racoma.com.phJ. Angelo Racoma on technology, economics, writing, problogging, and getting things done

A working paper by Kevin Fletcher of the International Monetary Fund (IMF)

… has reviewed some of the main possibilities for raising public sector revenue. It has argued that most of these proposals, such as increasing excises and the VAT, would raise revenue in a relatively efficient manner. In addition, most of these measures would be progressive, especially if part of the proceeds were used for well-targeted spending increases to strengthen social safety nets or if they allowed the government to avoid cuts in pro-poor spending. Moreover, given the magnitude of the Philippine’s fiscal problem, it is likely that virtually all of the main measures discussed (increasing excise, VAT, and electricity rates, and rationalizing tax incentives) will need to be adopted in some form, although the precise balance among them will depend on how policymakers weigh the various considerations discussed in this paper.

(emphases are mine -JABR)

I doubt if the measures mentioned in the paper, such as increasing Value Added Tax (VAT), excises, electricity rates, among others, would aid in increasing revenue collection in a “relatively efficient manner.” I would likewise doubt if the equity considerations would be met. I would also doubt if cuts in pro-poor spending would be avoided, and social safety nets strengthened. It all boils down to the mechanisms by which revenue collected is translated to services rendered.

In a nutshell, I could say that government simply cannot enhance its efficiency by reining in higher revenues. It should first consider seriously plugging leaks in the fiscal system and streamlining its operations. The bureaucracy is abound with corruption, and at this point still very much a bloated organization. Hence, increasing revenues without measures to clean up the system would mean that the extra money earned would most likely go into the wrong hands, or at least into wasteful activities. Add to this the crowding-out effect on investments in the private sector.

I believe that Government can also improve its finances by shifting from an obligation-based appropriation system to a cash/resource-based one. In the current oblig-based system, Government budgets by appropriating based on expected obligations, and not on resources currently on hand. It’s very much akin to budgeting to buy a car for $20,000 this year when you know that you will only earn $10,000. Hence, you would have to borrow to finance the balance. With this kind of system, the spectre of a large budget deficit always looms above our heads every year. It may be good to note that there are only two countries in the world using an oblig-based appropriation system: The Philippines, and the United States of America. An excerpt from a Glossary provided by the US Treasury:

obligation-based budget:

A budget that includes obligation-based appropriations. Such appropriations give rights to enter commitments with third parties and make cash payments according to these commitments, without a predetermined time limit. Such appropriations have their own life cycle and are not limited to one year.

In the end, I believe that it would take an insurmountable amount of political will for Government to finally minimize, if not entirely eradicate, the kinks in the system such as corruption, inefficiency, and ineffectiveness (and this, for many, is an impossible feat). The passing of new revenue measures or the conduct of technical studies are only partial solutions to the problem. The equation can only be balanced by a collective undertaking of all Filipinos to finally rid ourselves of the passive and selfish mentalities that seem to have been ingrained in our culture since way back.

It’s an exasperatingly difficult task. Somehow I’m afraid there’s only so much one can do to alleviate the situation we’re all in. I tried to do my part in my two years, 11 months and three weeks in the public sector–making history in the sidelines. Perhaps someday I will make another attempt. In the meantime, I will try my luck on the other side of the coin.

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