Japan and The Philippines Local Public Finance
August 6, 2009
Cyl Bryan Alberto Bagadiong, Local Public Finance, Meiji University Graduate School of Governance Studies
I. INTRODUCTION
Originally, the intent of this paper is to conduct a comparative study of Japan and The Philippines National Government Accounts for fiscal year 2007. Said purpose has the aim in view to paint a clear picture of fiscal dispositions of the two countries, hoping that these dispositions will shed light on the present priorities and fiscal policy directions of the said countries. In turn, it will, hopefully, make clear the reasons that lead the two countries to its present fiscal dispositions. In sum, the study aims to examine the responsiveness of the Fiscal Accounts of Japan and The Philippines through a preliminary study of the accounts listed in their respective expenditures and revenues for the fiscal year 2007 as supported by trends from 1990 to present.
This, however, will lead us to compare an apple to an orange. An initial perusal of the data provided in the class, for the Japan side, and the data from the Department of Finance, for the Philippines side, will give us the initial conclusion that the difference of the two is so great. The noticeable absence of comparable angle to support a sound conclusion to be derived from a traditional comparative study pervades the data. Thus, a different tack must be used in the conduct of this study. Instead of finding a comparable angle, conclusions and explanations will be deduced by highlighting the difference of the two countries’ fiscal disposition. By highlighting the difference, and at the same breath some comparable angles, the study will try to understand the two subject-countries’ fiscal disposition in a holistic or macro view rather than in an elemental or piece-meal perspective. In this way, this paper will remain faithful to the original intent and objective.
Finally, limitations in the data availability on both sides and the non-use of the Economate software will make this study a restricted one. Data on Japan side will be confined only to what were provided in the class. Whereas, the data on the Philippines side were also restricted on what were available on the websites of the National Economic Development Authority, Department of Finance, Bureau of Treasury, Central Bank of the Philippines, Department of Budget and Management and the Commission on Audit. To say the least, these data are insufficient to categorize this study as in-depth enough to be conclusive. The use of the Economate software, or non-use of it due to the Kanji and Hiragana characters of the command lines, was substituted by the Linest function of Microsoft Office’s Excel 2007 to make a projection analysis. In view of the above, further and a more scientific study in the future is therefore highly recommended.
II. NATURE OF ACCOUNT, NUMEROLOGY AND ITS NOMER-OLOGY
Understanding a national government budget involves the understanding of numerous accounting and financial technical terms. Added to this, the naming of these accounts largely depends upon those people who drafts the accounting and budgeting manual of each countries. Thus, a certain account name in a certain country is alien to another. Take for example Japan’s Local Allocation Tax Grants; there is no account of the same name that exists in the Philippines National Accounting and Budgeting Manual. Because of this, the study used the nature and purpose of those accounts to find a matching account in the other subject-country to compare.
Taking further the example as cited above, the purpose of that said account is to provide funds for the local governments for their operations and project as their share in the collected national wealth. In the Philippines, such fund do exist, albeit, does not have the same account name of that of Japan. The Philippines’ Allocation to Local Government Units has the same purpose of that of Japan’s Local Allocation Tax Grants. For purposes of this study, instead of the accounts’ various technical names, the controlling factor used in matching and comparing will be the purpose/s and nature of the said account. Short of saying that regardless whether it is a lime or a lemon, the fact remains that it is still a citrus fruit and it taste bitter. Thus, the table below will show the matching of both countries different accounts according to its purpose:
Table 1. Simplified cross-matching of various Account (Fund) Title and their respective uses
|
JAPAN ACCOUNT (FUND) NAME |
PHILIPPINES ACCOUNT (FUND) NAME |
USE OR NATURE OF THE FUND |
|
Local Allocation Tax Grant |
Allocation to Local Government Units |
To provide funds to local government units for their operations and projects as their share in the collected national wealth |
|
Social Security Fund |
Pension and Gratuity Fund |
To provide funds for various social needs of the population such as medical needs, pension, care for the elderly and the aged, etc |
|
National Debt Service Fund |
Debt Service Fund and Interest Payments |
Fund to pay various debt owed by the National Government to other countries(Foreign Borrowings) or to its people (Domestic Borrowings) through various modes such as government bonds, T-Bills, etc. |
|
Education and Science |
DepEd (Department of Education) School Building Program |
Fund to improve and further the quality of Education |
|
National Defense Fund |
