As of November 17, 2004

A TALE OF TWO CRISES: 1946 and 2004 By: Prof. Leonor Magtolis Briones Holder, Pres. Manuel Acuna Roxas Professorial Chair I. Revisiting the Past to Understand the Present Why a public professorial lecture on President Manuel Roxas? School children and ordinary citizens know him as the last president of the Commonwealth of the Philippines and the first president of the Republic. College students know about the debates surrounding his positions on issues of national sovereignty, Philippine-American relations and other political issues. Is Roxas relevant to the present fiscal crisis? Not very many Filipinos know that Roxas left enduring legacies in public administration and governance, economic planning, development finance and central banking, fiscal administration—taxes and other revenues, expenditures and borrowing— as well as accountability. Not many Filipinos know either that fifty-eight years ago, our country grappled with a terrible fiscal crisis in the aftermath of a war which was not of our making, but which devastated the country’s material and financial resources and infrastructure. Buildings were not the only edifices which were bombed and shattered; the economy was in ruins as well. Epidemics—cholera, dysentery, smallpox—swept the country and famine stalked the land. How Roxas managed the crisis of 1946 can provide insights as to how we can deal with the present fiscal crisis of 2004. After all, “ history that serves as a guide to the people in perceiving present reality is itself a liberating factor, for when the present is illumined by a comprehension of the past, it is that much easier for the people to grasp the direction of their development and identify the forces that impede real progress.” Renato Constantino in The Past Revisited, l975 Prof. Jose V. Abueva who conceptualized and inspired the Ating Pamana series assessing the administrations of Filipino presidents wrote that

“…On the part of the University of the Philippines as a community of scholars, we are committed to create and disseminate knowledge for its own sake, and knowledge useful for our people’s understanding and participation in problem-solving, nation-building, democratic governance, and national development. We want to help our people and leaders to have a social memory of our cumulative knowledge, experience and wisdom. To be a learning society. To strengthen our public institutions. And to enhance our sense of national community, our sense of history and a common destiny.” Jose V. Abueva , The Macapagal-Arroyo Presidency and Administration, 2004 The Fiscal Crisis of 2004 After several years of denial, no less than the President of the Philippines has finally admitted that the “we are in the middle of a fiscal crisis.” The consolidated public sector debt stands at P5.39 trillion as of 2003 (the latest data). Of this ,P4.063 trillion , which includes P708.5 billion in contingent liabilities , is accounted for by the national government According to the Department of Finance, the national debt stock as of the end of last year is already 92.4% of the GNP while the Consolidated Public Sector Debt is 161.3% of the GNP. Allocations for sectoral expenditures have been going down even as the debt service is rising steadily. For example expenditures for social service were allotted 33.2% of the budget in 1999 As of 2004, its share has gone down to 28.73% On the other hand, 18.3% of the 1999 budget was allocated for servicing of interest payments By 2004, it had ballooned to 31.4% of the total budget, making it the highest sectoral allocation.. For several years now, the annual deficit hovers at the P200 billion level. For 2005, the national government budget deficit is projected at P184.526 billion while the consolidated public sector deficit is estimated at P253.636 billion. The president’s admission of the fiscal crisis triggered loud calls for sacrifices and assorted advice on what to do about it. These have ranged from contribution of jewelry, cash donations, to revenue bills , abolition of the pork barrel and internal revenue allotments for local government units, reorganization of the government and even closure of Congress. Why revisit 1946?

Why is it important to revisit the fiscal crisis of 1946 and the efforts of President Manuel Roxas in order to help understand and possibly manage the crisis of 2004? First, the present fiscal crisis is not the very first one for the Republic. The birth of the Republic itself was attended by multiple crises, not the least of which was fiscal in nature. The country was engulfed with political, social, and economic threats, including problems of ethics and accountability. These problems still linger on, even after fifty years. Second, the solutions which Pres. Roxas crafted to solve the fiscal crisis might be instructive for the 2004 crisis. He introduced reforms in the areas of fiscal policy, revenue administration, expenditure and budget policy, made strong statements on the issue of borrowing, and improved accountability. Third, lessons can be drawn from the crisis of that time which can help the present government choose from the plethora of advice which have emerged since the President admitted its existence. After all, it has often been said that those who do not learn from history will be condemned to repeat it! II. The life and times of Manuel Roxas “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way…” from Charles Dickens, A Tale of Two Cities, 1859 Manuel Roxas led an extraordinarily fascinating public and personal life. As a child growing up in the Visayas, I am familiar with stories about the first Visayan president of the republic. I used to listen as my elders discussing his life and times. I remember the shock and terrible sense of loss which they felt when he died suddenly. For purposes of this paper, focus will be on his public life, particularly on public fiscal administration. Roxas’ career as a public servant spanned a total of 31 years from 1917 to 1948. He started from the lowest rung of the political ladder as councilor and climbed up to the presidency of the republic by 1946.

Roxas’ public life took place during a tumultuous period in Philippine history. He was born in 1892 and was six years old when the Philippines declared its independence from Spain. The brutal Philippine-American war ensued with the Philippines becoming a commonwealth under the United States. Thus, his public career was launched during the period of “tutelage” under the Americans. This was the time when the one-sided economic relations between the Philippines and the United States were firmly cemented, when political institutions and the “Philippine-style” democracy flourished, and when socio-cultural bonds were tightened. This period was the best of times for the country in that it finally freed itself from the yoke of Spanish domination, fought valiantly against the Americans, and later on against the Japanese. It was the best of times in that the Filipino people, having won their independence from the United States, finally had the opportunity to build an independent nation. But this time was the also the worst of times because the Philippines underwent three brutal wars –the war of independence against Spain, the Philippine-American war, and the war with the Japanese. These wars not only inflicted massive losses in life, public infrastructure and property but also weakened the bureaucracy, encouraged corruption, and made the Philippines vulnerable to political and economic pressure from the United States. It was the worst of times because the period of “tutelage” laid the basis for many of the economic, political, bureaucratic and social features of our country which until now remain and influence present-day policies and practices. Nonetheless, it was the best of times for the public career of Roxas. He went though the classic route aspired for by many ambitious politicians and won the highest public position within the gift of the Filipino people. Roxas, the Consummate Politician Roxas’ 31-year public career embodied the ideal combination of politics and administration. He occupied more important positions in the government than any other official of his time. He started as a politician joined the bureaucracy, then reentered politics again. Starting in 1917 as an “accidental” councilor of Capiz, he rapidly moved on to become the youngest governor of the province from 1919 to 1922. He gained national prominence and caught the eye of President Manuel Quezon when he was elected as national president of the Governors’ League.

Roxas was elected as Congressman in 1922 and for 12 consecutive years was Speaker of the House. In 1935, he became a member of the 1935 Constitutional Convention and was named one of the “Seven Wise Men” of the Convention. The other six wise men were (who were d other five?) After a stint in the bureaucracy as Secretary of Finance, he ran and won a seat in the Senate. After the war, he was elected as Senate President. He then founded the Liberal Party and proceeded to win the presidency of the country. As a politician, Roxas was admired for his brilliance in oratory. He was known to have personally written his speeches. III. The Roxas Legacy: Enduring Contributions to Public Administration and Governance The Roxas legacy in economic planning One of the least known and appreciated legacies of Roxas is in the field of economic planning. This is probably because it is common knowledge that his formal academic training was in law. Likewise, more is known about his brilliant political career than his record in administration and governance. Many times, this researcher wondered where and how Roxas the lawyer acquired his grasp of economics and finance. One of his biographers, E.B. Rodriguez, Director of the National Library in 1947, gives us the answer: preparedness— “As Secretary of Finance and Chairman of the National Economic Council, he put into effect the policy pursued by the Commonwealth Government, because of the impending war, for the Philippines to live a life of self-sufficiency….” “But it was his assiduous study of political economy which he began when he was with the OS-ROX Mission and which he never laid down during his entire public service, that prepared him for the Presidency of the Republic of the Philippines…. He studied seriously Economics, Business, Transportation And Communication; Finance—money, credit, exchange, cooperative finance, investment, speculation; Public Finance income and expenditure, the budget, revenue, taxation, customs, tariff, public credit, debts, loans and local finance.” E. B. Rodriguez, Roxas as a public man, 1947

