way this can be seen is with the performance of the economy in post-election years. As you know, election-related spending boosts economic activity. The black lines on the graph mark the past three post-election years in the Philippines, namely 2005, 2011, and 2017.
As you can see, remarkable dips were recorded in previous years. Growth decelerated from 6.7% in 2004, an election year, to 4.7% in 2005. Likewise, growth skyrocketed to 7.6% in 2010, another election year, before falling back to 3.7% in 2011.
For the Duterte Administration, this isn’t quite applicable. GDP growth was a robust 6.9% in 2016, an election year, but was sustained the year after with 6.7% GDP growth – the difference being a mere 0.2 percentage points. That we were able to sustain our growth trajectory is a testament to the administration’s competence in implementing policies anchored on sound macroeconomic assumptions.
Given the broad picture, the question now becomes: what is the government doing to sustain or even improve the said growth trajectory?
In measurable terms, here are our development objectives:
- Grow 7% to 8% in the medium-term, pushing the Philippine economy to upper-middle income status by 2022;
(2) Reduce poverty from 21.6% in 2015, to 14% in 2022.
These are lofty goals, but we intend to fulfill them by pursuing a strategic fiscal policy.
Expansionary Fiscal Policy
First, we have increased the planned deficit from 2 to 3 percent of GDP. We plan to sustain this level until 2022 to finance our spending priorities. This implies a deficit target of P482 billion in 2017 rising to P768 billion in 2022.
Our borrowings will have an 80-20 mix, in favor of domestic borrowing. This financing mix is designed to minimize our exposure to foreign exchange fluctuations and enable us to better manage our debts.
Let me assure you that despite the deficit trajectory, our budget strategy is sound, appropriate and sustainable. Our debt-to-GDP ratio is expected to progressively decline from 42% in 2017 to 37.9% in 2022. This is because we expect GDP growth to outpace the rise in debt accumulation. With low and falling debt profile, we earn the envy of most developed and developing countries in the world facing much higher debt-to-GDP ratios.
To complement our borrowings, the government is also in the process of reforming the tax system. We want to make the tax system simpler, fairer, and more efficient. Another objective of Tax Reform is to raise tax effort, defined as taxes as percent of GDP. We intend to increase it from 16% in 2018 to 17% in 2022. We plan to do this through new tax policy and tax administration reforms.
Package 1 of the Tax Reform for Acceleration and Inclusion (TRAIN) is projected to deliver P1 trillion in revenues from 2018 to 2022. Package 1A of TRAIN has already been passed by Congress last December 2017. Its main features include: lowering personal income tax rates, expanding the Value-Added Tax base, increasing excise taxes on petroleum products and automobiles, and introducing the tax on sugar-sweetened beverages.
The combined effect of the higher deficit ceiling and Tax Reform is summarized in this chart.
The higher deficit will raise additional resources amounting to about P176 billion in 2018 up to P258 billion in 2022. Meanwhile, Package 1 of TRAIN will deliver revenues reaching P130 billion in 2018. Once all the revenue-enhancing measures have kicked in, additional revenues will reach about P220 billion.
The combined effect of the two measures will generate fiscal space of about P305 billion in 2018 up to P478 billion in 2022.
The earmarking provisions of TRAIN will ensure that it will finance our development priorities. 70% of incremental revenues will go to infrastructure while 30% will go to social services. This is the macro perspective on TRAIN – an important revenue-raising tool for a more sustainable medium-term fiscal strategy.
Spending Priority: Infrastructure
Perhaps our biggest constraint to fully realizing economic prosperity is the country’s crumbling infrastructure. Since 2009, the Philippines has ranked last in overall infrastructure when compared to its ASEAN-5 peers. According to the most recent JICA study, the opportunity cost of traffic congestion in Manila is estimated at 3.5 billion pesos.
The poor infrastructure in the Philippines can be explained by the historical underinvestment in infrastructure. The Philippines has consistently fallen short of the suggested threshold for developing countries of 5 percent of GDP for infrastructure spending.