AFP (Arm Forces of the Philippines) Modernization Program |
Fund to further the strengthening of the capability of the Arm Forces and to provide funds for the furtherance of the National Security |
|
Economic Assistance Fund |
Priority Development Assistance Fund |
Fund to finance various aid to various sector for furtherance of economic activity or enhancement of economic capabilities |
|
Food Supply Fund |
Agriculture and Fisheries Modernization Fund |
Fund to secure food supply and enhance/aid the food production and marketing sector |
|
Transfer to Industrial Investment |
Budgetary Support To Government Corporation |
Fund to assist vital industries and sometimes act as sovereign funds to procure or aid some vital industries or trades which are either privately-owned or partly or wholly government-owned or controlled corporations |
|
Tax and Stamp Revenues |
Tax Revenues |
Funds collected by the Government through various taxes, such as property tax, consumption tax, income tax, etc. |
|
Contingencies |
Contingent Fund |
Allowance for other miscellaneous expenses unforeseeable but may arise in the future |
|
Other Revenues |
Others |
Collective Revenue collected from other sources except from tax, but recurring, such as fees, charges, rents and the likes. |
Added to these account titles used by the two countries that were been matched based on their purpose or nature, there are still account titles that are used by both countries and are included in their revenue and expenditures accounts that cannot be matched. Present in Japan but absent in the Philippines expenditure accounts are funds for Energy , Promotion of SMEs, and Public Works. Present in the Philippines but absent in Japan’s expenditure accounts are funds for Tax Expenditures Fund, National Unification Fund, E-government Fund, Miscellaneous Personnel Benefit Fund, International Commitment Fund, Calamity Fund, and Agrarian Reform Fund. Together, these funds shall constitute the Other Expenses of the expenditure side of Japan and the Philippines comprising 9.62% and 9.7% respectively of their accounts.
Another adjustment that must, and had been made, arises from the difference of the system of accounts used by the two countries. While Japan uses real and current account system, the Philippines meanwhile uses cash account system thus some account titles that can be found in Japan General Account and classified as that, can be found in the Philippines under Special Purpose Fund Accounts. However, the latter’s account heading is a misnomer on the part of the Philippines as it is recurring in every fiscal year in contrary to the general accounting and budgeting principles that special fund are those fund that are only allocated for a specific purpose within a specific period of short time, say may be three to five consecutive years.
The adjustment that had been mentioned above was made in a sense that account headings had to be disregarded. Instead, this study has to resort to the nature of the account and its purpose. In this way, matching of accounts had been attained otherwise; issues will not meet directly and no essential comparison and contrasting can be done.
Lastly, the issue of real amount as expressed by the figures in Table 2, 3, 4 and 5 below had to be foregone as amount of allocation of each country is an incomparable angle to pursue. It is already a cognizant fact that Japan is the world’s second largest economy thus has a much bigger Gross Domestic Product and Gross National Income to spare for its expenditures whereas the Philippines is a developing country whose GDP and GNP can be considered as dwarf if put side by side with that of Japan. In short, if the values of the figures will be uniformly converted in a single currency, say average end of period of exchange rate in US Dollars in a given period in each country, we will be forced to deduced conclusion from a two different and unrelated premises. It is like comparing the president of a multi millionaire company and an ordinary salary man of that company and asking ourselves whom of the two can earn money better and spend more.
Thus, in terms of the value of the account, this study had to use the percentage share of a certain account in the total value of the account title. For example, under Japan’s revenue breakdown, instead of using the real value of Tax and Stamp Revenue amounting to 53, 467 billion yen (which can be translated into 487 billion US dollars using the present exchange rate of 1 US dollar is to .009 Yen as of January 10, 2008), the study will instead use the percentage equivalent of that said revenue account name, which is 64%, in the totality of the whole revenue source account. To reinforce the example further, under the Philippines revenue breakdown, instead of using the real value of Tax Revenues amounting to 647.70 billion pesos (which can be translated into 15.91 billion US Dollars using the present exchange rate of 1 US dollar is to .025 Peso as of January 10, 2008), the study will also instead use the percentage equivalent share of that said revenue account name, which is 81.81% of the totality of the whole Revenue source account. This is to level the plane of comparison between the two countries. In short, we had to analyze on the basis of priority of accounts as shown of percentage eaten by those account in the pie rather than the actual real monetary value of the said accounts.
