Philippines in Fiscal Crisis

I believe that the Philippines is in a crisis but it is not yet a fiscal crisis. By definition, fiscal crisis is a condition in which government can no longer manage its debts due to a huge budget deficit, an imbalance between revenues and expenditures. The budget deficit reached P199.9 billion in 2003. It stood at P80.1 billion as of June and was forecast to hit about P200 billion this year. However, the government can still pay for this huge amount and has in fact allocated almost a third of the proposed budget for 2005 for interests' payments of 270 billion pesos (Budget Secretary Emilia Boncodin, July 8, 2004). Thus, since we are still able to pay our debt we are not yet in a fiscal crisis.

Undeniably, the Philippines is beset by a drop in average incomes, high inflation, high unemployment and currency depreciation, evidences of a fiscal crisis. As of April 2004, the unemployment rate in the country stood at 13.7 % and the underemployment rate at 18.5%, the highest so far in the region. (http://www.inq7.net/brk/2004/jun/30/brkpol_17-1.htm). This is as simple as saying that we are having a crisis.

Economists suggested ways and means on preventing the Philippines in getting into the fiscal crisis. The 11 UP economists proposed new tax and austerity measures that will help the government save for the rainy days. However, I find their data insufficient. First of all, they should have elaborated that the tax collection system in the Philippines is very poor. Customs collections decline from 5.6% of GDP in the mid-1990s to 2.8% in 2002. (Afterthoughts: UP economic report: overdue, selective, not daring enough. Aug 31, 2004. By Bello, et al). Tax Elasticity or the response of tax collection to increases in income has gone down from 1.62% in 1996 to 0.37% in 2000. Which means that in 1996, a one percent increase in income led to a 1.62 percent increase in tax collections whereas in 2002, a 1% increase in income led to only a 0.37% increase in tax revenue. In short, tax collection now hardly increases or benefits from GDP growth (http://www.inq7.net/opi/2004/apr/03/opi_scmonsod-1.htm). With the implementation of the new taxes what is the assurance then that it can be collected? I bet the percentage of increase in the collection of the new taxes would even be immaterial compared to the increase in our budget deficit. Aside from this, I think taxpayers lost its confidence in the people running the government that they resort to tax evasion. The government has gone from bad to worst with rampant corruption issues. If the tax collection system can be strictly implemented, maybe the government does not need to impose another tax to raise the fund that we need to pay off our deficit. Second, the congressmen are businessmen themselves. Thus, I believe they will not pass bills that will hurt their business in some ways or the other. Take for example the sin taxes. The department of finance sought 30% increase in excise tax for tobacco and alcoholic