From 1983 until 2014, infrastructure and other capital spending amounted to less than 3 percent of GDP. It was only by 2015 that infrastructure spending went above 3% at 4.3% of GDP, still not passing the 5% threshold. For a developing country, this is completely unacceptable.
We intend to change this dismal state of affairs and usher in a new golden age of infrastructure with our flagship ‘Build, Build, Build’ program.
Last year in FY 2017, we have allocated P858.1 billion, or 5.4 percent of GDP, for infrastructure development. Now, for FY 2018, infrastructure spending is pegged at P1.06 trillion. This is equivalent to 6.1% of GDP and is higher by 24.5% compared to the 2017 budget. This annual infrastructure spending will be ramped up, reaching as much as 7.3 percent of GDP in 2022.
This allows for huge increases in the budget of the two major infrastructure agencies. The budget of the Department of Public Works and highways grew by 40.3% from PhP 454.7 Billion in 2017 to PhP 637.9 Billion in 2018. Meanwhile, the budget of the Department of Transportation increased by 24.4%, from PhP 53.3 Billion in 2017 to Php 66.3 Billion in 2018.
These hefty allocations for infrastructure are proof that we mean what we say, that we are serious in achieving the promise of the President to bring growth and development throughout the whole country.
We have 75 big-ticket projects under ‘Build, Build, Build’: 31 roads and bridges, 12 rail and urban transport, six air transport, four water transport, four flood management projects, 11 water supply and irrigation, four power projects, and three other public infrastructure projects.
For 2018 alone, we are rolling out 34 out of 75 major projects under the “Build Build Build” program. We already broke ground on 15 infrastructure projects last year.
Three of our major infrastructure projects lined up for 2018 are the Metro Manila Subway Project (MMSP), the Clark International Airport Expansion Project, and the MIndanao Railway Project.
We are fast-tracking each project’s progress. We are committed to ensure that all these investments in infrastructure would translate to a safer, efficient, and more comfortable commute for the benefit of the riding public.
Spending Priority: Human Capital Development
Aside from infrastructure, we will also spend heavily on human capital development.
The challenge is how to develop our young population into an agile and competent workforce. We have a young population whose median age is about 23 years old. In an aging world, we recognize that this can be an asset or a liability.
True to our commitment in transforming the lives of the Filipino people, we will continue to invest in human capital development through our banner social programs.
This is why the Social Services sector (education, health care, social protection, among other things) continues to get the lion’s share in the FY 2018 National Budget with P1.42 trillion, a 38% share in the overall budget.
Some of the major programs that we are currently funding include the Conditional Cash Transfer Program, the National Health Insurance Program, the universal access to tertiary education, and the full implementation of the K-12 Program.
The government will sustain this level of support for education, health, and social protection. In fact, the share of social sector expenditures to GDP is planned to rise from 8.5% of GDP in 2017 to 9.2% of GDP by 2022.
Public spending is now one of the strongest drivers of growth in the Philippines. The country’s national budget has grown exponentially in the past 10 years. In 2008, the National Budget stood at PhP 1.3 Trillion. In 2016, the budget was at PhP 3.0 Trillion. This year, FY 2018, the national budget stands at PhP 3.8 Trillion. Coming in, there have been concerns that implementing agencies may not have the “absorptive capacity” to utilize their budget allocations. Our 2017 figures show otherwise.
In terms of budget utilization, infrastructure and other capital outlays increased by 15.4 percent year-on-year in 2017. In fact, actual disbursements for infrastructure exceeded the program by P19.4 billion or 3.5 percent. In total, infrastructure spending in 2017 reached P569 billion.
In general, actual spending almost mirrored the program with underspending being reduced to 3%. Here, we define underspending as the difference between programmed spending and actual spending. If we net out interest payments, underspending is further trimmed to 2%. This is a significant achievement given that underspending has plagued the bureaucracy in the past.
This also means that the expansionary fiscal policy is being put to good use because the funds are actually being spent.