III. THE GENERAL ACCOUNTS
To begin with, we have to simplify the understanding of government accounting system to understand the intricacies of the same. Let us use some analogy like comparing the government budgeting to that of a household budgeting. In a household, several expenses (General Expenditures) are needed to be considered for the household to function and to maintain the welfare of its members. There are the transportation expenses, pension premium payments and medical expenses, education expenses of the children, food expenses, payment to person the household member/s owes a loan, heating and light expenses, among others.
These household monthly expenses have to budget against the monthly income (Government Revenues) of the household. The household monthly expenses have to be deducted from the household monthly income. Should the monthly expenses proved too be less than the monthly income or should there is more or additional income than the actual expenses, there will be savings for the household. In public finance, we call it budget surplus. However, should the household expenses exceed that of the household income, the household has to borrow from other person or institution such as bank to supplement the money for the needed household expenses. This situation results to the so-called budget deficit. In public finance, borrowing money are usually made either from the money of the citizens (domestic borrowings such as selling bonds, loan from local banks or other financial institution) or from the money of other countries (foreign borrowings such as ODA, bilateral loans, multilateral loans, WB financial Package, JBIC Yen Loan package, etc).
Having been enlightened on the intricacies of a government budget by comparing it to a household budget, we have to look into the figures exhibited by both countries in the expenditure side of their accounts (expenses of the household). These are the items of which both countries had spent their money in the past immediate preceding year. All figures in the table are expressed in billionth digit of their respective monetary units, Yen for Japan and Peso for the Philippines.
Table 2: Japan 2007 General Account Budget
|
ITEMS |
AMOUNT |
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|
|
Table 3: Philippines 2007 General (SPF) Account Budget
|
ITEMS |
AMOUNT |
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|
|
Likewise, below are the tables for the two countries Revenue Account for the year 2007 (Income of the Household where the money for the expenses had come from). Same as the above, all figures of both tables are expressed in billionth digit of the respective monetary unit.
Table 4: Japan 2007 Breakdown of Revenues
|
ITEMS |
AMOUNT |
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|
|
Table 5: Philippines 2007 Breakdown of Revenues
|
ITEMS |
AMOUNT |
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|
|
At first glance, we will be tempted to conclude easily that Japan has maintained a well-balanced budget having been that the total expenditures amounting to approximately 83 trillion Yen is equal to that of the revenue of also 83 trillion yen. Whereas, one may easily conclude further that the Philippines is much more prudent as it seems to appear that, after deducting the government expenditures amounting to 433 billion pesos to the actual revenues of 791 billion pesos, there is a budget surplus of 357 billion. This however is a first in the history of the Philippines after a decade of budget deficit and this is not due to prudent budgeting but an unexpected realized income from the sale of Philippine National Oil Corporation to a Chinese company late last year. The sale had long been in the table for negotiation, for years, under the present administration’s thrust of privatization, thus only now that the sale had been realized resulting to an income un-programmed at the beginning of the fiscal year.
IV. JAPAN’S FISCAL PRIORITIES
To help us make up a clearer picture of the tables above, Pie Charts had been made to aid us in the analysis of the said figures (see annexes). Chart A refers to Japan breakdown of expenditures while Chart B refers to the Philippines breakdown of expenditures. Chart C refers to Japan breakdown of revenues whereas Chart D refers to the Philippines breakdown of revenues.
