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Public Fiscal

Management (PA 57)

of Graduate AND
The Philippines has traditionally had a
private enterprise economy both in policy
and in practice. The government
intervened primarily through fiscal and
monetary policy and in the exercise of its
regulatory authority.

Although expansion of public sector enterprises

occurred during the Marcos presidency, direct state
participation in economic activity has generally been
limited. The Aquino government set a major policy
initiative of consolidating and privatizing
government-owned and government-controlled firms.
Economic planning was
limited largely to establishing
targets for economic growth
and other macroeconomic
goals, engaging in project
planning and implementation,
and advising the government
in the use of capital funds for
development projects.
P l a nn i n g
o pme nt
The responsibility for economic planning was
vested in the National Economic and Development
Created in January 1973, the authority assumed
the mandate both for macroeconomic planning that
had been undertaken by its predecessor organization,
the National Economic Council, and project
planning and implementation, previously undertaken
by the Presidential Economic Staff.
National Economic and
Development Authority plans calling
for the expansion of employment,
maximization of growth, attainment of
fiscal responsibility and monetary
stability, provision of social services,
and equitable distribution of income
were produced by the Marcos
administration for 1974-77, 1978-82,
and 1983-88, and by the Aquino
administration for 1987-92.
Growth was encouraged largely through the provision
of infrastructure and incentives for investment by private
capital. Equity, a derivative goal, was to be achieved as
the result of a dynamic economic expansion within an
appropriate policy environment that emphasized labor-
intensive production.

The National Economic and Development Authority

Medium-Term Development Plan, 1987-92 reflected
Aquino's campaign themes:
Reduction of structuresand
of unemployment of privilege and
mass poverty,
Decentralization of power
monopolization in of andeconomy
rural decision making
The private sector was described as
both the "initiator" and "prime mover"
Goals included alleviation of poverty,
of the country's development; hence, the
generation of more productive employment,
government was "to encourage and
promotion of equity and social justice, and
support private initiative," and state
attainment of sustainable economic growth.
participation in the economy was to be
Goals were to be achieved through agrarian
minimized and decentralized.
reforms; strengthening the collective bargaining
process; undertaking rural, labor-intensive
infrastructure projects; providing social
services; and expanding education and skill
The plan also involved implementing more
appropriate, market-oriented fiscal and monetary
polices, achieving a more liberal trade policy based
on comparative advantage, and improving the
efficiency and effectiveness of the civil service, as
well as better enforcement of government laws and
regulations. Proper management of the country's
external debt to allow an acceptable rate of growth
and the establishment of a "pragmatic,"
development-oriented foreign policy were
extremely important.
Economic performance fell far short of plan targets.
For example, the real GNP growth rate from 1987 to
1990 averaged 25 percent less than the targeted rate,
the growth rate of real exports was one-third less, and
the growth rate of real imports was well over double.
The targets, however, did provide a basis for discussion
of consistency of official statements and whether the
plan growth rates were compatible with the
maintenance of external debt-repayment obligations.
The plan also set priorities. Both
Aquino's campaign pronouncements and
the policies embodied in the planning
document emphasized policies that would
favorably affect the poor and the rural
sector. But, because of dissension within
the cabinet, conflicts with Congress, and
presidential indecisiveness, policies such
as land and tax reform either were not
implemented or were implemented in an
impaired fashion.

In addition, the Philippines curtailed resources available for

development projects and the provision of government services in
order to maintain good relations with international creditors.
Early 1950s

An Investment Incentives Act,

administered by a Board of
Investments (BOI), was
passedTheto encourage
Philippine and direct
investment more
has undertaken to provide 1967
systematically. Three
incentives to firms, years
later, an Exportand
domestic Incentives
was invest
passed,in priority
of the
effort economy
to move the economy
beyond imports substitution
Late 1960s and 1970s

The incentive structure was criticized for favoring

capital-intensive investment as against investments in
agriculture and export industries, as well as not being
sufficiently large. Export incentives were insufficient to
overcome other biases against exports embodied in the
structure of tariff protection and the overvaluation of the

The investment incentive system was revised,

and again in 1987, with the goal of rewarding
performance, particularly exporting and labor-
intensive production.
Legislation under
As a results of objections
consideration by the made by the United States and
other industrial nations to export-subsidy provisions contained
Philippine Congress in
in the 1983 Investment Code, much of the specific assistance
early 1991
to exporters would limit
was removed in the 1987 version. The 1987
this authority.
Investment Underconsiderable
Code delegates the discretionary power
overnew proposal,
foreign investmentforeign
to the government Board of
Investments when foreign
participation exceedingparticipation in an enterprise
40 40percent
percent. would be
allowed in any area not
covered by a specified
"negative list."
Fiscal Policy