Rodriguez further notes that “it would have been impossible for him to reach the Presidency…had he had to count on his legal talent alone, although he has been as bright a lawyer as any who have ever practiced in our local bar.”(source) In 1938, Roxas set aside his political career and accepted Quezon’s offer of the secretaryship of Finance. He then became the trusted adviser and right hand man of the president. Roxas headed several government corporations as well as the Tax Commission. His chairmanship of the National Economic Council can be considered as among his most important positions. Roxas is quoted as saying, “From now on, I shall devote all my time to economic problems. You can say that I am a lawyer who has turned economist….I think that we will have to visualize the Philippines ten or fifteen or twenty years from now …when we shall be…twenty-five, thirty or forty million people. We shall plan for the Philippines now …until it reaches that stage of development to provide for the welfare and happiness of the population, to give work to the people, to promote social services, justice, and to insure to every man and woman of this country not only social security but an opportunity to work, to toil, to enjoy, and possess the benefits of the blessings of enlightened modern civilization.(Villaluz, page 1). Free Trade and Economic Planning One of the earliest speeches of Roxas reveals his views on the country’s free trade relationship with the United States and emphasizes the need to plan for the time when the Philippines would be granted independence after the promised ten-year period. While sectors who benefited from free trade feared the coming of independence, Roxas saw it as a challenge to prepare for freedom from economic ties with the United States. Fears were rampant that the economy would collapse and the country would be conquered by another foreign power as soon as it gains independence from the United States. Roxas believed otherwise. In a landmark speech written both in Spanish and English, he stated that “Just as a patient may, by judicious living, proper regimen and sheer will power, extricate himself from the tightening grip of illness, so a nation, by statesmanship, discipline and will to survive, may free itself from dangers that threaten it to extinction.” (source) On the importance of economic planning, he continued, “What is there then to prevent the Philippines from planning its economic life and growth to enable it to obtain the greatest benefits during the interim period of ten years, while free trade with the United States exists, and at the same time gradually to prepare the national economy so that it may maintain itself stable and strong after the termination of that relationship? I can see no obstacle except the deep-seated skepticism that warps the thought of many of our economists and leaders in industry and agriculture who, seeing the country secure

under the existing free trade are unable to visualize any other means of salvation except through the perpetuation of that arrangement.” (source) Roxas emphasized that economic planning was necessary to “avoid serious injury to our national economy upon the termination of free trade.” He insisted that “the leadership in the Philippines should address themselves to the safeguarding of the national economy in it integrity.” He then concluded that “the logical course for us is to reduce a much as possible the relative importance in the national economy of the industries depending for their existence on free trade with America.” According to him, this could be done in three ways: First, curtail the production of articles which must rely on free trade with the United States or tariff differentials elsewhere. Roxas admitted that the proposal would entail enormous losses on producers of these goods. However, he argued that precisely the ten year period was provide to allow gradual readjustment of the national economy and of the industries concerned. Second, place protected industries on a competitive basis through a drastic reduction of production costs. Roxas insisted that this should be attempted and systematically pursued. Nonetheless, he believed that production costs can still be materially reduced without cutting wages. To Roxas, “when costs are reduced by slashing wages there often arise social and economic problems of greater gravity than those sought to be remedied. The need of maintaining the standard of living of the masses cannot be overlooked. This is particularly true in the Philippines where in many industries wages are already below what may be considered sufficient to supply the minimum living requirements of the workingman and his family.” In other words, Roxas was already batting for greater efficiency in protected industries even during the pre-independence period. At the same time, he sought to protect the workers from drastic wage cuts. Even as he presented painful solutions, he endeavored to shield the common man from harm and showed sensitivity to their plight. Third, stimulate new industries and the production of articles and crops that may find a local market or which may compete in the open markets of he world. To Roxas, this third alternative offered the most promise. He argued that “it does not require lowering of wages nor restriction of output, much less the scrapping of existing industries. It responds to the urge of progress.” Roxas noted that “there are many industries which could be developed in the Philippines both for our social and economic advantage. We have potential power and raw materials in abundance. We have a ready and growing market.”

Interestingly, Roxas expressed concern for our natural resources. He cautioned that “industries which deplete important natural resources should be avoided.” Thus, the National Economic Council was created to plan for economic independence from the United States. Not surprisingly, Roxas was chosen by President Quezon to chair the Council. Many government institutions owe their beginnings to Manuel Roxas. For example, how many in the National Economic and Development Authority know that their institution traces its origins to the vision of a man who dreamed not only of political independence but more important, economic independence for his country? Unfortunately for Roxas and the Philippines, two years after he led the crafting of the country’s economic plans global events intervened and the Philippines was plunged into war. Roxas and public administration Present-day land reform is associated with contemporary presidents. What is not known is that Roxas authored the first land reform bill which provided for the expropriation of the Buenavista Estate for distribution among its tenants. Since alternative economic activities had to be explored in preparation for economic and political independence, Roxas played a major role in the creation of the National Development Company and was its chairman. During that period, private business, content with protected industries, was hesitant to pioneer in new industries. The Philippine Charity Sweepstakes Office which up to this day performs social development functions, had Roxas as its first Chairman. In like manner the National Rice and Corn Administration, forerunner of the present National Food Authority was chaired by Roxas, as well as the Insular Sugar and Refining Company. As first president of the Republic, reestablished the government under great difficulty and stress. He reorganized the judicial system, the Philippine army, the health department, ad the public schools. Among the agencies which were created during the Presidency of Roxas were: Department of Foreign Affairs (EO 18, 16 September 1946); Department of Commerce and Industry (EO 94, 4 October 1947); Foreign Funds Control Office (RA 7, 9 August 1946); Emergency Currency Board (RA 22, 25 September 1946); Bureau of Investigation (RA 157, 19 June 1947); Patent Office (RA 165, 20 June 1947); Commission on Planning, Priorities, and Allocations (AO 2, 15 July 1946); Civil Aeronautics Commission (AO 7, 28 July 1946); Philippine Port Commission (AO 13, 12 October 1946); Tax Commission (AO 36, 3 June 1946; Board of Surveys (EO 11, 31

July 1946); Philippine Relief and Trade Rehabilitation Administration (EO 90, 10 September 1947); Government Enterprises Council (EO 93, 4 October 1947); and, Local Government Reform Commission (Congress of the Philippines Joint Resolution #2, 16 October 1946). As president of the republic, Roxas made very significant contributions to administrative law. Thus, the Code Commission was created pursuant to Executive Order 48 for the purposes of revising old codes and drafting new codes of substantive law “that would be more in conformity with Filipino customs, the modern trends in legislation, the progressive principles of law” (SONA 3, 1948). Among the codes drafted were the Civil Code, the Revised Penal code and the Commercial Code. The legacy of Roxas is not limited to the national government. It is not well known that he pioneered in local government reform. Under the Local Government Reform Commission, he reorganized the local government system and prescribed guidelines for local fiscal administration. An enduring legacy Considering his short 23 months stay in office as president, Roxas indeed left an enduring legacy in public administration and governance. Government policies on the role of government in the economy, long-term economic planning, land reform, government reorganization, administrative law , local government reform, protection of the environment and social welfare are among his major contributions to public administration. IV. ROXAS’ CONTRIBUTIONS TO PUBLIC FISCAL ADMINISTRATION, DEVELOPMENT FINANCE AND MONETARY INSTITUTIONS Even as the Roxas legacy in general public administration is wide-ranging, his most important contributions are in the specialized fields of public fiscal administration, development finance and monetary institutions. Roxas as Secretary of Finance and Chairman of the Tax Commission Even as a congressman, Roxas already evinced interest in public fiscal administration, particularly taxation. His accomplishments as Secretary of Finance and Chairman of the Tax Commission are a matter of historical record. The Tax Commission, which he chaired, was tasked to revise and codify the country’s tax laws into what was known as the National Internal Revenue Code of 1939. The Commission, which was created pursuant to EO 160 in 23 August 1938, was established for the purpose of revising both the national and local tax systems. In codifying the National Internal Revenue Laws, the Commission used three basic principles of a sound tax system namely: fiscal adequacy, theoretical justice, and

