12-POINT FISCAL AGENDA

FOR THE NEXT ADMINISTRATION AND THE 15TH CONGRESSMarch 15, 2010

Freedom from Debt Coalitionwww.fdc.ph

A FISCAL CRISIS IN THE OFFING?

Jan-Oct Actual 2009 Q1-Q4

Program

Percent Growth

2009/20082008 2009

Surplus/(Deficit) -62.3 (266.1) -250 326.9Revenues 972.6 925.4 1,239.20 -4.8 Cash 925.1 881.4 1,183.90 -4.7 Non-Cash 47.4 44 55.3 -7.3Expenditures 1,034.90 1,191.50 1,489.20 15.1 Cash 987.5 1,147.50 1,433.90 16.2 Non-Cash 47.4 44 55.3 -7.3

FISCAL AGENDA (SUMMARY 1-7)

1. Strike out the Automatic Debt Servicing Provision or Section 26(B), Book VI of Executive Order 292 or the 1987 Revised Administrative Code.

2. Conduct an Official Debt Audit. 3. Repudiate blatantly illegitimate debt cases. 4. Rescind onerous contracts entered by the national

government.5. Repeal the outmoded Republic Act 4860 or the

Foreign Borrowings Act of 1966.6. Pass an Alternative Official Development Assistance

(ODA) Act.7. Regulating borrowings by the Local Government Units

(LGUs) by amending Sections 295 to 303, Book II, Title IV of Republic Act 7160 or the Local Government Code of the Philippines.

FISCAL AGENDA (SUMMARY 8-12)

8. Scrap the R-VAT law or Republic Act 9337 and explore passing a law rationalizing fiscal incentives and removing incentives for corporations.

9. Issue an Executive Order (EO) declaring moratorium on privatization of state assets pending a review of privatization policy.

10. Pass a law Automatically Appropriating Funds to Education pegged at 6% of the GNP as prescribed by the UNESCO.

11. Pass a law Automatically Appropriating Funds to Health in order to ensure that total health expenditure is pegged at no less than 5% of the GDP as the standard recommended by the WHO.

12. Pass a law Automatically Appropriating 5% of the General Appropriations Act (GAA) to housing and settlement projects.

ON DEBT PAYMENTS: STOPPING THE FISCAL HEMORRHAGE

Situation: For all post-EDSA governments, from 1986 to 2008, debt service for interest payments alone already averaged around 25.72% of the national government budget.

Not to mention payments for principal amortization excluded from the budget and automatically deducted from new borrowings

Illegitimate debts are being continually paid, like the Austrian Medical Waste Incinerator and SEMP2 “Textbook scam” projects

DBM Proposed Spending for 2010 (in billion pesos)

Foreign Debt Service 253.459 Education Spending 235.210

Foreign Interest Payments 119.582 Health Spending 48.344

Foreign Principal Amortization 133.877 Natural Resources 13.317

Domestic Debt Service 492.716 Agriculture 55.368

Domestic Interest Payments 221.230 Housing and Community

Development 100.989

Domestic Principal Amortization 271.486

Water Resources Development and Flood Control

14.602

Note: Breakdown of totals may not sum up due to rounding of digits.

ON DEBT PAYMENTS: STOPPING THE FISCAL HEMORRHAGE

1. Strike out the Automatic Debt Servicing Provision. Section 26(B), Book VI of Executive Order 292 or the 1987 Revised Administrative Code – Mandates automatic appropriations for interest payment

and principal amortization of government obligations

2. Conduct an Official Debt Audit. Pending the completion of such an audit, suspend payments on obligations challenged as illegitimate. The 13th House of Representatives passed House Joint

Resolution no. 1 calling for a Congressional Debt Audit at the height of the fiscal crisis, but this was shelved by the finance committee.

In the 14th Congress, the bill was re-filed as HJR no. 4.

ON DEBT PAYMENTS: STOPPING THE FISCAL HEMORRHAGE

3. Repudiate blatantly illegitimate debt cases.

This can start with the list of 13 cases of illegitimate debts the Senate and House of Representatives already identified in the Special Provisions on Interest Payments in the Bicameral Conference Report of House Bill 2454, the then proposed 2008 General Appropriations Bill.

4. Rescind onerous contracts entered by the national government

such as Independent Power Producers (IPP) contracts that continue to bleed our public coffers.

Situation: The power to unilaterally contract loans allows the presidency to raise as much money as (s)he can through borrowings.

Thus, the borrowing spree of post-EDSA governments continued after Marcos, peaking at Arroyo’s term. From 2001 to 2006, Mrs. Arroyo borrowed a total

of P2.83 trillion, exceeding the total P1.51 trillion combined borrowings of the Aquino, Ramos and Estrada administrations spanning fourteen years.