As shown in Chart A, Japan’s top Five (5) spending priorities are Social Security (25.50%), National Debt Service (25.33%), Local Allocation Tax (18.01%), Public Works (8.38%) and Education and Science (6.36%). These spending priorities reflect the present needs of Japan’s society. The biggest expense brought about by Social Security can be attributed to the growing number of aged person in Japan while the National Debt Service is brought by the growing budget deficit year after year in the national government budget. Thus, this latter fact will negate the first impression that had been made in glancing at Chart A and C that the expenditures is well balanced with the revenues. National Debt Service Fund, having eaten a quarter of the pie of expenditures only leads us to one conclusion – that is, Japan National Government had, for some time, been borrowing money for its expenditures. Those loans are now maturing, thus need to be paid, as evidenced by the presence of that fund and it is quite huge as proven by the percentage share of the fund to the national wealth.
Japan’s Local Allocation Tax Grants for their local government agencies had been dramatically reduced to 18.01%. This is probably the result of the Trinity Package Reform that the National Government had implemented throughout the years. This reflects the political will and sincerity of those in power to afford the local government agencies more autonomy through decentralization and fiscal empowerment. The reducing trend of share of the local government agencies from the national wealth should not be construed here that the national government is slowly depriving the former of fiscal support. On the contrary, this reduction of share was brought by the greater delineation of the national government to the local governments the authority to levy taxes and raise their own fund. Greater leeway, or fiscal autonomy for Local government to raise funds, coupled with greater authority, function and responsibility, results to a greater independency of the local governments from the national government. In short, the fiscal disposition of the National Government reflects its commitment to greater decentralization of powers and empowerment of the local governments.
Public Works and Education and Science remain predominant needs of the society to further its advancement towards a modern society. Thus, the presence, as priorities, of these in the General Accounts shows that the budget is forward looking, anticipatorial and responsive to the need of the Japanese Society. The reduction of the Public Works Fund can be explained by the recent shift of the planners in spending for infrastructures. Instead of being customer-focused in the determination of spending, the planners shifted to objective-focused approach. This enhances the efficiency of the project by asking the questions ‘what will be attained if this infrastructure will be constructed’ rather than ‘who will benefit if this infrastructure will be constructed”.
V. THE PHILIPPINES FISCAL PRIORITIES
Allocation to Local Government Units (45.40%), AFP (Armed Forces of the Philippines) Modernization Program (11.52%), Pension and Gratuity Fund (11.07%), Agriculture and Fisheries Modernization Program (4.82%) and DepEd (Department of Education) School Building Fund (3.93%) are the top Five (5) spending priorities of the Philippines national government. Allocation to Local Government Units got the lion’s share of the pie. This is because of the many and liberally devolutionized functions of the national government to the local governments but lesser fiscal autonomy and tax raising powers. For the whole system to function there is a need for the national government to keep the local government running by supplanting fresh funds periodically and regularly otherwise, service will never filter down to the people. This fiscal disposition also highlights the apparent dependency of local governments to the national government for funds to finance its operations. This, however, is driven more of practical needs rather than caprices, for institutionalized sharing scheme of this fund is in place based on several verifiable and objectives indicators.
AFP Modernization Fund, being the second largest spending priority is a clear response of the government to the growing national security threat, both domestic and foreign, against the country. For the past years, the country had been persistently plaque by security breached from Jemaah Islamiyah, a local radical armed group of terrorist from the neighboring Indonesia, causing terrorist acts in Southern Mindanao region of the country. Until recently, this Muslim extremist joined forces with Abu Sayaf, a local radical terrorist group in Mindanao, wreaking havoc and fear in the country and in the neighboring countries as well. In response to this, the need for upgrading the capability of the Armed Forces of the republic becomes an utmost priority for the government to quell and respond to these threats.
Pension and Gratuity Fund earning the third rank is a manifestation of the Government’s commitment to its aging population and retired employees. This fund however been marked by gradual decline for the past years. The decline is not due to the declining number of aged person in the country but due to the privatization of this function. Agriculture and Fisheries Modernization Fund is the government’s investment to further enhance the agriculture and fisheries sector of the country making it more competitive with other countries. This fund also aimed to reduce the country’s dependency on rice imports from other Asian economy by modernizing its own rice production sector. The country visions itself to be a rice exporting country by 2015.