administrative feasibility. In its report on 25 February 1939, the Commission had endeavored to carry out the policy of giving greater emphasis to the three taxes which best typify the ability principle and which had been inadequately utilized. These taxes are: personal income tax; the estate and inheritance taxes; and excise and percentage taxes on non-essential goods and services/luxuries (Report of the Tax Commission, 6). With the National Internal Revenue Code of 1939, the philosophy of progressive taxation and the ability-to-pay principle was enshrined as a fundamental public policy. The landmark policy answers the basic question in taxation: who should bear the burden of taxation? Indeed, equity dictates that those who have the ability to pay , benefit most from the workings of the economy and earn more in income should contribute more in terms of taxes . As recounted by one of the members of his technical staff, “As Chairman of the Tax Commission, he convinced all the members …some of whom were business magnates in Manila of the necessity of revising the tax system with a view to securing adequate revenues to meet the expanding needs of the government and distributing the tax burden proportionately….As a result, the National Internal Revenue Code came into being which was expected to render sufficient Revenues to cover the needs of the Government for the next 10 years.” --Modesto Formilleza, The Filipino Observer, 1947 With a progressive system of taxation, then Secretary of Finance prepared the fiscal system for the time of independence. Ensuring public accountability Public finance involves the formulation of fiscal policy, revenue administration, budgeting, and public borrowing. The last but equally important phase is public accountability. In ensuring public accountability in governance, especially in the management of public finance, President Roxas issued EO 43 which transferred from the General Auditing Office the function of preparing and keeping the accounts of the various departments, bureaus, offices and dependencies of the National Government, the functions of acting upon requisition orders for supplies and materials, furniture and equipment, and the functions of operating the salvage warehouse (7 February 1947). On 21 April 1947, President Roxas decreed AO 33 to create a committee to investigate charges of graft and corruption against officers and employees of the Bureau of Internal Revenue and to study the organization and operation of the said Bureau so as to avoid irregularities therein.

The ordinary citizen may not particularly be aware of it, but Roxas enshrined another important principle in public fiscal accountability. This is the separation of the auditing from the functions of accounting and procurement. The latter two are operating activities. The audit office cannot maintain accounting records and prepare financial reports which it will audit later. The audit office will end up auditing itself! Neither should it get involved in procurement activities which will also be subject to audit. Institutionalizing development finance One of the most important government financial institutions at present is the Development Bank of the Philippines. Many of its employees may not know that the gigantic DBP traces its origins to the Rehabilitation Finance Corporation which was established by Roxas. Thus, he initiated the policy of financing for development objectives. After his inauguration as president of the republic, he established the Rehabilitation Finance Corporation (RFC), the forerunner of the now Development Bank of the Philippines. The PhP300,000,000 RFC served as national credit reservoir for the reconstruction and repair of the war damaged property and for the expansion of the national economy (RA 85). The Congress enacted RA 85 on 29 October 1946 which created the RFC. The Corporation was empowered, among others, to grant loans to private individuals, corporations or associations for the rehabilitation or development of agricultural, commercial or industrial enterprises. Institutionalizing monetary policy The legacy of Roxas is not only in general public administration, fiscal administration and development finance. He also left an enduring legacy in the field of monetary policy. As Secretary of Finance under President Quezon, Roxas already recognized the need for a central bank. In 1939, bill was drafted under his direction. It was approved by the Philippine legislature. However, since the Philippines was a commonwealth under the United States, the bill had to be approved by the President of the United States. Unfortunately “influential foreign interests worked against its approval, and it was returned without action to the Commonwealth Government.” (Central Bank, 1974) During the Japanese occupation, the Philippine Assembly of that time once more approved a bill creating a central bank. Once more, a foreign conqueror opposed it. This time, it was the Japanese. It took political independence to finally make the dream of Roxas a reality. Immediately after his inauguration as president of the republic on July 4, 1946, Roxas

instructed Miguel Cuaderno, Sr. to study the possibility of a bank charter. He then created the Central Bank Council in August, 1947. At that time, a Joint Philippine-American Finance Commission likewise recommended the creation of a central monetary authority. By February 1948, the draft bill was submitted to Congress. Roxas made a special appeal for Congress to enact it immediately. Thus, by June 15, 1948 it was signed into law. Tragically, Roxas did not live to see his dream come true for he died in April. It was the new president, Elpidio Quirino who signed it into law. Quirino hailed it as a “charter of our economic sovereignty.” (Central Bank, 1974) Thus, Roxas is credited with the creation of the most important monetary institution in the country. IV. The Fiscal Crisis: circa 1946

When Manuel A. Roxas took his oath of office as President of the Commonwealth in May 1946, and shortly after, as president of the republic barely two months later on July 4,1946, he took over the reins of country which was not only in the grip of a fiscal crisis. He became president of a country devastated physically, financially, economically and even morally by a war between the two superpowers of that time: the United States and Japan. Ravaged public infrastructure and physical facilities Between the warring Americans and the Japanese, public infrastructure and physical facilities were either bombed or razed to the ground. In their campaign to “liberate” Manila and the rest of the country, the American forces bombed and destroyed practically all major buildings and installations. As vividly described by Bernstein, “Manila’s liberation came, early in 1945, amid a holocaust of fire and death.” (Bernstein, The Philippine Story, p. 217) For their part, when the Japanese forces retreated and eventually surrendered, they burned everything in their path. Thus, “Official reports, photographic evidence, and statements of those who have seen the ruin and destruction are unanimous in asserting that, of all the war ravaged areas of the world, the Philippines are the most utterly devastated from the standpoint of the ratio of functional construction still intact to functional construction damaged or destroyed, the effect of destruction on functional economy, social facilities of the nation, and the effect of war damage on the capacity of the nation to rebuild and repair.”

--as quoted in Shirley Jenkens, p. 42 To make the above official description more graphic, Bernstein reports that in Manila, the only government building still intact was Malacanang. “The business district of Manila was practically 100 per cent destroyed. Eighty per cent of the south residential district…lay in rubble. About 70% of the public utilities, and three quarters of the factories and stores, were ruined. Manila was only the most striking example of countrywide devastation. Cebu was almost entirely wiped out. Lesser towns were badly hit, and whole barrios were burnt to the ground.” (Bernstein, p. 217) The spectre of corruption The war did not only ravage the Philippines physically. Its moral fiber weakened under the onslaught of war and the selfish need to survive. Bernstein continues, “Nearly everyone had a racket, from GI to customs inspector, from clerk to high government officials. Newspapers reported on pilferings, thefts, murders, until these were news no longer. Under the tutelage of some American soldiers, Filipinos hijacked food from relief ships in the harbor.” “The city, the whole country was a nightmare of chaos and corruption, of misery and destruction…”Bernstein, p.219 What about the bureaucracy? In his classic study, The Bureaucracy in the Philippines, O. D. Corpuz notes that “The bureaucracy of the immediate postwar period was characterized mainly by low prestige, incompetence, meager resources, and a Large measure of cynical corruption. The low prestige was caused, primarily, by substandard salaries and corrupt bureaucratic behavior.” (O.D. Corpuz, p. 222) The threat of epidemics and famine Filipinos who survived the war were threatened by onslaughts of cholera, dysentery, and yes, smallpox. The grimmest physical threat of all was famine. Food production was at its lowest. Carabaos and work animals had been butchered by the Japanese for food. When he took his oath as last President of the Commonwealth, Roxas warned, “There is hunger among us. In the mountain provinces and in other far-flung areas of our land children starve…Plagues of rats and locusts gnaw at our food supplies. Public health and sanitation have been set back a quarter of a century.” Housing for most of our urban citizens is shocking in its inadequacy and squalor. Disease and epidemic threaten….”( Roxas, inaugural speech.1946)