Moreover, the quality of these debts is also a cause of worry, especially with the recent noise on the anomalous $329 million NBN-ZTE deal

ON FINANCING:REMOVING THE DEBT STRAIGHTJACKET

ARROYO - STILL LARGEST BORROWED, LARGEST PAID

Aquino (86-92) Ramos (93-98) Estrada (99-00) Arroyo (01-07) -

20.0

40.0

60.0

80.0

100.0

120.0

140.0

59.6 52.7

64.7

126.9

55.9

23.9

85.4

118.3

Debt Service and Borrowings, in real (1985) prices,

divided by years of rule (in billion pesos)

Debt Service (real) divided by years of ruleBorrowings (real) divided by years of rule

(IN TRILLION PESOS, END-2008 USES US$1=47.40, END-SEPTEMBER 2009 USES US$1=47.60)

NG Outstandingend 2008 vs. end Sept. 2009

Php 4.221 T Php 4.338 T

Domestic (by instruments) Php 2.414 T Php 2.424 T

Treasury Bills 0.770 0.607

Treasury Bonds/Notes 1.628 1.807

Loans 0.016 0.009

Others 0 0

Foreign (by creditors) Php 1.806 T Php 1.914 T

Multilateral 0.278 0.316

Bilateral 0.477 0.472

Commercial 0.039 0.043

Foreign Denominated Securities 1.013 1.083

NG Contingent Liabilities 0.546 0.579

Domestic Debt 0.073 0.089

Foreign Debt 0.473 0.490

Source: Bureau of TreasurySDADNote: Break-down of totals may not add up due to rounding of digits

ON FINANCING:REMOVING THE DEBT STRAIGHTJACKET

5. Repeal the outmoded Republic Act 4860 or the Foreign Borrowings Act of 1966 and replacing it with a better foreign borrowings law which ends fiscal dictatorship by: a) regulating Presidential powers to incur

obligations, b) strengthening Congressional role in controlling the debt stock, c) increasing accountability and people’s participation in the process, d) updating debt cap figures, e) allowing for repudiation and cancellation of illegitimate debts, and f) mandating as a policy that foreign borrowings must not in any way stifle national development or impose supply or policy conditionalities.

6. Pass an Alternative Official Development Assistance (ODA) Act a) reduces, instead of increases, obligations arising

from ODAs, b) increases public participation, accountability and oversight measures, and c) mandates the participatory drafting of a National ODA Plan in order to strictly regulate the flow of ODA and other concessional loans.

7. Regulating borrowings by the Local Government Units (LGUs) by amending Sections 295 to 303, Book II, Title IV of Republic Act 7160 or the Local Government Code of the Philippines in order to ensure more stringent regulation by the

Development Budget Coordinating Committee and Congress and grassroots participation in the decision-making and implementation of financed projects.

ON FINANCING:REMOVING THE DEBT STRAIGHTJACKET

ON REVENUES: SHIFTING THE BURDEN TO THE ABLE

Situation: Despite having regressive taxation schemes such as R-VAT, and its reputation as “the biggest seller” of government assets among the post-Edsa I administrations, tripling Ramos’ P29.91 billion in 1994 with her P90.62 billion in 2007, revenue effort under the Arroyo administration remains poor.

The Arroyo administration’s average Revenue-to-GDP score, pegged at 15.51% from 2001 to 2008, is less than Corazon Aquino’s 15.53% (1986-1991), Fidel Ramos’ 18.8% (1992-1997), and Joseph Estrada’s 16.3% (1998-2000).

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Aquino Ramos Estrada Arroyo

13.00%

14.00%

15.00%

16.00%

17.00%

18.00%

19.00%

20.00%

0.155124617973024

0.163010474017019

0.188015650084852

15.53%

Philippine Revenue EffortAquino's AverageRamos' AverageEstrada's AverageArroyo's AverageRevenue Effort

Source: Bangko Sentral ng Pilipinas, National Statistical Coordination Board

ON REVENUES: SHIFTING THE BURDEN TO THE ABLE

8. Scrap the R-VAT law or Republic Act 9337 as a step towards shifting to a more progressive tax regime. The government shall explore passing a law

rationalizing fiscal incentives and removing tax incentives to corporations.

The government must also raise tariff rates at its levels before the entry to the WTO.

9. Issue an Executive Order (EO) declaring moratorium on privatization of state assets pending a review of the privatization policy. Draft a national plan on increasing capacity of

Government Owned and Controlled Corporations (GOCCs) to generate revenue and efficiently deliver services to the public.

ON SPENDING: PAYING GOVERNMENT’S SOCIAL DEBT

Situation: From 1986 to 1996 and 1999 to 2008, interest payment allocation exceeded education spending, despite the provision in the Philippine Constitution, Article XIV, Section 5.5, stating that education is supposed to receive the highest budgetary allocation.

Spending for social and economic services continue to deteriorate under the Arroyo administration, with the sectoral share of economic services and social services dropping from 24.2% to 20.6% and 32.2% to 29.8% respectively from Estrada to the first half of the Arroyo administration.