In the past, the appropriations in the National Budget had a validity period of two years. This led the laxity on the part of bureaucrats as they bided their time knowing they had two years to use their budget. We did away with that starting with the 2017 National Budget. Evidently, it worked. Government spending quickened.
We plan to effectively put an end to underspending through the passage of a Budget Reform Bill. We plan to institutionalize our gains from past reforms by comprehensively legislating the budget process. By 2019, we will be transitioning to an annual cash-based budgeting regime. An annual cash-based budget will limit the time of delivery and payment for goods and services appropriated in the budget to just one fiscal year, with an extended payment period of three months.
Agencies will then be required to demand actual delivery of goods and services for their funds to be considered “spent”. This is a major leap forward compared to the prevailing system where agencies only have to contract out projects never mind that delivery of goods and services have not yet occurred.
Looking ahead, we are very optimistic for our country’s growth prospects. Others share in this optimism as well. With sound macroeconomic fundamentals, improved government spending, the tax reform initiative, we have garnered the recognition of international credit rating agencies. In fact, Fitch Ratings upgraded the credit score of the Philippines from BBB- to BBB last December 2017.
Soon, we will all get a glimpse of what a modern Philippines would look like – first-world infrastructure; better trained and flexible labor force; more decent jobs and higher wages; open, effective and accountable governance; an economy that is one of the fastest growing in the fastest growing region in the world.
Realistically, the road from the present to our vision will not be a walk in the park. Things may get worse, before they become better, and we cannot do it alone. So please join us in this difficult yet surely rewarding journey for a better, safer, fairer, richer and more beautiful Philippines.
Thank you and mabuhay!
February 27, 2018 (Day 1) |
Venue: Great Eastern Hotel, Quezon City
Secretary Benjamin E. Diokno
PH-OGP and PGC Chair, Department of Budget and Management
To NEDA Secretary Ernesto Pernia, PCOO Secretary Martin Andanar, PLLO Secretary Adelino Sitoy, CHED Chairperson Prospero De Vera, DILG OIC Eduardo Año, Mr. Jeffrey Lehrer, Director of the Office of Economic Development and Governance of USAID Philippines, Mayor Herbert Bautista;
Fellow workers in government, members of civil society organizations, participants from various business groups, to our international development partners, the media, and the academe;
Magandang umaga po sa inyong lahat.
I am pleased to welcome you to the first cluster of our Luzon leg of the Open Government and Participatory Governance Regional Dialogues. This is the fourth of a series of our townhalls and serious conversations with citizens on key priority programs of government. In recent weeks, we have had very productive discussions in the Cities of Bacolod, General Santos, and Zamboanga. I hope that this cluster’s dialogue will be as productive as the previous ones.
Let me begin by sharing some good news: the Philippines is making waves in the international scene for openness in governance. We are now number one in Asia, and number 19 in the world in terms of Budget Transparency.
I am happy to share with you the results of the Open Budget Survey 2017, a global assessment of budget transparency based on the amount and timeliness of budget information that governments make available to the public. For the 2017 round, 115 countries were evaluated, and based on the survey results, the Philippines was assessed to be the MOST fiscally transparent country in Asia, followed by Indonesia, Jordan, Japan, and South Korea. The Global Average is 42. The Philippines’ score is 67.
We are very proud of this achievement. In surpassing our Asian neighbors, we have further cemented our position as a global leader in Open Governance.
Furthermore, I am also proud to share that in the 2017 FOI Annual Awards, the Department of Budget and Management (DBM) was awarded as the sole FOI Champion Department for its outstanding commitment in ensuring transparency in public service.
In line with the administration’s commitment to FOI principles of transparency and accountability, the DBM is committed to the Philippine Open Government Partnership (PH-OGP), which is now implementing its 4th National Action Plan (2017-2019). One of the objectives included in this Action Plan is the passage of legislation on access to information, with the FOI as its benchmark program.
With his promise of real change, the Filipino people elected the country’s first Mindanaoan President—Rodrigo Roa Duterte. For the first time in a long time, Filipinos have voted for someone from the periphery to become the 16thPresident of our Republic last May 2016.