DepEd School Building Fund will be used for further upgrading of the country’s human capital. School building here refers not only to infrastructure building but software building too. The term “school” here was used loosely to mean knowledge building of which a school represents. Human Capital is one of the largest exports of the country today, being services ranking third from the contributors of the country’s GDP, and the economy as a whole. The Philippines considers its world class service sector as one of the main engine of growth of the country’s economy.
VI. OF LEMONS AND LIMES: THE SIMILARITIES OF ACCOUNTS
The Philippines Allocation to the Local Government which costs the national wealth almost half of it and Japan’s Local allocation Tax Grants of only more than a quarter marked the stark difference of the two countries’ fiscal priorities. The Former has much lesson to learn from the innovativeness of the latter in promoting decentralization and local government empowerment. Lessons must be learned that decentralization efficiency can only be attained if the devolution of responsibility and governance will be coupled with devolution of fiscal autonomy and fund raising powers. The Trinity Fiscal Reform Package implemented by the latter is a strategic action that made the national government’s fiscal spending lean and mean, so to speak.
Social Security in Japan, which bears the 25% burden of the share of national wealth and the Philippines Pension and Gratuity Fund which amounts only to 11.07% is comprehensible since the latter does not have the problem of a rapid aging population. If there is a problem in the latter, it is the expanding demand of the latter’s aging population dependents. Sons and Daughters of this aging population are already going to college at this period and their pensions are not enough to support their rising cost of education. Added to this is the continuous depreciation of the purchasing power of the peso. Thus, a need to increase the amount of the pension being received is in order.
National Debt Service of Japan amounting to 25.33% of the expenditures and the Philippine’s Debt Service Fund of 3.18% can also be analyzed by several factors. The reason why the Philippines has a lower debt service fund may be because that the Philippines loans are not yet maturing in the year 2007 thus payment of principals are not yet included and the debt service amount only includes interest payments. Another may be also the strategy of the Philippines to stop borrowing on commercial terms but instead take advantage of the Official Development Assistance from other countries which have a much lower comparable interest charges than that of commercial ones. This opportunity is absent from the Japan side and present to the Philippines side.
Education and Technology is an investment expense by Japan which rationale is yet to be understood by the Philippines. Again, there are several factors to be considered. To be fair to the Philippines, it may well understood the rationale of the investment having included it to the top five spending priority of the country, however, due to its fiscal limitation, it has to prioritized based on the pressing needs it has for the day. On contrary, the Philippines AFP Modernization Program earns a high priority as compared to Japan’s National Defense. Not only that this is attributable to the pressing needs but its prioritization on Japan’s side is restricted by its constitutional limitation to maintain Armed Forces. Technically, there are no Armed Forces to speak of the latter. What it has is the so-called Self-Defense Forces of which if given utmost priority, Japan constitutionalists might argue that the country is arming again in violation of its constitution.
Japan’s Economic Assistance which earn 0.83% share and the Philippine’s Priority Development Assistance Fund of 2.64% has the same purpose. In papers, it is a fund extended to marginalized or, in the case of the former, some interest economic groups, to enhance their productivity. Albeit, at least in the case of the Philippines, this is considered as political money as it is used to finance some projects that had been identified by the politicians in the guise of economic activity furtherance. A larger share in the Philippines side means that political pressures had been exerted more in the crafting of the budget.
Transfer to Industrial Investment which is 0.02% in Japan and Budgetary Support to Corporations amounting to 4.08% in the Philippines is a spending activity which, strategically, is very vital to further both countries economic powers. This spending activity is a lesson learned by the Philippines from Japan itself. It is an imitation of a developing country from a developed country. This explains why the Philippines spend more than that of Japan at this moment as the latter is already a developed country, thus, only needs as “maintenance expense” so to speak. While in the case of the Former, it has to nurture more its vital industries and protect some badly needed economic sectors from the giant economies in this free market world.