The political context The political context of the fiscal crisis was just as threatening. The newly independent republic was caught between conflicting political and economic interests. Those who benefited from the pre-war economy wanted a restoration of the old arrangements, and more. Strong opposition came from the ranks of the organized peasants of Central Luzon, the workers’ unions and the Hukbalahap armed group. The latter saw independence as an opportunity to finally chart “a truly independent and selfreliant course for the nation.” (Constantino, p. 194) An economy in ruins Roxas became the president of a country whose economy was in ruins as a result of the brutal war. Productive capacity had been destroyed and inflation reared its ugly head. Roxas himself warned that “The coincidence of easy money and high prices gives …the false illusion of national prosperity….The prosperity of money and prices is a hallucination, a nightmarish dream resulting from the scarcity of commodities and the influx of half a billion dollars of troop money. Soon, very soon, we must awake from that dream.” Roxas continued, “We will find that mere money, bloated by inflation and circulating in narrow channels, does not bring about prosperity and national wellbeing. Everyday, that money is being siphoned from our land by more and more imports—not productive imports, but imports for consumption. The well-being of the tradesman alone is not the wellbeing of our people.” Roxas, inaugural speech, May 1946 The budget in 1946 The fatal combination of a country physically and economically in ruins, morally devastated by war and caught in a bitter political debate inexorably led to the fiscal crisis of 1946. Barely a month after his proclamation as president of the Commonwealth, Roxas presented a tentative budget proposal for the fiscal year 1946-47. Expected revenues? P40 million. Expected expenditures? P250 million! In his own words, “We are faced first of all by the fact that our government is without financial means to support even its basic functions, not to speak of

the great projects in rehabilitation and economic development which we contemplate and which are, indeed, vital to our continued existence. A tentative pared-to-the-bone budget estimate for the next year projects expenditures of over P250 million. Using the present sources of government revenue as a basis for estimation of expectable income, we can count on only about P40 million for the coming fiscal year…” Manuel Roxas, June 3, 1946 The state of the export sector, relative to imports partly explained the situation. Roxas pointed out that while annual exports before the war amounted to P240 million a year, “we may, with good fortune, expect to export P30 million worth of goods this year. On the other hands, expected imports “will exceed P30 million several times. The savings Of our people an the windfall of money brought us by the liberation forces are rapidly disappearing.” (Roxas) The budget of the republic for the first fiscal year therefore had revenues of P40 million comprising 16% of expenditures for bare essentials of P250 million. It was clear that 84% of the proposed appropriation had to be raised either from increased revenues or massive borrowing! It would be interesting to calculate how much P250 million is in current terms. During that period, the peso was pegged to the dollar at a rate of 2 pesos to 1 dollar. Suffice it to say that if a budget has expected revenues which are only 16% of the budget, a fiscal crisis indeed existed. Besides, no less than President Roxas himself informed the public of the situation in the same manner that President Arroyo herself announced the fiscal crisis of 2004. Expenditures during the Roxas years During the early years of the republic, the fiscal year started from July 1 and ended on June 30. Since the republic was formally inaugurated on July 4, 1946, it did not have an official budget yet since this had to be submitted. What Roxas did was to reenact the budget under the Commonwealth until such time when the budget of the republic would be approved. Thus, the Commonwealth budget under CA 723 was in effect from July 1, 1946 to October 22, 1946 when the first budget of the republic for 1946-47 was approved under Republic Act 80. The budget for 1947-48 under Republic Act No. 156 was approved on June 18, 1947. The Roxas presidential years therefore covered three budgets over a span of two years: the Commonwealth budget up to October 22, 1946, and the republic’s budgets for 1946-47 and 1947-48.

The breakdown of general appropriations for the two fiscal years are as follows. Details of the commonwealth budget could not yet be obtained as of this writing. It is said that budgets reflect the priorities and the commitments of government more than speeches. It is interesting to note that unlike the usual trend of budgets to increase each year, Roxas’ budget for the second year is lower than that of the first year. It probably reflects his efforts to curtail expenditures to the bone. Total general appropriations for 1946-47 is P248,685,783. The following year, general appropriations for 1947-48 went down by ----% to P225,644,306.00. Not surprisingly, considering the volatile situation at that time, national defense got a lion’s share of the budget—31.28 % during the first year and 34.10% during the second year, or slightly more than a third of total appropriations. Actually, the absolute amount of appropriations for defense went down from P77.7 million to 76.9 million. Next to defense, instruction or education was allotted 21.80% of the budget during the first year of the Roxas administration and 23.79% during the second year. As in defense, the actual amounts went down because of the reduction of the total budget. It is interesting to note that 15.88% of the first year budget was allotted to contingent funds and 15.95% during the next year. Fourth in priority was finance, followed by health and public welfare, agriculture and commerce, justice, public works and communications, and foreign affairs. The office of the president was10th in the order of priority with over 2% share of the budget. It is also interesting to note that the University of the Philippines had a higher budget than the Senate, Departments of Interior, Labor, the General Auditing Office and the Supreme Court, the Commission on Appointments, COMELEC, and the VicePresident! Other appropriations and expenditure commitments. While examining the general appropriations, this researcher was wondering why actual expenditures as reported by both the Budget Commission and the General Auditing Office were much larger than the amounts provided for in the General Appropriations Act. In those days, it was the practice to pass supplemental appropriations for expenditures which were not originally provided for in the budget. Other budget items included receipts automatically appropriated , special purpose appropriations, fixed expenditures, continuing appropriations like public works and projected additional expenditures.

At present, the practice of passing supplemental budgets is not encouraged unless there is an identified revenue source. Roxas changed the budget format by integrating all other expenditures of the government in his budget message. As can be seen later in the section on deficits, Roxas’ calculation of the deficit is larger than those reported by the Budget Commission and the General Auditing Office. During the two years of Roxas’ presidency general appropriations and other committed expenditures are as follows: TOTAL APPROPRIATIONS FY 1946-47 General Appropriations 248,695,783 Public Works Special Purpose 90,315,000 Receipts Automatically Appropriated 1,795,710 Fixed Expenditures 12,804,685 Outstanding Obligations 20,812,164.35 TOTAL 374,432,342.35 FY 1947-48 227,397,283 20,000,000 7,000,000 1,766,450 14,308,255 270,471,980

And so, it came to pass that the first president of the Philippine republic had to manage a budget of which only 16% was covered by a revenue source during his first year! A Tale of Four Deficits The matter of fiscal deficits is considered so technical that only experts claim to understand them. Even then, experts don’t agree all the time. What appears as a deficit to one expert can be considered a surplus by another, depending on his or her interpretation of accounting rules and regulations as well as accounting practices. A crucial factor is the definition of terms. It is not surprising, therefore that the fiscal deficits are calculated in different ways. Documents which this researcher examined revealed four versions of the fiscal deficit during the Roxas administration. One version is the deficit as reported by President Roxas himself in his State-of-the-Nation addresses and budget messages. Another version is the deficit or surplus as the case may be, as reported by the Commissioner of the Budget Pio Pedrosa. The third version is the deficit or surplus as reported by the General Auditing Office. The fourth version is reported by the Bell Commission which assessed the state of the Philippines during the 1950’s

DEFICITS As reported by Roxas As reported by Pedrosa As reported by Bell Commission As reported by GAO
Sources:

FY 1946-1947 FY 1947-1948 (246,439,125.34) (139,000,000) 64,472,742.96 surplus 8,160,223.10 surplus (117.2 million) 3.1 surplus 49,258,725.55 surplus (13,507,721.16)

Roxas Version, Budget Message Pedrosa Version, Budget Commission Report GAO Version, GAO Report Bell Commission, GAO Report

