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Commentary
May 3, 2016

Budget as a Tool for Development or for Political Patronage and Vindictiveness PART 1

PART 1 of 2

In the spirit of recording the contemporary experience and history of presidential leadership and governance, the University of the Philippines has conducted and continues to conduct the U.P. Public Lectures on the Philippine Presidency. The series of lectures is done towards the end of every presidency since the late President Corazon C. Aquino (1986-1992). This assessment has become a political institution and tradition.

A few weeks before he exits from Malacanang, Benigno S. Aquino III’s turn has come. As one of the professors invited to the lecture series to assess Mr. Aquino’s performance, below is my initial assessment of his fiscal performance.

The national budget is a tool for development. But as the saying goes: the test of the pudding is in the eating.

What President Aquino did and didn’t do, and their policy consequences, will define his budget performance.

MAJOR ACTS OF COMMISSION

  1. The Disbursement Acceleration Program (DAP).
  2. Serious underspending
  3. Neglect of agriculture
  4. Neglect of public infrastructure
  5. Failure to reduce poverty
  6. Failure to push fiscal autonomy as envisioned in the Local Government Code of 1991

1. The DAP is a monumental error in governance.

The Supreme Court ruled unanimously that the President, with the advise of his budget guru, usurped the congressional power of the purse. This is a P149-billion mistake, and its authors shouldn’t go unpunished.

The SC ruling on the DAP will go down in Philippine history as the real reform in government budgeting. It clarified and amplified existing budget rules and procedures as envisioned in the Constitution, and should guide future Presidents and legislators.

2. Large underspending means lost opportunities for potential beneficiaries of unimplemented or delayed projects.

The amount unspent (excluding interest payments) from appropriations authorized by Congress is an enormous P805 billion from 2011 to 2015, and rising. It was P76 billion in 2011, P56 billion in 2012, P130 billion in 2013, P267 billion in 2014 and P276 billion in 2015.

To be fair, Congress passed all the annual budgets of President Aquino on time, and he should be congratulated for it.  However, this means the blame for serious underspending is solely the president’s fault. Starkly, it also means that the early approval of the budget is a necessary but not sufficient condition for timely implementation.

Clearly, the epic underspending of the budget is not an act of fiscal prudence. Rather, it is a product of poor budget preparation and incompetence on the part of the President’s top men and women.

3. The Aquino III administration neglected agriculture.

A total of P260 billion was spent by the Department of Agriculture from 2011 to 2015. Yet agriculture continues to stagger; it was practically flat in 2015.

Agriculture grew by 2.6 percent in 2011, 2.7 percent in 2012, 1.1 percent in 2013, 1.6 percent in 2014, and a flattish 0.2 percent in 2015. Because of El Nino, and the poor government’s response to this more-or-less predictable weather pattern, agriculture is expected to decline by as much as 5 percent in 2016.

Among the three sectors of the economy – agriculture, industry and services – agriculture has the highest impact on the lives of the poor. About one-third of the labor force is employed in the sector, and more than half of the poor reside in rural, agricultural communities.

Given these, the conclusion that recent growth was not inclusive appears warranted.

4. As a result of past neglect and unfavorable economic conditions, infrastructure spending has been constrained before the Aquino III administration; yet, in an environment where interest rates are at rock-bottom interest rates and  public debt-to-GDP ratio is low, Aquino III administration invested the least in public infrastructure as percent of GDP.

Consequently, the state of public infrastructure is the poorest among ASEAN-5 economies. Yet, there is unanimity among experts that the state of public infrastructure is a binding constraint to growth.

Budget-As-A-Tool

5. The Aquino administration failed to alleviate poverty.

After a decade, from 2006 to 2015, poverty incidence remains unchanged at 26.3 percent. And because population has increased, there are more poor Filipinos now than before.

The Philippines is the only country among ASEAN-6 economies (ASEAN-5 + Vietnam) that failed its Millennium Development Goal (MDG) commitment to halve poverty by 2015. The others have met their MDG goal of halving poverty many years ago.

6. The Aquino administration is seriously undermining fiscal autonomy.

The BuB program is being heralded by the Aquino administration as real reform; in reality, it is a tool for political patronage, a way of capturing political support at the grassroots level.

The Aquino team promises to expand the BuB program down to the barangay level – a clear case of ‘bribing’ local authorities for political support rather than encouraging them to live within their means.

Local government units have sufficient resources to pursue their own dreams and aspirations. The Local Government Code of 1991 made sure that local governments have adequate grants and taxing powers.

Last year, provinces, cities, municipalities and barangays received a whooping P418 billion in the nature of an unconditional grant called Internal Revenue Allotment (IRA). This year, the IRA is a hefty P465 billion, and this level is expected to rise overtime for as long as taxes coming from domestic sources are rising.

The irony is that the two devolved functions to local governments–basic health care and social welfare–have been significantly taken over by the Central government through the National Health Insurance and the Conditional Cash Transfer Program. Moreover, practically all regional and district hospitals that were devolved to LGUs in 1991 have been recentralized.

With less expenditure responsibilities than before, coupled with huge IRA, why should local authorities continue to be given additional support by the Central government in the nature of BuB projects? Remember that the Central government has huge needs for funding nationwide and regional infrastructure projects.

The IRA and the grant of additional taxing powers for local government units are the legacy of Cory Aquino. However, local authorities are supposed to learn to govern frugally – to operate within a ‘hard budget constraint’. Instead, the Aquino III administration is teaching local authorities to be fiscally dependent on Imperial Manila.

Given the poor quality of the projects funded by BuB, its loose implementation, and lack of effective third-party monitoring mechanism (a strong monitoring mechanism, by its nature, is expensive) there is a strong likelihood that public funds allocated for BuB will just be misused or will go to waste.

As an aside, in the May 9th elections, voters should choose local candidates who can operate and manage their respective communities within a hard budget constraint, rather than those who will continue to ‘beg’ central administration officials for extra largesse in exchange for their support of administration candidates in future elections. Vote wisely!

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