Japan’s Food Supply Fund (0.73%) and Philippine’s Agriculture and Fisheries Modernization Fund (5.44%) is incomparable in percentage value yet complimentary. Incomparable in a sense that primary product is vital for both countries yet the minimal priority of Japan in terms of fiscal disposition seems to elude reasons. The reason may well lie behind the nature of economy of both countries. While Japan, being an industrialized country, aims to secure only domestic primary product consumption, the Philippines, being an agricultural country, aims to secure not only its domestic consumption but to gain share of the foreign market consumption through exports. The latter can only attain this through increased production and quality. Finally, this is complimentary, since primary product trade import and export data of the two countries shows that Philippines is the leading source of agricultural products of Japan. Viewed from the perspective of Japan, the Philippines is still incurring trade deficit, thus, the need to upgrade the Philippines production capability. In the end, both countries will benefit on the present fiscal dispositions of their governments.
VII. OF APPLES AND ORANGES: THE DIFFERENCES OF ACCOUNTS
Present in Japan but absent in the Philippines are fund for the development or furtherance of Energy (1.04%), Promotion of Small and Medium Enterprises (SME) and Public Works (8.38%). While in the Philippines, and absent in Japan, are the following strategic expenses which are Tax Expenditures Fund (2.43%), National Unification Fund (1.15%), E-government Fund (2.30%), Miscellaneous Personnel Benefit Funds (1.57%), International Commitment Fund (0.44%), Calamity Fund (2.07%) and Agrarian Reform Fund (2.01%).
Energy development absence in the Philippines spending can be well explained by the following factors but none of which means that the Philippines doesn’t need any furtherance on its energy supplies versus the growing needs. The Philippines, albeit not an oil producing country, do not suffer energy insufficiency or deprivation. This is because that its local energy produced, mainly from Malampaya Natural Gas Reserves in Palawan Islands, is enough for the country but insufficient to be exported. The reason is that the country is prohibited by the constitutional prohibition of “national patrimony” to further developed and exploit its vast reserves of oil and gas. The country responded on this restriction by concentrating more on the alternative sources of energy such as bio-fuels (from grass and sugarcanes which are abundant in the Philippines) and renewable energies such as hydro-power and wind-turbines. To finance these, the Philippines relied heavily on private business investments and foreign aids, such as the Spanish Government Clean Energy project in the Philippines.
Infrastructure or Public Works investment are also absent or low in priority in the Philippines spending due to its strategy of building its much needed infrastructure through Built-Operate-and-Transfer Schemes whereby a private business corporation will build the much needed infrastructure, operate the same for a certain period of time to get back its investment and earn some profits, and after that, transfer the ownership and operation of the same to the government after the expiration of the previously agreed term. Promotion of SMEs is done actively in the Philippines too but expenses of the same are shouldered by business groups rather than the government. This is because the business sectors in the Philippines views the informal sector as a market and opportunity rather than impediment of progress. This is a classic example of a multi-sectoral partnership in socio-economic development.
On the other hand, Tax Expenditures are viewed by the Philippines as necessary expense realizing that, because of its decade of budget deficit (see Chart E), there is a need for the government to enhance its tax collection effort and capability. Its revenue being dependent largely upon taxes (62.73%) as shown in Chart D and less from other sources, the indispensability became too much apparent. E-government Fund is also a need to curb corruption in the government by minimizing human intervention in the processes, greater information and process transparency, and cutting the much hated bureaucratic red-tape. Upon completion, the government will shift to e-governance by integrating modern communication and information technologies to its day to day governance.
National Unification Fund was used to finance the ongoing peace negotiations with the Moro Islamic Liberation Front and the Muslim National Liberation Front. These are Muslim separatist which insist on a separate Muslim state of Mindanao from the Philippines. A century of war had been waged against the government by these separatist. Funds are needed to attain the peace and progress in Mindanao Islands. Peace negotiations through third office, played by the Organization of Islamic Countries, are moving forward, thus, this expense. Part of the fund was also used to provide livelihood to the members of the New People’s Army, an armed group of the Communist Party of the Philippines, who availed the amnesty program offered by the government with the aim in view, for this rebels to go back to the folds of law.