Coming from Mindanao and from his decades-long local government experience, the President knows what it is like to be set aside, to call for help only to be left unanswered—he knows what it is like to get left behind.
So now, we have a strong President who vows to ensure that the promise of real change will be felt by all Filipinos all over the world. To make this happen, he knows that working with our citizens is an imperative. Given the sheer extent of corruption and red tape in the bureaucracy, we know that changing the way government works will not be possible without the effective mobilization of civil society and sustained demand from the very citizens we are accountable to.
And so, in May 2017, President Duterte signed Executive Order No. 24 that reorganized the Cabinet Cluster System and created the Participatory Governance Cluster of the Cabinet or PGC. He also created the Office of Participatory Governance under the Office of the Cabinet Secretary through EO. No. 9.
This is an administration that truly recognizes the value of citizen engagement in governance. Moving forward, we will continue to strengthen our international commitment to making government more transparent, accountable and participatory through the Open Government Partnership or the OGP platform.
Through various citizen engagement programs, we are making sure that governance is not limited to government alone. We are opening up government by providing citizens with a seat at the policy table, and giving them a legitimate voice and vote in what the government does and plans to do in the years to come.
Today is yet another milestone in the way that we practice open and participatory governance. With the joint effort of national and local government, civil society organizations, business groups, and with the support of USAID, our main development partner, we have organized another leg for this series of Dialogues.
We have set out to present the various participatory governance initiatives of the Duterte Administration and to encourage more citizens to help us in the implementation and monitoring of these programs.
We also wish to consult various stakeholders on the proposed new initiatives to be included in the Participatory Governance Cluster Roadmap 2017-2022. We aim to develop a Roadmap that highlights the inclusion of sectoral policies and program goals that will directly impact the lives of the Filipinos at the grassroots. We believe that the impact of any government undertaking will be better felt by citizens if we also broaden the focus of participatory governance towards access to and delivery of basic public services in the most effective and least bureaucratic way.
There is also a need to engage key actors beyond the Central government and toward subnational government. Later, OIC Año and his colleagues in the DILG will set the tone for our discussion on how we can effectively localize open and participatory governance. We shall discuss our plans to improve local governance and feature selected best practices on open government that are being spearheaded by some of our most progressive local chief executives.
Later in the afternoon, we will have a Talakayan Session on Open Government Practices with featured Local Chief Executive Towards a Sub-National OGP Plan. A Subnational Plan can go a long way as a means of advocating, building capacities, and securing commitments on open government at the local level.
As part of our outreach efforts to promote fiscal openness in the bureaucracy, we will also be presenting to you the National Budget for FY 2018 and the Budget Reform Bill .
On another note, officials from the Department of Finance, and key business leaders are also joining us to discuss the Comprehensive Tax Reform Program, which I strongly support. Instituting a progressive tax regime, along with more effective tax administration, is of utmost priority for the Administration. We have successfully passed package 1 of the Tax Reform for Acceleration and Inclusion (TRAIN), signed into law last December 19, 2017. , we will be consulting with you on the second package of tax reform measures.
The next two days will be packed with interesting sessions and exchanges, and so I would also like to take this opportunity to ask for your active participation. Through this forum, we hope you can help us set the direction and build the narrative of participatory governance in the Philippines. Let your voices be heard. Be at the frontlines of public sector reform work. Be part of the change you want to see in our country.
The Duterte administration is serious in its commitment to expand citizen engagement work. We are looking forward to having deeper conversations and reflections with you on this through more of the sessions slated in the next two days. Various sectors are represented in this hall—from national and local government, to civil society, academe, public sector unions, business groups, and the media. Having said this, I urge you to network and get to know each other better. For many of us who are not new to this kind of work, let’s continue engage constructively with one another.
Continue mobilizing. Continue engaging the government and pushing it to change. Let’s keep the pressure on. The challenge for us is monumental because we are being asked to do things that we’ve never done before--to go beyond business as usual. But together, we can be a strong force. With our shared goals and our heart for public service, let us come together and push for real and genuine change in our country.