The government has taken a rather

conservative stance on fiscal activities. Until the
1970s, national government expenditures and
taxation generally were each less than 10 percent
of GNP. (Total expenditures of provincial, city,
and municipal governments were small, between
5 and 10 percent of national government
expenditures in the 1980s.)
s regim
National government activity increased to between
15 and
Both 17 approaches
percent of GNP, largely because
contributed to theofvicious
of expenditures
deficits and, the
generating later, growing
need debt-service and
for borrowing,
the debt service on those loans creating greater
deficits 1and
9 8 8the need to borrow even more. At 5.2
9 8 7 a nd
1 percent of GNP, the 1990 government deficit was a
major The ratio of government
consideration expenditure
in the 1991 standbytoagreement
GNP rose
above 20 percent. Tax revenue, however, remained
between Manila and the IMF.
relatively stable, seldom rising above 12 percent of GNP.
Chronic government budget deficits were covered by
international borrowing during the Marcos era and mainly
by domestic borrowing during the Aquino administration.
The largest portion of the national government
budget (43.9 percent) went for debt servicing. Most
of the rest covered economic services and social
services, including education. Only 9.1 percent of the
budget was allocated for defense. The Philippines
devoted a smaller proportion of GNP to defense than
did any other country in Southeast Asia.

The Aquino government formulated a tax
reform program in 1986 that contained some thirty
new measures. Most export taxes were eliminated;
income taxes were simplified and made more
progressive; the investment incentives system was
revised; luxury taxes were imposed.

Beginning in 1988, a variety of sales taxes were replaced by a

10 percent value-added tax--the central feature of the
administration's tax reform effort. Some administrative
improvements also were made.
1984 and 1985
Late 1980s
The latter with
figure The collections were
Problems the
Assessments of athe
P10.1 billion, 70
was based taxon system
the magnitude of tax over
percent increase
fact thattoonly
have 38
more to
evasion by corporate
1988, they remained
do with collections than
percent of income tax payers
P1.4 billion below
with the rates. Estimates
registered firms
of individual income tax
varied from as low
expectations. Tax as
the country P1.7 billion
evasion to as high
P13 billion. by
between filed
13 anda 27
mismanagement and
tax return corruption
Low collection rates also reinforced the
regressive structure of the tax system. The
World Bank calculated that effective tax rates
(taxes paid as a proportion of income) of low-
income families were about 50 percent greater
than those of high-income families in the mid-
1980s. Middle-income families paid the largest

Individual income taxes accounted for only 8.9 percent of tax

collections in 1989, and corporate income taxes were only 18.5
percent. Taxes on goods and services and duties on international
transactions made up 70 percent of tax revenue in 1989, about the
same as in 1960.
The consolidated public sector deficit--the combined deficit of
national government, local government, and public-sector
enterprise budgets--which had been greatly reduced in the first two
years of the Aquino administration, rose to 5.2 of GNP by the end
of 1990

June 1990
As a result of the 1990-91 Persian Gulf crisis, petroleum
prices increased and the Oil Price Stabilization Fund put an
The strain on the proposed
government budget. The sudden cessation
a comprehensive newoftax
remittances from contract
reform package workers
in an attempt to in Kuwait
control theand Iraqsector
public and
deficit. interest rates
About that on domestic
time, debt ofBank,
the IMF, World the government
and also
Japanese to the deficit.froze loan disbursements because the
Philippines was not complying with targets in the standby
agreement with the IMF.
Negotiations between the Aquino
administration and Congress on the
administration's tax proposals fell, with the two
t obe r sides agreeing to focus on improved tax
1990 collections, faster privatization of government-
owned and government-controlled corporations,
and the imposition of a temporary import levy.

Earl A new standby agreement between the

y1 991 government and the IMF in early 1991 committed
the government to raise taxes and energy prices.
Although the provisions of the agreement were
necessary in order to secure fresh loans, the action
increased the administration's already fractious
relations with Congress.
M Policy
1991 the policy-making
Central Bank of thebody of the Central
Philippines was
Bank was theinMonetary
established June 1948Board, composed
and began of the
governor of the Central Bank as chairman, the secretary
the following January. It was charged with
of finance, the director general of the National
Economic monetary Authority,
and Development stability;thepreserving
chairman of
the valueof and covertibility
Investment, and three of members
the peso; and
from the
private sector.monetary, credit,
In carrying out and exchange
its functions, the Central
Bank supervised
conditions the commercial
conducive banking system
to the economic growthand
managed the country's foreign currency system.
of the country.
Domestic saving (including capital
consumption allowance) averaged 25
percent of GNP, about 5 percentage
points less than annual gross domestic
capital formation. This resource gap was
1975 to 1982 filled with foreign capital.

