SOLUTIONS TO FISCAL PROBLEMS

By: Dr. Rogelio V. Paglomutan

Part I (Two Parts Series)
The twin problems of large budget deficits (excess of expenditures over revenues) and huge debt
burden (debt servicing) are the urgent concern of the countrys policy makers. These problems can translate into
an economic crisis that will also worsen unemployment and the balance of payments, and threaten the countrys
political stability.
For the past five years, the national government posted budgetary deficits that exceeded 100 billion
pesos yearly. As a percentage of GDP, the deficit is way beyond the critical limit of 3.5% (-5.2 % and -4.6 % in
CY 2002 and CY 2003, respectively). For CY 2004, the budgetary deficit will hit 200 billion pesos, having
exceeded the monthly target in the election month in May. Consequently, the national government debt stock
has doubled, from 1.7 trillion pesos in CY 1999 to 3.6 trillion pesos in March 2004 (excluding contingent
obligations of about 750 billion pesos arising from guarantees given to GFIs and GOCCS). Interest payments
alone more than doubled from 106.3 billion pesos in CY 1999 to 226.4 billion pesos in CY 2003 (estimated at
271.5 billion pesos for CY 2004), accounting for about 30 percent of the national budget, and easing out
allocations for education, health and other vital social services. If these trends are not arrested, the local and
international market will lose confidence in the Philippine government and economy.
The positive note in the current national government debt structure is the lengthened maturity of
domestic debt (44 percent medium term and 27 percent long term) and foreign debt (10 percent medium term
and 90 percent long-term). We are better off than Argentina. But maybe not for long.
We need to address the revenue, expenditure and financing sides of the budget, including the
organization structure to remedy this crisis-in-the making.
First, some preconditions to fiscal solutions:
Everyone (earning individuals and corporate entities) should do his share as a good citizen
Political units (national and local) should institute implement reform measures and show political will in the
fight against graft.
The system should penalize tax cheaters and violators of austerity measures
Sound organizational structure for the fiscal sector and the bureaucracy designed to control spending
Macro political-economic stability.
The following measures will impact significantly on revenues, expenditures, financing, and organization, thus
arresting the fiscal problem and improving the situation in the medium term.
On the revenue side; we need to generate a big jump. Heres how:
Reduce fiscal incentives given to enterprises of all sizes by 50 %, particularly the income tax holidays
granted to enterprises registered under BOI, PEZA, Micro Business Enterprises Law, and those located in
special economic zones particularly in Subic and Clark;
Revisit the value-added tax (VAT) system, which has huge tax leakages (as argued in Congress by ex-Rep.
Enrique Garcia and Rep. Herminio Teves) arising from the overdeclaration of input tax used for subtracting
output tax. The VAT is theoretically sound but not practical due to anomalies in the claims for input taxes.
We should return to the simple sales tax system for industries with huge tax leakages.
Restore the income tax for overseas contract workers. Their families enjoy the benefits of public services,
particularly education, security, roads and other social services. The OCWs enjoyed these services before
and when they are in the country, and the government provides some services for them abroad. Fairness
requires that they pay taxes like the rest of us.
Tax on text messages. There are currently 5.5 million individuals paying income taxes to BIR as against the
30.4 million labor force participants, of which 25 million are SSS members and 1.4 million are GSIS
members. Moreover, about 50 per cent of the economy is considered underground or informal, whose
players pay no income taxes. This proposed tax measure will capture more taxpayers (about 23 million
cellphone users). This proposed tax is progressive since the higher income individuals have higher text

consumption levels. The taxes generated should fund priority programs in the educational sector in order to
be acceptable to the public;
Retain the existing income tax system for individuals and business enterprises. The proposed gross income
taxation (GIT) for businesses will lead to understatement of revenues and/or overstatement of costs of
goods sold. Moreover, the lag effects from adjusting to the new tax system will exacerbate the deficit
problem;
Sell the military camps in Metro Manila, particularly, one half of Camp Aguinaldo to fund AFP modernization,
and generate more business activities and taxes from the private sector;
Sell the Commonwealth property of the University of the Philippines in Diliman, since the UP administration
has failed to develop its excess land holdings;
The SEC and BIR should jointly design a scheme to monitor income tax payments of SEC-registered
enterprises due to the relatively low proportion of income tax paying SECregistered enterprises;
Securitize the national governments future receipts of its share in the Malampaya natural gas proceeds and
other oil findings/reserves to pay for NAPOCOR debts;
Confine the duty free shops in the airport terminals to reduce foregone customs duties;
Adjust airport terminal fees for foreign bound travelers;
Promote tourism, mining, fisheries and small enterprises to generate more jobs and incomes, and thus
generate higher income taxes.

Dr. Rogelio V. Paglomutan is associate professor of finance and economics at the College of Business and
Economics, De La Salle University and former deputy national treasurer, DENR Assistant Secretary and NEDA
Staff Economist

These article are contributed by the CBE Faculty in the column of Business Focus of Manila Bulletin
published August 9, 2004.