Thank you very much and may we all have a fruitful and productive dialogue.
22 February 2018 | 12:20 pm – 12:35 pm | Caruso Ristorante Italiano
To the Italian Chamber of Commerce of the Philippines, European Union Ambassador to the Philippines Mr. Franz Jessen, colleagues in the government, ladies and gentlemen: good afternoon.
First of all, we consider the private sector as a crucial partner in achieving our national goals. Hence, I welcome this opportunity to shed more light on the Administration’s Tax Reform Program.
In the spirit of openness, we want the private sector and the general public to understand the why’s and how’s of tax reform – the rationale for TRAIN (or the Tax Reform for Acceleration and Inclusion) and how its provisions will translate to growth with equity.
So, for the next fifteen minutes allow me to explain how TRAIN fits in the development agenda of this administration.
TRAIN and the Government’s Development Agenda
Even before we were sworn into office, we outlined very ambitious goals for the country. We want to push the Philippine economy into upper-middle income status by 2022. This implies having per capita income of at least $4,000. It also means achieving economic growth of 7% to 8% annually in the medium-term.
But GDP growth does not really say much about the general welfare. This is why we also set a goal of reducing poverty – from 21.6% in 2015 to 14% by the time we step down from office.
This twin goals are clearly articulated in the Philippine Development Plan (PDP 2017 – 2022). We are committed to deliver on these promises and hold ourselves accountable for the results.
Strong, sustainable growth with equity. How do we plan to achieve such lofty goal? For me the strategy is straightforward. Peace and order is a precondition to growth. We cannot pursue growth and development if there are shootings in the streets.
Then we have two major drivers of growth: first, the planned upgrading of public infrastructure, and second, the investment in human capital development.
The need to upgrade public infrastructure is a no-brainer. As a country, the Philippines has underinvested in public infrastructure, spending a measly 2.6% of GDP during the last half century.
The signs of this neglect are too stark to miss: massive traffic congestion, crumbling roads and bridges, unreliable and rickety Metro rail system.
Poor infrastructure has hampered the country’s economic competitiveness. The Philippines consistently ranks the worst in overall infrastructure among the ASEAN-5 countries in the World Economic Forum (WEF) Competitiveness Rankings. Business owners know too well that poor mobility drives up the cost of doing business. This drives away many investors and dampens economic growth.
Next is the need for social services. In an aging world, our most important asset is our young population whose median age is 23 years. We need to invest in our youth who will be the future drivers of growth. This means we need to take care of their health, give them access to the best education public money can buy, provide for their nutritional needs, among other interventions.
Economic Implications of TRAIN
In response to the need to upgrade the country’s public infrastructure, we have embarked on an expansionary fiscal policy. We will spend P8 to P9 trillion (or $160 to $180 billion) for public infrastructure from 2017 to 2022. The infrastructure budget will rise from 5.4% of GDP in 2017 up to 7.3% of GDP in 2022.
In like manner, investment in social services will also steadily increase to 40% of the national budget or 9.2% of GDP in 2022.
To finance such expansionary fiscal strategy, the government has adopted a two-pronged approach. First, we have decided to expand the deficit ceiling from 2% to 3% of GDP. Second, we intend to increase revenue effort, defined as total revenues as percent of GDP, by reforming the tax system and improving tax administration.
TRAIN is an essential tool in our expansionary fiscal strategy. It will not only generate additional resources for priority programs and projects but also make our fiscal program more sustainable.
In 2018, the estimated revenue yield of Package 1A and 1B is about P130 billion. But once all the revenue-enhancing measures have kicked in, the additional revenue intake will steadily rise to as much as P220 billion annually. In total, TRAIN will generate close to P1 trillion in revenues from 2018 to 2022.
Package 1A, which was passed by Congress last year, has the following salient provisions: lower personal income tax rates, broader VAT base, increased excise taxes on petroleum products and automobiles, and the introduction of taxes to sugar-sweetened beverages.