The first thing that the reader notices about the four sets of figures is that each set varies widely from the three other sets. The second noticeable thing is that while two versions reported deficits during the first year, the other two reported surpluses. Consequently, two versions reported surpluses during the second year, the other two versions reported deficits. Thus, Roxas reported huge deficits in two years, characterized by a dramatic drop in the second year. Pedrosa, on the other hand, reported surpluses during the same two years, with a sharp drop from P64 million to P 8 million during the second year. For its part, the General Auditing Office reported an excess of income over expenditures during the first year and a sharp drop to a deficit during the second year. The deficit version of the Bell Commission reported a deficit during the first year and a surplus during the second year! Unfortunately, it will take some time to untangle the different versions and reconcile their differences. Not all the accounting details are available. However, one source of the variation is in the way income is defined. During Roxas’ time and even up to the eighties, proceeds from loans where considered as part of income. Thus, the income of government is classified into ordinary income from taxes, licenses and fees; and extraordinary income from loans and other sources. In all his major speeches, especially his budget messages, Roxas DID NOT include loans as income in the calculation of the deficit. He consistently referred to these as “the actual deficit.” The Budget Commission and the GAO considered loans as part of income. This explains why Roxas’ deficit figures are extremely large even as Budget Commission reported comfortable surpluses. Another source of the variances is the treatment of income. In calculating deficit, he did not limit himself to the expenditures in the general appropriations act. As pointed out in an earlier section, he included all other expenditures and expected obligations which are listed in other acts of congress. This researcher’s personal view is that in times of great fiscal difficulty it is more prudent to integrate all possible income, but not include loans, and all possible

expenditures even if they are not in the general appropriations act. In this manner, the chief executive has a comprehensive picture of all incomes and expenditures. He has a clear idea of the expected budgetary shortfall for a particular year. It is easy to fall into the trap of assuming that a deficit is smaller than feared because loans are treated as income and expenditures are limited only to those in the general appropriations act. Presidents are primarily political leaders. Their public pronouncements inevitably reflect political objectives, and not necessarily economic truth. It is delightful to discover a president who did not mince words or sugar coat the fiscal crisis with technical gobbledygook. He said it resolutely and truthfully: total expenditures is this much; expected revenue is only this much; therefore, the actual fiscal deficit is this much. Let us allow Roxas to explain it himself when he presented the budget message for fiscal year 1947-48: “This budget includes all the information needed to describe and forecast the condition of the national treasury—the resources and the obligations of the government during the current and the incoming fiscal years…. I find it anomalous that the President should present to you…a budgetary proposal for the general appropriations of the Government, and omit consideration of what have been called the special purpose appropriations and other commitments. I think the Budget should contain the President’s recommendations for all expenditures of government….The budget, as approved, should serve to inform the people of all the fiscal operations of the government.” Roxas Manuel, Budget Message, Fiscal Year 1947-48 The enormous magnitude of the cash requirements for his administration and his own calculation of the “actual deficit” gave him that sense of crisis, that sense of urgency, and that sense of fiscal danger which impelled him to undertake sweeping reforms in fiscal administration. V. MANAGING THE FISCAL CRISIS OF ROXAS’ TIME

For twenty-three months, Roxas and his valiant team struggled mightily with the fiscal deficit. At the same time he had to resolve political issues which were inextricably linked to the deficit. 1946-47 Taxes and other revenue measures

Even during his early days as Secretary of Finance and Chair of the National Economic Council, Roxas consistently placed importance on taxes and other revenues as the foundation of sound fiscal administration. It is not surprising that as president of the republic, he focused on increased taxes as the most effective way of handling the deficit. Roxas’ first target was the income tax. During his first state of the nation address on June 6, 1946, he bluntly observed that “…we must proceed to study our sources of revenue. I believe our income tax to be entirely inadequate, in the light of the national need and the emergency situation we face. Taxes must be raised to reasonable levels without discouraging enterprise or business expansion. I believe firmly in the principle of taxation on the basis of ability to pay.” Roxas, State of the Nation Address, June 6, 1946 Time after time, in his pronouncements about taxation, Roxas always emphasized that he was for progressive taxation. In one year’s time, no less than twelve tax measures were passed by Congress under Roxas’ tireless prodding. According to an account on the fiscal history of the Philippines, “The income tax on corporations, associations, and partnership was increased from 8 to 12%…individual income tax rates were also increased …government corporations were not exempted from the campaign to increase tax rates. A law was passed in June 1947 requiring the to pay the same tax rates being paid by private corporations.” Fiscal History of the Philippines, p. 27 Not everyone suffered during the war period. As in any war, profiteers and buccaneers emerged, accumulating wealth during and after the war. Roxas declared that “Some individuals have accumulated through the war years considerable fortunes, while others of our countrymen were offering their lives on the altar of freedom. As a measure to effect social justice as well as to obtain desperately needed revenue, I propose the imposition of a war profits tax based on taxable income and the increase in capital assets from1941 to 1945.” (Roxas, Sona, 1946) Roxas also urged the readjustment of taxes to inflation. Thus, “Taxes must be realistically readjusted to the inflation which holds us in its grip. Taxes in a sense represent forced savings. Under present circumstances, increased taxes are a type of

blood-letting which will do much to cure the high blood pressure of the current inflation.” (Roxas, SONA, l946) Reduction of expenditures The usual reaction to a large fiscal deficit is to cut expenditures. This is also what Roxas endeavored to do. He required departments, bureaus ad offices to effect savings in appropriations for salaries and wages according to the following schedule: for the first P100,000, 5%; for amounts in excess of P100,000 but not exceeding P500,000, 7%; for amounts in excess of P500,000 but not exceeding P1,000,000, 9% and, for amounts in excess of P1,000,000, 10%.”(Roxas, Budget Message for 1946-47) It will be noted that even as he endeavored to reduce expenditures to “irreducible minimum” he did not make across-the-board cuts. The expenditure cuts were made according to the size of the budget. Furthermore, Roxas made sure that “the mot urgent and vital needs of the country” were provided for. Thus, provision was made for economic planning and scientific research; for the intensification of the food production campaign to avoid impending hunger and starvation; for more teachers and schoolrooms; for better protection of pubic health; for more effective control of prices; and for the employment of those out of work. Roxas also proposed the creation of an Institute of Nutrition to conduct studies and propose policies on the nutritional needs of the people. One major expenditure cut which Roxas implemented was the reduction of aid to provinces, cities, municipalities an municipal districts to help them meet their operating expenses for essential ordinary services by early 50%. Roxas declared, “…Local governments must begin immediately to improve their revenue collection to enable them to meet their own needs. Financial dependence upon the National Government must be discontinued at the earliest practicable date….As a matter of policy, therefore, aid to provinces, cities and municipalities, and municipal districts will…be gradually reduced and stopped altogether.” Roxas’ instruction was to grant the full allocation for the first quarter; reduce it to 75% by the second quarter; then to 50% by the third quarter, and finally to 75% by the fourth quarter of the year. Only the share of local governments from internal revenue allotments was retained since this is mandated by law.

Still another strategy which Roxas adopted was the postponement of salary increases for officials and employees of the government. However, he provided for a cost of living differential for low-salaried employees. A final expenditure cut was the suspension of P71 million out of the total authorized P474.2 million. Roxas also announced that he planned to submit a rescission measure, whereby he would withdraw some expenditures already provided for in the budget, and curtailing others. He planned to do this after carefully reviewing the budget even after it was passed. Borrowings It is obvious from his public pronouncements that Roxas was a most reluctant borrower. Yet, he knew that even the maximum level of taxes which he could squeeze from the economy would not be enough to finance even the minimum expenditures of the country. He therefore sought authority from Congress to negotiate for a loan of P800 million pesos in five yearly installments. He proposed that the first installment be in the amount of P200 million. Roxas also sought authority to borrow a separate P500 million from the United States Export-Import Bank to finance rehabilitation and reconstruction. With his usual candor, Roxas did not promise a balanced budget in the very near future. He said it would take at least five years to balance the budget The General Auditing Office reports that in 1946-47, only P120 million was received a budgetary loan from the Rehabilitation and Finance Corporation of the United States. . Starting the reorganization As early as his inaugural speech, Roxas already called for a reorganization of the government. He directed a detailed review of the functions of government departments and the percentage efficiency of the departments, as well as their personnel. 1947-48 Taxes and other revenues In his second SONA, President Roxas reported that government revenues, which was five times what was estimated for FY 1946-47, although far from sufficient, had reached a total which could compare favorably with pre-war government income. The Government revenues, however, were only 1/3 of the authorized expenditures.