International Commitment Fund is a fund which the Philippines have to contribute to the Association of South East Asian Nations (ASEAN) for the continuous operation of the group. This is part of the diplomatic and international commitment of the country to its neighboring countries in South East Asia. Meanwhile, Agrarian Reform Fund is an expense to implement a decade program to effect agrarian reform in country. This expense is mandated by the Revised Comprehensive Agrarian Reform Law that had been passed by the Legislative Body of the Philippines, thus, is considered as statutory obligation.
Calamity Fund is another statutory obligation expense. A law had been passed by the Congress of the Philippines that a certain percent of the annual budget must be set aside to finance any untoward expenses that may be brought by a calamity, whether man-made or natural. This fund can also be used in the upgrading of the capability of the government in responding to any emergencies owing to the fact the Philippines is being visited by an average of 45 Typhoons annually and is considered to be under the Pacific Ring of Fire, thus, prone to earthquakes and volcanoes eruptions.
Miscellaneous Personnel Benefit Fund is again another statutory obligation to finance the National Government’s Employees Productivity Enhancement Program. The fund will be used to pay incentives and bonuses of the employees related to an enhanced productivity based on an agreed verifiable and objective indicators.
All of these, regardless of the country, are accounts that are dictated by needs and current pressing priorities, as viewed in the eyes of those who governed. These expense accounts give us the pictures that each of the subject-country’s budgets is influenced by several and varying factors of governance. Sound principles of normative public finance dictates government spending must be responsive enough to the needs of its constituents. The two-subject countries are seen to be trying to be faithful to those principles. However, several influences were also seen and evident on the prioritization of the government spending on both countries. The important thing is, conclusion and observations that can be derived from these data will be helpful for both countries in the course of their reflection for the next years budgeting process.
VIII. GETTING THE MONEY
Chart C and D demonstrate the similarities and differences of how the two governments raised their much needed money to spend. Japan and Philippines both get the bulk of their sources from Taxes. The former gets the bulk of money from Taxes and Stamp Revenues (64%) while the Philippines on Tax Revenues (81.81%). It would seem that The Philippines is much more dependent to taxes than Japan. This is because the Philippines had also stopped its reliance from borrowings due to its increasing public debt. At present, the government is in the cycle of debt wherein it borrows to pay old debts. It is a vicious cycle that The Philippines is trying to get out as evidenced by its attempt to decrease borrowings and payments of old debts through other sources. (See Chart E). Other than this, the government had resorted to incomes from privatization, as had already mentioned on earlier chapter. However, this income is not fixed and sometimes unreliable as it is dependent upon the negotiations and command prize of the property being privatized.
While the Other Income of the Philippines is much bigger than that of Japan, this is because Trade income Account is considered as Other Income in the Philippine side. Foreign Grants are also considered as income for this replaced the borrowings of the Philippine’s government on commercial terms. This is because The Philippines is taking advantage of the lower interest rates of Foreign Grants as compared to Long-Term and Medium Term Bills and Bonds which Japan uses in its borrowings.
It may be shown therefore that the Philippines had learned its lesson from its several years of experience in borrowing money. These lessons learned are now being implemented to further its vision of prudent spending - prudent in a sense not of curbing expenses but proper prioritization of expenses and utilization of resources. Proper prioritization and utilization means that the government must spend money responsibly and on expenses that are badly needed to spur economic growth such as infrastructure and improvement of human resource capital. These in turn will generate the much needed industries and generate jobs. And finally, hopefully, it will curb the menace which is poverty.
Lastly, the Philippines needed an overhaul on its revenue raising efforts. The question is which best map to follow: additional taxes or enhance tax efficiency measures? Or both? This study cannot perfectly answer that question due to its limitations, thus it is suggested that further study and data gathering and analysis be done on the state of finance of the Philippine Government. What is important though is the pressing need for the Philippines to have a Fiscal Road Map that will include the vital changes that it needed in both expenditures and revenue efforts of the Government.
This Fiscal Road Map must also provide for safety nets, assumptions and forecast taking into consideration all factors such as inflationary impacts, debts, contractionary impacts etc. Most importantly, the need for accountability and transparency must be given due importance. The People of the Philippines, as my experience shows when the Value-Added Tax was imposed, are willing to pay additional taxes or are willing to shoulder additional burden from the government. Provided, that the People also can feel and see where their money are spent and ever cents of it are spent worthily.