Meanwhile, Package 1B is projected to be passed in the first half of 2018. It contains provisions for general tax amnesty, estate tax amnesty, adjustments to the motor vehicle users charge, and amendments to the bank-secrecy law. Congress has committed to prioritize Package 1B to complete the first tax reform package.
You see, the full effects of TRAIN will only be appreciated in the medium to long-term. Perhaps many are complaining of the additional excise taxes with TRAIN. But we’re sure that such criticisms will die down once they see the impressive infrastructures built and the social services programs implemented.
These are not mere promises because TRAIN includes earmarking provisions. 70% of TRAIN revenues will be earmarked for the “Build Build Build” program while the balance will be allotted for social services.
This doesn’t mean, however, that TRAIN will not have an immediate impact. Let us not forget that as a result of the TRAIN, the Philippine tax system will be simpler, fairer, and more efficient. The lower personal income taxes will mean higher consumer spending and private investments. These effects are immediate.
TRAIN provides much-needed tax relief for 99% of income tax filers. Remember that personal income tax rates were last adjusted in 1997. These rates don’t reflect anymore the prevailing economic conditions. Inflation has pushed income earners to higher income tax brackets, even though their purchasing power has not increased accordingly. This phenomenon is called “bracket creep”.
The TRAIN will improve immensely the progressivity of the tax system. The tax liability of 99% of Filipino tax filers will be lower as the highest marginal rate of 32% is reduced to 25%. At the same time, the first P250,000 and below of personal income are now tax-exempt. As a result, this will put more money in the pockets of Filipino workers, money which can use to consume, save or invest.
On the other hand, the top tax rate for those earning more than P8 million – effectively P11 million -- has been increased to 35%, up from 32%. Without doubt, the Philippine income tax system has become more progressive and fair as a result of TRAIN.
The revenue loss owing to the lower tax rates for the personal income tax is huge. It needs to be recouped. And it will be recouped with the broadening of the VAT base and higher excise taxes on petroleum products and vehicles, cigarettes, and sugar-sweetened beverages (or SSBs)
Mitigating Measures and Inflation Outlook With TRAIN
The most controversial aspect of TRAIN is the adjustment in excise taxes for petroleum products and the taxes on sugar-sweetened beverages (SSBs). For the petroleum products, the last time the taxes were reset was in 1997.
For the sugar-sweetened beverages, there is a compelling health argument aside from a revenue argument in imposing the “sugar taxes”.
Admittedly, some households will be worse off as a result of TRAIN. But in order to compensate for the inflationary impact of TRAIN, we have set aside P200 per month per household to the poorest 50% of households. This means that some 10 million households will benefit from this mitigating measure.
This unconditional cash grant is not a promise. It is a fact. Some P24.5 billion for the unconditional cash grant has been included in the 2018 Budget.
But that’s not all. The unconditional cash transfers will be increased to P300 per month in 2019 and 2020. We estimate that the cash grants should be more than enough to compensate for the temporary price increases with TRAIN.
Objectively, we see TRAIN as anti-inflationary in the medium to long term. It will reduce transport costs of both goods and services with the upgraded infrastructure.
In the short term, we are aggressively pushing for the liberalization of the rice sector. If we succeed, the price of rice will fall. The inflationary impact of the decline in the price of rice will be roughly equal to the short-term inflationary impact of TRAIN.
Overall, the inflation outlook remains to be manageable. We have retained our inflation target of 2% to 4% for the years in the next 5 years, which already takes into account TRAIN.
Lastly, as a Professor of Economics, let give you a brief lecture on how to view TRAIN from the perspective of an economist. The appropriate way to look at the TRAIN is its net incidence, which should answer the question: who bears the tax burden and who benefits from higher government spending?
The reality is that it is not as if the government will collect the taxes and then lock them up in vault of the Treasury. As I have said before, the revenues generated by the TRAIN will be used to finance the “Build Build Build” and our social services programs. These will evidently benefit the poor the most. After all, it’s the poor who will benefit the most from an improved public transport system. It’s the poor who send their children to public schools and it’s the poor who uses the services and facilities of public hospitals.