To make a study on the fiscal situation of the Philippines and to make recommendations on fiscal measures, the President appointed a joint PhilippineAmerican financial commission, created under the terms of an agreement between President Truman of the United States and President Roxas. The objective of the Commission was to obtain the maximum amount of revenue, utilizing every available tax expedient and every available method of collection while at the same time refraining from undertaking fiscal measures which would seriously interfere with the rehabilitation and economic development program (Budget Message, FY 1947-1948). The account of the fiscal history of the Philippines recounts that: “In 1947, the Joint Philippine-American Finance Commission, a factfinding body sent to the Philippines under an agreement between the two countries to examine the economic and budgetary problems of the country, gave the following recommendations aside from the establishment of a Central Bank and a managed monetary system: (1) an increase in corporate income tax from the current 12% to 18%; (2) a drastic increase in the percentage taxes on luxury goods; (3) a material increase in estate, inheritance, and gift taxes; (4) a progressive development of real property taxation to yield at least P50M annually as against the pre-war average of P14.5 annually and the 1946 collection of P10.7M. According to the account, five tax measures were legislated in response to the commission report. This makes a total of 17 tax measures in two years! It was also reported that “the many post-war tax rates being introduced created an uproar from various affected groups, but the taxation machinery rolled on.” Expenditures While it is true that revenues, particularly from taxes increased spectacularly, expenditures continued remained higher. Roxas consistently stressed the need for transparency and a full explanation of the proposed expenditures of government. In all his budget messages, he went into excruciating details on the budget, practically explaining each item and justifying each expenditure. According to him, “In the light of the current deficit, and the deficit which we face next year, there must be a full and satisfactory explanation of our future commitments. “ Roxas, Budget Message for 1947-48 With regard to the aid given by the National Government to the provinces, cities,

municipalities, and municipal districts, the appropriation was reduced by fifty per centum, as proposed by the President during his message on the national budget for fiscal year 1947. This aid was gradually reduced and was eventually stopped altogether on the assumption that these units had already put in place their revenue services. Roxas established the policy that local governments should adopt a graduated program of diminishing reliance from the National Government for ordinary operating needs. To control the deficit, the President undertook the following administrative measures: a. Out of the sum of Php385.33 million appropriated for the fiscal year, Php40 million was suspended and Php8.2 million was not released by the President (GAR, 1947-1948) A rescission bill was submitted to Congress to cancel various authorized appropriations amounting to Php120,000,000. Adjusted the appropriations for the expenditures to be met by the Government revenues and loans.

b. c.

In the reduction of government expenditures, the President stated that the Government had to “spare no pains to reduce government expenditures”. He used the following tests to the proposed government expenditures : (1) Are the expenditures essential for the maintenance of vital services : peace and order, education and public health, the administration of justice, the promotion of common welfare and national defense? (2) Are the expenditures essential for the program of rehabilitation or expansion of the economy? Any expenditures which did not answer any of the aforementioned tests had to justify themselves in an extraordinary manner (Budget Message FY 1947-1948). The Secretary of Finance approved as aid to local governments which continued to require further assistance from the National Government because of the destruction brought by war only Php3.7 million during the fiscal period 1947-48 as compared with Php13.6 million during the last fiscal period (GAR, 1947-48:13). During the first year of liberation, all expenditures of the local governments were financed by the National Government. President Roxas proposed the revision of the laws pertaining to powers of taxation given to provincial and local government. He said in his speech that “it (was) high time that provinces and municipalities realize that they should have the power to control the financial life of their respective communities” (You and I Are

Servants of the People, 557). Local governments were given more power to tax to gradually eliminate their total dependence from the National Government. Borrowings Roxas felt he had to explain why a deficit was projected inspite of the dramatic increase in revenues, “The public must be told why we must borrow money, money which must surely be repaid. The nation must be assured that the responsible heads of government envision a point at which the budget will be balanced…” He eagerly looked forward to the end of deficits. “I do see such a point. All my thinking and all the plans of government are directed toward the achievement of that point…I cannot see tht point reached until 1951” (Roxas, 1947) One unusual act which Roxas did in relation to borrow was the loan from the U.S. RFC. He was actually granted a loan of P140 million. However, when he saw a sharp upward trend in revenue collections, he paid back P20 million. Reorganization In accordance with the Reorganization Act of the last session of Congress, as he proposed in his previous SONA, a general overhauling of the government machinery to achieve maximum efficiency and economy in government operations had been launched. Filling in of positions, except those of public necessity, was suspended while the study for reorganization was on the way (SONA 2). For the purpose of reorganization, a non-partisan and non-political Board appointed by President Roxas had started preparing a comprehensive report on the reorganization of government departments, agencies, bureaus and divisions. President Roxas directed the Board to attempt to accomplish a saving of at least 25% in government expenditures, and to promote simplicity and efficiency in government operations. Upon the recommendation of the Reorganization Committee, the President directed that each department and agency, in making its budgetary request for FY 1947-48, submit two personnel plantillas, a permanent and a supplemental plantilla. The permanent plantilla contained the necessary and indispensable positions, while the supplemental plantilla carried those which may be dispensed with. No vacancies in supplemental plantillas were filled and became automatically abolished upon becoming vacant. This plan was expected to result in a reduction of the total budgetary outlay for salaries and wages.

One account reports that over 1,100 positions were abolished during Roxas’ time. The January 1948 SONA One of the greatest accomplishment of his administration, he reported, was the marked improvement of the financial position of the government (SONA 3, 586). However, despite the great and rapid increase in collections, the yearly revenues were not yet sufficient to cover the total appropriations for the ordinary expenditures approved by Congress. He then urged the Congress to consider the recommendations made by the National Economic Council and the Joint Financial Commission. The following were the recommendations of the Joint Financial Commission: a. establishment of a Central Bank and a managed monetary system; b. increase in corporate income tax from 12% to 18%; c. a drastic increase in the percentage taxes on luxury goods; d. material increase in estate, inheritance, and gift taxes; e. a progressive development of real property taxation to yield at least P50 million annually as against the pre-war average of P14.5 (CRC, 27). President also urged the Congress to practice the severest economy in the approval of appropriations. He enjoined the Congress to adopt a firm determination to raise the general fund revenues to around Php272 million and to confine the overall expenditures chargeable to that fund strictly within that amount (SONA 3, 588). While making long strides towards fiscal rehabilitation, the government was rapidly paying in full treasury vouchers issued and contractual commitments made before the war. The President enumerated his legislative proposals for consideration by Congress. Among those relevant to fiscal administration are the following: a. b. An Act establishing the Central Bank, defining its powers in the administration of the monetary system; A law granting the President, under such conditions as the Congress may impose, authority to control imports and to increase or decrease from time to time the sales tax in luxuries, semi-luxuries and non-essential commodities up to 100% of the present rates, but in no case to be less than the rates now imposed. This measure is intended to raise revenue, conserve dollar

exchange resources, and to channel surplus purchasing power towards productive investments. c. d. A law amending the Administrative Code to grant more autonomy to, and enlarge the power of taxation of provinces and municipalities. A law authorizing the President under certain conditions to guarantee loans granted by certain international or foreign credit institutions to government or private banks, companies and private individuals. A law authorizing the Government to guarantee a certain percentage of loss which may be suffered by any private bank, insurance company or any other credit institution, on account of loans it may grant to private individuals for home construction, the amount of each loan not to exceed P10,000 for each individual borrower, and fixing aggregate amount of the loans for which such guarantee may be given A law amending the National Internal Revenue Code by providing for collection in advance of the sales on the basis of the declared cost of the merchandise upon withdrawal from the custom-house or factory; the amount collected in advance to be credited to the actual tax liability after the first sale has been made. A law amending the NIRC by increasing the present tax rates on alcoholic beverages, beer, soft drinks, cigarettes and other tobacco products.

e.

f.

g.