Between 1983 and 1989

Domestic saving as a proportion of GNP declined on the

average by a third, initially because of the impact of the economic
crisis on personal savings and later more because of negative
government saving. Investment also declined, so that for three of
these years, domestic savings actually exceeded gross investment.
Early 198
1970 0s

Bank resorted,
the Centralin theBank's
to financial
foreign life.
creditIt set
on interest
terms that
rates generally
on both bank
deposits and loans,
risk. The
at rates thatofwere,
for inflation,
the development
negative. Central
of financial
Bank credit
was extended in the
to commercial
the through
growth an of extensive
saving.of The
of the banking system on funds from the Central Bank
at low interest rates, in conjunction with the discretionary authority
of the bank, has been cited as a contributing factor to the financial
chaos that occurred in the 1980s.
The proportion of Central Bank loans and
advances to government-owned financial
institutions increased from about 25 percent of
the total in 1970 to 45 percent in 1981-82.
Borrowings of the government-owned
Development Bank of the Philippines from the
Central Bank increased almost 100-fold
during this period. Access to resources of this
sort, in conjunction with subsidized interest
rates, enabled Marcos cronies to obtain loans
and the later bailouts that contributed to the
financial chaos.
The government introduced a number of monetary measures
built on 1972 reforms to enhance the banking industry's ability to
provide adequate amounts of long-term finance. Efforts were
made to broaden the capital base of banks through encouraging
mergers and consolidations. A new class of banks, referred to as
"expanded commercial banks" or "unibanks," was created to
enhance competition and the efficiency of the banking industry
and to increase the flow of long-term saving. The functional
division among other categories of banks was reduced, and that
between rural banks and thrift banks eliminated.

Early 1980s Monetary and fiscal policies that were set
by thereserve
The government, contributed towas
requirement large
intermediation margins, the difference
revised upward twice, going from
between lending and borrowing rates.
21 percent to 25 percent. In
addition, the government levied
both a 5 percent gross tax on bank
Example, loan rates averaged
a 20 whereas
percent tax on
rates on savings deposits
depositwere earnings,
only slightlyand
In 1990
than 4 percent. The Central Bank traditionally
extensively to cover budget deficits
maintained relatively high reserve requirements (the
proportion of depositsand
absorb excess
remain growth in the
in reserve),
money supply.
in excess of 20 percent. 1988
In addition to large intermediation margins, Philippine banks
offered significantly different rates for deposits of different
For instance, in 1988 interest rates on six-month time
deposits of large depositors averaged almost 13 percent, whereas
small savers earned only 4 percent on their savings. Rates offered
on six-month and twelve-month time deposits differed by only 1
percentage point, and the rate differential for foreign currency
deposits of all available maturities was within a single percentage
point range..
Because savings deposits accounted for approximately 60
percent of total bank deposits and alternatives for small
savers were few, the probability of interest rate
discrimination by the commercial banking industry between
small, less-informed depositors and more affluent savers,
was quite high. Interest rates of time deposits also were bid
up to reduce capital flight. This discrimination coupled with
the large intermediation margins, gave rise to charges by
Philippine economists and the World Bank that the
Philippine commercial banking industry was highly
Money supply growth has been highly variable,
expanding during economic and political turmoil and then
contracting when the Philippines tried to meet IMF
requirements. Before the 1969, 1984, and 1986 elections,
the money supply grew rapidly. The flooding of the
economy with money prior to the 1986 elections was one
reason why the newly installed Aquino administration
chose to scrap the existing standby arrangement with the
IMF in early 1986 and negotiate a new agreement. The
Central Bank released funds to stabilize the financial
situation following a financial scandal in early 1981, after
the onset of an economic crisis in late 1983, and after a
coup attempt in 1989.
The money was then repurchased by the Treasury and the
Central Bank--the so-called Jobo bills, named after then
Central Bank Governor Jose Fernandez--at high interest rates,
rates that peaked in October 1984 at 43 percent and were
approaching 35 percent in late 1990

The interest paid on this 1984

debt necessitated even greater
borrowing. By contrast, in and,
1984in order 1985
to regain
access to external capital, the growth rate of the money
supply was very tight.

IMF dictates were met, very high inflation abated, and the
current account was in surplus. Success, however, was
obtained at the expense of a steep fall in output and high
It is the process of transferring
ownership of a business, enterprise,
agency, public service or public
property from the public sector (a
government) to the private sector,
either to a business that operate for
a profit or to a non-profit

When Aquino assumed the presidency in 1986, P31
billion, slightly more than 25 percent of the
government's budget, was allocated to public sector
enterprises--government-owned or government-
controlled corporations--in the form of equity
infusions, subsidies, and loans.
Aquino also found it necessary to write off P130
billion in bad loans granted by the government's two
major financial institutions, the Philippine National Bank
and the Development Bank of the Philippines, "to those
who held positions of power and conflicting interest under
Marcos." The proliferation of inefficient and unprofitable
public sector enterprises and bad loans held by the
Philippine National Bank, the Development Bank of the
Philippines, and other government entities, was a heavy
legacy of the Marcos years.
Early 1991
The Asset Privatization Trust had sold 230 assets with net
proceeds of P14.3 billion. Another seventy-four public sector
enterprises that were created with direct government
investment were put up for sale; fifty-seven enterprises were
sold wholly or in part for a total of about P6 billion.

There was widespread controversy

over the fairness of the divestment
procedure and its potential to
contribute to an even greater
concentration of economic power in
the hands of a few wealthy families.
Jepnie Jan Gadong-
Dr. Rosario Clarabel C.
Course Facilitator