In effect, TRAIN takes into consideration the immediate, the medium, and the long-run effects of the law. Admittedly, it is not a perfect law, but on balance it is a big plus for the economy.
The passage of Package 1 of TRAIN signals the Duterte Administration’s commitment in improving the economic conditions of the country and the general welfare of its people. It is not only a display of sound economic policy-making but also of President Duterte’s political will.
In the months to come, the Department of Finance (DOF) will propose the other tax reform packages. These will complete our vision a simpler, fairer, and more efficient tax system.
Thank you and mabuhay!
To Vice President for Social Development, Atty. Jaime Hofilena, thank you for inviting me to give this talk;
To the students, faculty and other members of the Ateneo community, good afternoon;
Today I have the pleasure of discussing with you how the budget process works towards achieving the Sustainable Development Goals in our country.
The Sustainable Development Goals were first and foremost factored into the crafting of the Philippines’ current medium-term development plan, the Philippine Development Plan (PDP) 2017–2022.
The main instrument for mainstreaming the SDGs into these PDP are its results matrices, which contains the statement of objectives and corresponding indicators for various levels of results (goals, outcomes) to be achieved under the plan.
The National Economic and Development Authority (NEDA) issued planning guidelines for the formulation of the PDP, which required government agencies to align their targets in the results matrix of the medium-term plan with the long-term vision of the Philippines and the 2030 Agenda.
In fact, NEDA did a mapping of the PDP indicators against SDG indicators. The mapping showed that over half of SDG Tier 1 indicators, meaning indicators routinely monitored by the government, under several goals – SDG 1 (poverty), SDG 2 (hunger, food security), SDG 3 (health), SDG 4 (education), SDG 7 (energy access), SDG 8 (growth and employment), SDG 9 (infrastructure) and SDG 15 (environmental protection) were included in, or fully consistent with, the PDP indicators.
The Philippine Development Plan is clear, comprehensive, and evidence-based. But how do we make sure our plans are realized? How do we ensure that we deliver on our administration’s promises and our international commitments such as the Sustainable Development Goals? With the budget.
The budget is the primary instrument for the implementation of the government's policy. It sets the direction and pace of economic growth and development.
It is important, therefore, that the budget is anchored on sound macroeconomic assumptions and a carefully-crafted fiscal program.
Currently, we are pursuing an expansionary fiscal policy that will raise the deficit from 2 to 3 percent of the GDP in the medium term. This new deficit target will allow us to increase spending on infrastructure, rural development, and social services, so we can create jobs and address the inequality prevailing among the different regions of the country. This entails deficit targets of PhP 523 billion in 2018 to PhP 761 billion in 2022.
We will adopt an 80-20 borrowing mix in favor of local borrowings to minimize our exposure to foreign exchange fluctuations and enable us to better manage our debts.
This increase in deficit, I assure you, is no cause for alarm as the economy shows no sign of slowing down. The debt-to-GDP ratio is expected to decline progressively from 42.1% in 2017 to 37.9% in 2022. Simply put, this means that our economy will continue to outgrow its debt.
This means we are free to borrow and spend, if we spend the right way. For 2018, we have a 3.767 trillion budget to spend, our largest to date.
But how do we make sure we are spending the right way?
Since 2007, the Department of Budget and Management has adopted the Medium Term Expenditure Framework. The MTEF, as it is practiced in the Philippines, is a 3-year rolling budgeting approach that sets out government’s expenditure plans within an available resource ceiling.
It consists of two components: top-down resource allocation and priority setting through the medium term fiscal plan, the Philippine Development Plan, Public Investment Program, and other priority programs and plans and a bottom-up estimation of the medium-term costs of existing policies or programs/ activities/ and projects (PAPs) and new policies and programs aligned with government priorities.