President Roxas asked the Congress to give preferential attention to the creation of the Central Bank. This measure would strengthen the banking system and provide resiliency to the monetry system without in any way affecting its stability. With the reform contemplated in the monetary system, as a result of the creation of the Central Bank, President Roxas expected that funds would become available to finance the industrial program, the construction of irrigation systems and other aids to agriculture and industry which were urgently needed to accelerate the economic development of the country. In Summary To summarize, Roxas devoted a great deal of energy and dedication to the resolution of the fiscal crisis. His first target was to increases taxes and other revenue. One account reports that no less than 12 tax bills were passed during his brief administration. Roxas also passed a war profits tax which levied on those who profited much from the war as well as its aftermath.

While he zeroed in on tax revenues, Roxas was careful to protect the low income groups. He hewed faithfully to the ability to pay principle and a progressive system of taxation. On the matter of expenditures, Roxas was similarly focused on drastic, and even brutal cuts in expenditures. Nevertheless, he argued for increased allocations for scientific research, nutrition, education, health, and maternal care. Even as he strongly supported fiscal autonomy for local governments, Roxas did not spare the lgus. He drastically reduced national government support for lgus drastically,leaving only the internal revenue allocations. Reorganization was another strategy. One account reports that over 1,100 positions were abolished during his time. The tentacles of corruption held government in its grip, leading to wastage and leakage of government resources. Roxas waged a war against corruption and issued specific instructions for the investigation and removal of erring officials. It is admitted by writers who researched on the Roxas administration admitted that he himself was scrupulously honest and died a poor man. VI. INSIGHTS FOR THE FISCAL CRISIS OF OUR TIME “There was a king with a large jaw and a queen with a plain face, on the throne of England; there was a king with a large jaw and a queen with a fair face, on the throne of France.” Charles Dickens, A Tale of Two Cities It is obvious that the situation of 1946 and 2004 are very different from each other. One common thread, however, is that both periods had to contend with fiscal crises. It is interesting to note that some of the solutions are similar. Roxas utilized practically the same tools now being used: increasing revenue, and cutting expenditure to reduce the deficit. Yet some of the things that Roxas did were different and very interesting. 1. When and how to tell the bad news? When should President inform the people that the government is in a fiscal crisis? To what extent should details be given? These are the difficult questions which several Filipino presidents grappled with, and are struggling with. For example, President Marcos did not admit the crisis until, the government literally could not pay the debt. By then, it was too late and the creditors quickly moved in to oversee the management of the debt crisis themselves.

For Roxas, the fiscal crisis was the very first thing he reported to his people. When he delivered his inaugural speech as last president of the commonwealth, he described in vivid terms the extent of the crisis and the factors which triggered it. At that time, Manila was wallowing in a lot of money—money spent by the U.S. military immediately after the war. Prices were skyrocketing. He knew, however, that U.S. spending would not last and that the government would need to generate its own resources sooner than later. He then announced in great detail his policy initiatives, personally managed the implementation of these policies, and never stopped exhorting the people about the seriousness of the problem. Innaugural addresses and state of the nation addresses are occasions to bring good news and cheer to the people. Roxas used these occasion to warn the people about the serious problems which were threatening the survival of the country. 2. Overwhelming drive Roxas’ energy and drive during the campaign were overwhelming. He was consistent in all his policy decisions and never wavered. The sense of urgency pervades all his major and even minor pronouncements. One inaugural address, three state of the nation addresses, three budget messages and countless speeches revolved on the need to increase revenues, reduce expenditures and manage borrowing. Within a year tax collections increased fivefold. He even returned part of what he borrowed during the first year. Still, he never wavered in his campaign on the deficit. He continually warned the people that the fiscal crisis was not yet resolved inspite of impressive victories. He won battles but knew that the war still had to be won. His words leap from yellowed pages and grip the reader with a strong sense of danger which must be averted at all costs. Several writers ( Romulo, Malcolm, Bernstein) noted that his obsessive work habits exacerbated his already fragile physical health and literally broke his heart. Drive, consistency and focus characterized the Roxas campaign. 3. Absolute honesty Roxas was absolutely honest with the people on the extent of the fiscal crisis. He did not attempt to gloss over the extent of the financial challenges confronting the government. The extent of detail which he reported to the people in numerous speeches is impressive. 4. Looking at the whole fiscal picture

During his short-lived administration, Roxas started the practice of reporting to the public the entire fiscal picture. He did not limit himself to the general appropriation act. He include all other commitments of government which would require additional funds like the continuing appropriations, special appropriations, automatic appropriations Thus, the president had an idea of the total resource requirements of the country. In times of tremendous fiscal stress, it is very useful to have the total picture so that financial requirements can be fairly projected. Information on total cash requirements are very important especially in a time crisis. 3. adhering to the ability to pay principle and protecting the poor Roxas’ most impressive achievements in fiscal administration are in the realm of taxation and revenue generation. From his inaugural speech to his last SONA a few months before his death, Roxas remained focused on taxes and revenue generation. What is important to note is that he concentrated on progressive taxation and remained faithful to the ability-to-pay principle. Much of the increase in taxation during his time was in income taxes. Ever year he came up with new ways of further increasing tax rates. He was not content with individual taxes. He went doggedly after the private corporations as well and even required government corporations which were created during his stint as Chairman of the National Economic Council, to pay taxes too. As one account reports, “the tax machinery rolled on” inspite of the uproar from affected sectors. Other progressive taxes which Roxas initiated were directed towards real property. Even consumption taxes had obvious progressive features, like the drastic increase in taxes on luxury goods, and the increased rates on beer, cigarettes and alcoholic drinks. Roxas also went for indexation of these sin taxes. So what is new? Roxas further imposed war profits taxes on carpetbaggers who built fortunes from the ravages of war. . It is not therefore surprising to note the General Auditing Office’s report that in 1946-47 revenue from taxation stood at P186,683,567.58 comprising 50% of total income. This indeed is a far, far cry from the original estimates! By 1947-48, revenue from taxation further rose to P267,201,177.06 accounting for 74% of total income. Thus, an important insight to Roxas’ policies is that even as increase in taxes is important, care must be undertaken to insure that such increases should be borne by those who have the capacity to bear it. The notion that every one should bear the burden of increased taxation and “suffer equally” is debatable. The poor are already suffering at present.

Roxas started the momentum of increased tax revenue collections. His efforts were cruelly interrupted by his untimely death. 4. suspension of expenditures If Roxas was bold and innovative in revenue generation, he was single-minded on the matter of expenditures. He started the practice of suspending expenditures in order to curb the escalation of the deficit. In 1946-47, Roxas unhesitatingly suspended P71 million in expenditures to avoid an impending deficit. In 1947-48 he suspended P40 million and did not release P8.2 million. 5. rescission of appropriations Roxas was not contented with suspension of expenditures. During the second year of his administration, he went one step further. He submitted a rescission bill to cancel authorized appropriations amounting to P120 million. This researcher does not recall any other instance of a president proposing cancellation of authorized expenditures. Obviously, he utilized the vast powers of the presidency to rein in the deficit. The rescission of appropriations might explain the big drop in the 1946-47 appropriations of P374,432,342.35 to P270,471,980 by 19471948. 6. reduction of aid to local government units During the period immediately after the war, local governments were fully financed by the national government. They had to be assisted because of the near total destruction of productive capacity, infrastructure and local government facilities. As described in the earlier part of the paper, Roxas proposed and implemented the phasing out of aid to local government units, except internal revenue allotments. Inspite of the fact that he himself was a former local government official, he pointedly stated that “it is high time that provinces and municipalities realize that they should have the power to control the financial life of their respective communities.” (Roxas 1946). He believed that local governments should be given more power to tax in order to gradually eliminate their dependency on national government. At present, local governments receive various kinds of assistance in addition to their internal revenue allotments.