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Aquino Ramos Estrada

Arroyo

-

500

1,000

1,500

2,000

2,500 Suffer the Future

Debt per capita vs. Health, Education per

capita

Health per capita (deflated)

Education per capita (deflated)

Debt payment per capita (deflated)

ON SPENDING: PAYING GOVERNMENT’S SOCIAL DEBT

10. Pass a law Automatically Appropriating Funds to Education pegged at 6% of the GNP as prescribed for developing countries by the United Nations Educational, Scientific and Cultural Organization (UNESCO).

11. Pass a law Automatically Appropriating Funds to Health in order to ensure that total health expenditure is pegged at no less than 5% of the GDP as the standard recommended by the World Health Organization (WHO) for developing countries. In addition, government expenditure on health should not

be below well the level recommended by the Commission on Macroeconomics for Health (CMH) for low and medium-income countries, which is 1% of the GNP for health by 2007 and an additional 2% by 2015.

12. Pass a law Automatically Appropriating 5% of the General Appropriations Act (GAA) to mass housing and settlement projects for the poor.

Fiscal Dictatorship and Congress’ Undermined

Power of the Purse

The Reality behind the “Power of the Purse”

FISCAL DICTATORSHIP The 1987 Constitution accords the Congress

“the power of the purse” as a testament of the principle of checks and balances, a divergence from the Marcosian authoritarian power over the budget.

In practice, however, legal restrictions prevent the legislature from effectively exercising this power. Ironically, most of these restrictions are inherited

from a Marcosian statute – the Presidential Decree 1177 by Aquino’s Revised Administrative Code of 1987.

The integrity of our budget institution as it stands is rendered highly vulnerable to rent-seeking prospects for an overtly powerful president.

1. THE POWER OF IMPOUNDMENT

Contained in Section 38, Book VI of the 1987 Revised Administrative Code as derived from Section 43 of Presidential Decree 1177, the provision ensures that the President can refuse to allocate the money that had been appropriated by Congress.

While the General Appropriations Act included prohibitions of impoundment in the General Provisions, the executive can always impound because of the constitutional guarantee of this power.

The government wielded this power in order to “tame the deficit” and to reach fiscal balance, at the expense of its promised expenses.

2. THE POWER TO REALLOCATE “SAVINGS”

Contained in Section 39, Book VI of the 1987 Revised Administrative Code as derived from Sections 44 and 45 of Presidential Decree 1177, this empowers the President to channel savings to cover deficits of other items in the budget.

When the powers to impound and to reallocate savings are combined, it is tantamount to a power to realign appropriations itself.

The power also incentivizes artificial generation of savings which can be reallocated elsewhere. For example, FDC already reported that the Arroyo administration had been borrowing more than it should, and reporting the excess as savings.

3. THE POWER TO LINE-VETO Contained in Article VI, Section 27(2) of the

1987 Constitution, which is similar to Article VIII, Section 20(2) of the 1973 Philippine Constitution, this guarantees the power of the executive to veto specific items of the budget while retaining the others.

Since it is the executive which proposes the budget via the DBM, the executive can simply veto changes that had been made by Congress on the budget proposed by itself.

While Congress can override the presidential veto as stipulated in the Article VI, Section 27(1) of the 1987 Constitution, the onus of ensuring that the budget they appropriated remains legislated is shifted back to the Congress.

4. THE POWER TO VETO LEADING TO A REENACTED BUDGET

Contained in Article VI, Section 25(7) of the 1987 Constitution, which is similar to Article VIII, Section 16(6) of the 1973 Philippine Constitution, the provision shields the executive from exhaustion of funds should the Congress refuse to come up with the budget.

Reenacted budgets allow the government to save money. The 2005 budget’s reenactment allowed the Palace to save as much as P135 billion.

The Arroyo administration operated under three budget reenactments during its seven-year term – in years 2001, 2004, 2006.

5. THE POWER TO UNILATERALLY CONTRACT LOANS

Contained in Article VII, Section 20 of the 1987 Constitution, which is Article IX, Section 15 of the 1973 Philippine Constitution

Allows the presidency to raise as much money as (s)he can, using future revenue-generation capacity as collateral. Loans are simply a tax levied on future

generations, as they will be beholden to pay it later when the payments are due.

There is a requirement to submit a Congressional report, but submission of a report is neither a request for Congressional approval, nor even a semblance of consultation.

CONSEQUENCES OF AN “EXECUTIVE BUDGET” These provisions combine to create an

executive-biased budget which concentrates all fiscal powers in the hands of the president.

It directly impedes on the dictum of separation of powers and compromises checks and balances. Discretion lays the conditions for corruption. While corruption may not actually happen, the

suspicion alone that it can, withers away the confidence on the integrity of the budget process.

It will also be more difficult to orient institutional responses to legitimate social interests. Centralization limits forward and bottom-up transmission of what social needs are and how they can be addressed.

FISCAL DICTATORSHIP = AN UNDERMINED CONGRESS

Because of an executive budget, the Legislature’s constitutional power of the purse is gravely diminished.

A concentrated fiscal power contributes in making political parties weak.

The control of resources inevitably has impact to the development of political parties. Because an incumbent President can cause

the immediate release or delay of IRA, PDAF and other local funds.

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