In 2016, the DBM adopted the Two-Tier Budgeting Approach whereby cost estimates for continuing programmes (Tier 1) are separated from budget proposals for new programmes (Tier 2). The amount of expenditures for ongoing programmes (Tier 1) is deducted from revenues, which yields the “fiscal space” available for funding new or expanded programmes (Tier 2).
We use the MTEF as a strategic way of measuring the level of uncommitted funds available for new and expanded programs while giving predictability to agencies in the funding of approved and on-going programs.
For multi-year projects, cost estimates are done for Years 1, 2 and 3. The cost estimate for Year 1 enters the annual budget, while cost estimates for Years 2 and 3 become forward estimates in the MTEF.
After agencies submit their Tier 1 proposals, the DBM issues the Budget Priorities Framework, an annual update of the government’s priorities for new or expanded spending.
The MTEF affords predictability for ongoing programs while allowing the expansion of ongoing programs and inclusion of new ones.
Aside from cost estimates, agency budget proposals also contain target outputs and outcomes.
In 2000, the Department of Budget and Management (DBM) introduced the Organizational Performance Indicator Framework (OPIF) to ensure not just greater budget accountability but also that actual results are felt by our citizens.
OPIF is an approach to expenditure management that directs resources for major final outputs toward results and measures agency performance through key indicators.
Before the adoption of OPIF, agency budget requests were largely focused on the cost of activities, personnel, equipment, and other resources to conduct programs and projects (inputs and activities), rather than focusing on the results (outputs and outcomes) of agency performance and their impact on improving the quality of lives of people.
With the implementation of the OPIF, we crafted performance indicators for organizational outcomes. These were incorporated in the budget document, the General Appropriations Act (GAA), to link funding to results and to provide a framework for more informed resource allocation and management.
Outputs are also provided at the organizational level, classified as Major Final Outputs (MFOs), which are goods or services that an agency is mandated to deliver to its external clients.
The inclusion of performance information is further improved in the 2018 budget.
In the 2018 budget, we adopted a budget structure based on a program expenditure classification, or what we call PREXC. Whereas previous budgets would only identify outputs and outcomes up to the organizational level, the 2018 budget identifies outputs and outcomes down to the program level.
In view of the formulation of the Philippine Development Plan (PDP) for 2017 — 2022, the DBM recommended that indicators agreed in the PDP — Results Matrices and in the Sustainable Development Goals (SDGs) be used as bases for these indicators.
This is what the 2018 budget looks like now – we have the sector outcomes and organizational outcomes per department, and then the operations are outlined by program.
And in another volume, we have the program outcomes and performance indicators for each outcome.
Let me illustrate the linkage between the SDG targets and the PREXC-based budget. One of the health-related goals is the end of specific epidemics like AIDS and other tropical and communicable diseases.
You can see the targets annualized in the 2018 Budget for some of these communicable diseases on this slide. The performance targets being number of malaria-free provinces, number of filariasis-free provinces, treatment success for tuberculosis, among others.
Here, you see clearly how the SDGs are reflected on the legislated budget.
Aside from the annual incorporation of the SDGs in the Budget Priorities Framework, we are also mapping SDG indicators against budget performance indicators. With the introduction of the performance indicators at the program level, it is easier to see a one-to-one correspondence between the indicators. The 2018 budget will serve as a baseline for us to measure the scope and cost of our commitment to the 2030 agenda.
The reforms I have discussed thus far are mostly focused on budget preparation– particularly the form of the budget. But the capacity to coordinate and execute the budgets fully is still a challenge if we truly want to attain our SDG commitments. We hope to address these issues in budget execution through the passage of a budget reform bill.
We hope to institutionalize the gains we have made on past reforms, and thus, we are pushing to comprehensively legislate the mechanisms embedded in our budget process once and for all. This has not been done before.
With the passage of the Budget Reform Bill, only programs and projects that will be delivered for the year are likely to be included in the budget. This will strengthen the focus and accountability of government as program outputs become more clearly linked to their appropriated budget.
With this, we can focus on the monitoring and evaluation of non-financial outputs such as performance indicators and sector indicators.
Thank you for listening to the talk. I am excited to hear your questions.