7. borrowing as a last priority—returning borrowed money As noted earlier, Roxas was a reluctant borrower. In resolving the fiscal crisis of his time, he expressly stated his preference for increasing tax revenue and control of expenditures. The best indicator of this is when he returned part of the money he borrowed from the United States when tax revenue increased a year after. What Roxas did is without precedent in the Philippines. The researcher is not aware of any other president who made a similar decision. 8. pervasiveness of the domestic and external environment It can probably be stated that Roxas did all that should have been done by a competent president and fiscal administrator in managing the crisis of his time. It can also be stated that most of the things that are being done at present were done by him, including increasing the rates of sin taxes! At the same time he implemented other strategies which might be of interest to 2004. Unfortunately, an early death interrupted the momentum of his fiscal reforms. One can only speculate what would have happened to the deficit if he lived longer. Interestingly, the Bell Report showed a sharp decline in tax revenues after the Roxas administration. Inspite of the wide variation in actual numbers, three of the four sets of deficit reports cited earlier in this paper actually showed dramatic reductions in deficits. As reported by Roxas, the first year of the republic had a deficit of P246 million. By the second year, this went dramatically down to P139 million. The Pedrosa report reflected surpluses for the two years of the Roxas years, P64 million and P8.1 million. The Bell Report on the other hand reflected a deficit during the first year of P117.2 million which changed into a P3.1 million surplus by the second year of the Roxas administration. These figures show very sharp improvement of the fiscal picture. Nevertheless, what impelled Roxas to resort to borrowing inspite of the spectacular success of his fiscal reforms. And why did the deficit linger? Fiscal policy and administration cannot be separated from the domestic and external political environment. It would not be an exaggeration to state that the political environment of Roxas time was tumultuous. The Philippines was just a small pawn in the bitter battle between two superpowers. It was also caught between the dominant political ideology and an alternative ideology. Was tax and other revenue enough to solve the fiscal crisis? There are perhaps two possible reasons which help explain why tax revenue was not enough during the Roxas period. First is the need for rehabilitation and reconstruction of the economy from

the ravages of war. The second is the financial requirements for the development of a free and independent economy. Many assessments have been made of the immediate postwar period. Constantino, Bernstein, Ventura, Gleech and Jenkens are among those who have strongly, if not, angrily protested that the war damages payments which the United States paid to the Philippines hardly covered actual damages inflicted during the war. Different calculations place war damage as over $1 billion at the very least. However, the War Damage Act provide only for a total outlay of $620 million, including services and surplus war goods and cash payments. To add insult to injury, actual release of funds came in trickles. Bernstein reported that actual payment was made only after three years. This is confirmed by the General Auditing Reports which do not show any inflow for war damage during the Roxas presidency. He raged, “In other words, the war-torn islands have been forced to live in a state of shock for at least three years since they were freed.” What actually happened is that the country was forced to finance its own rehabilitation for three years before relief finally came! No wonder tax revenues were not enough. Because the war damage payments were slow in coming, Roxas was forced to borrow. Unfortunately, even the loan which the United States granted him was not enough. Students of history will recall that the Bell Trade Act which tied our economy to that of the United States for twenty-eight years, was a conditionality for the signing of the War Damage Act. The Military Bases Agreement completed the triumvirate of agreements which not only triggered the longest running rebellion but also shaped the character of our economy for thirty years, and probably beyond. The problem of the fiscal deficit cannot be separated or delinked from the bigger problems of politics and the economy. The domestic cannot be separated from the regional and the global. During the Summit on Financing for Development, the matter of the debt problems of developing countries was the subject of vigorous discussion and debate. It was agreed that trade is a very important factor in the management of the foreign debt of developing countries. Earnings from trade is the best source of foreign exchange for the payment of debts, not more borrowing. On the other hand, trade deficits only serve to exacerbate the debt problems of developing countries. In the case of the Philippines, the economy was tied to “so-called free trade” with the United States even after independence. Chronic trade deficits compelled the government to borrow from the external market to finance its foreign exchange requirements.

True, there are many reasons for the persistence of fiscal deficits even after Roxas. Definitely, the inability of the economy to generate sufficient foreign exchange from trade is one of them. Efforts at resolving the fiscal deficit should not be limited only to fiscal strategies on taxes and other revenue, expenditures and borrowing. The pervasive and intrusive external environment must be confronted and resolved as well. This is a very important insight for 2004. What if…. Historians and political analysts cannot agree whether Roxas had a choice at all when he decided to campaign for parity rights or free trade as a conditionality for the payment of war damage claims which the country desperately needed. Did Roxas have options other than relying on the United States and resorting to borrowing? At that time, Europe was in shambles and Japan was blown to smithereens. The United States stood out as the lone superpower after the war. Constantino points out Roxas had options: “Roxas assumed office at a time when conditions were propitious for starting the country off on a new basis. The pre-war economy based on a lopsided trading pattern was in shambles. The time was therefore ripe for planning the national life on the basis of the people’s needs. The political system had been shaken up. Many of the principal collaborators belonging to the pre-war leadership were still under detention, and a new non-traditional and fairly strong coalition embodying the aspirations of a broader sector of liberals, laborers and peasants had entered the scene demanding and end to the colonial relationships. A strong, nationalistic leader could have taken advantage of his charisma to temper the euphoria of “liberation” with calls for nationalist vigilance and to chart a truly independent and self-reliant course for the nation. But to a man with a different orientation, a shattered economy limited rather than enlarged options, and peasant-worker militancy was a threat rather than a welcome development.” On the other hand, Arcellana writes: “In retrospect, one can understand why Roxas accepted parity; he had to. The United States had the Philippines over a barrel, or in the palm of it hand. By whichever metaphor; it was the Bell Act or nothing. We took the Bell Act (and parity): we had to. The alternative was chaos, bankruptcy, misery, and even civil war. A man must be judged in the context of givens, in terms of his milieu and the unavoidable, unshakable circumstances within which he

must work. A man stands responsible for his decisions and his choices, even when there are hardly any to speak of: Roxas assumed full responsibility for this decisions, confident of his ability to deal with the problems that might arise from it. That Roxas died so suddenly before he could realize his vision for his suffering country was the Philippine’s great misfortune.” And what if Roxas did not die so soon? It is likely that the fiscal reforms which he started would probably have continued. He was barely two years in office when death struck him down at the height of his powers and the increasing momentum of reform. Perhaps the tale of the fiscal crises of 1946 could have been different. In his own immortal words, “Our fiscal problems are complex and difficult. They can be solved satisfactorily and only if we face the facts without illusions. Our problems cannot be solved by the panacea of currency manipulation or by blind dependence on limitless borrowing. The only sound solution lies in increased revenues from an expanding economy and a drastic restraint in our expenditures. Sacrifices must be made now.” A tribute from a great Filipino It takes a great Filipino to assess the accomplishments of another great Filipino. Claro M. Recto points out that “It was the destiny of Manuel Roxas to govern during the most difficult era of our country’s history. The problems created by the war and enemy occupation could not yield to immediate and simultaneous solutions. Considering the number and magnitude of these problems, the poor and inadequate means at his command for their remedy, and the extreme brevity of the time fate was to allot to him, no other ruler without his talent and industry could have achieved as much as he.” Recto argued that “the achievements of Manuel Roxas must be judged as a whole rather than as isolated fragments or disjointed episodes if we are to determine their significance in history.” Roxas and 2004 Roxas died 56 years ago. His times and our times are very different in the same manner that Paris and London were very different at the time of the French Revolution. And yet, as Charles Dickens hints, they were also similar. Roxas continues to speak to us

in 2004 in the institutions he built and strengthened, and in the fiscal policies he pursued with relentless dedication. In the eloquent prose of Recto: “Like those stars whose light still reaches us through infinite space although themselves died out thousands of years ago, the splendor of your genius will continue to illumine the firmament of our nation, in order that this generation of Filipinos and the generations still to come may point out to the world and with just pride declare: he was one of the greatest men of his generation…”

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