IX. SOME TRENDS
To support the argument above, there is a need for us to take a look into Chart E which plots the trends of expenditures and revenues in the Philippines. Unluckily, this study will not have the credibility to do the same with the Japanese side as it has already been perfectly explained by Sensei Kanemura. Instead, this paper will attempt to digest the Philippines trends from 1990 to 2007.
At first glance, it can be easily seen that from 1990 to 1996, the country exhibited all the symptoms and potentials of economic recovery and was even then tagged as the tiger cub of Asia. In 1995, the country even exhibited a revenue surplus. However, an unfortunate event happened. The Asian Financial Crisis hit the world market that The Philippines was not spared. In 1996, a forced austerity measure in government spending was implemented to cushion the impact of the crisis to the country causing a sudden dropped in the scale. In 1997, the government was backed in the spending spree as it set to host the 1997 Asia-Pacific Economic Conference (APEC) in Subic Bay, Philippines.
From 1988 to 2006, the trend was marked by increasing expenditures over a sluggish growth in revenue. This was further aggravated by the peso devaluation. This results to budget deficit, thus, forcing the government to borrow from both domestic and foreign sources. This can be shown by the steady and stiff climb of the green line in the chart. In 2003, the first phase of Fiscal Reforms was implemented tagged as Aggregate Fiscal Discipline. These reforms were centered on political, administrative and institutional reforms. It aims to minimize public debt at manageable level, increase collection efficiency, and instill public expenditure management, among others.
The results of these reforms are felt but not the way it was envisioned. It was insufficient. There is still something lacking to finally address the recurring problem of debt manageability, revenue raising and expenditure management. If these will not be addressed by the Philippine Government, the linear trends as plotted using the Linest method will be true. The linear trend projection shows a steady progressing line where debt or financing will continue to grow and no sign of decline. The Expenditures and the Revenue will continue to its course ever widening the gap between the two. Thus, the ever growing demand for a second phase of reform must be provided.
X. CONCLUSION AND RECOMMENDATIONS
A Philippine legislator, who is a graduate of economics, when confronted by these fiscal issues in the Philippines, lamented to his priest what to do and through the way, muttering technical financial terms he knows of. The Priest fell into silence. But after a moment of pause, the priest answered “My son, in that case, makes Fiscal Policy your religion and Primary Surplus your god”.
The foregoing is an exaggeration if one will try to answer incites that had been seen in the study. It is this student’s belief that there is no need to have a conversion of religion and radical shift of belief or non-belief for that matter to contribute to the observations that had been gleaned by this paper. As this paper started on simplification, this paper will also end through simplification.
Going back to the analogy of households, this paper learned that studying Japan and The Philippines public finance is like looking into two household of completely different circumstances. One is considered to be affluent while the other is a middle class household. While the other may have members who earns enough to contribute to the day to day living and maintenance of the household, the other has few members that can contribute.
The other household may live in a modern house, fully automated and secured, while the other household live in a house that needs renovation, and is in constant badgering of pests and robbers. While the other household is located in the city, the other household is in the rural area, thus its needs and environment both affects its budgeting. Nevertheless, both are households and there are thematic commonalities that can be found in both household, for after all, both are home where people lived.
The household budget of Japan reflects the priorities and needs of its people. It gave more thrust on the Allocation of Tax Grants, Social Security and National Debt Servicing. It generates its income primarily on tax revenues. Public works and Education and Science are also two of its priorities. It seems that the fiscal disposition of Japan adopts a direct approach to better the lives of its people. These manifestations are considered by others as welfarism.
The Philippines on the other hand has its own Allocation to Local Government Units eating a much larger piece of the pie. This means that the social efficiency of its budget is reduced if compared to Japan. For every One Peso that Japanese pays for his tax, 25 centavos goes to Local government while the seventy five centavos will be spent to better the lives of the tax payer. In case of the Philippines, for every One peso that a Filipino pays for his tax, 45 centavos goes to Local Government, thus only the remaining 65 centavos can be spent to better the lives of the tax payer. This will result to indirect approach in the improvement of the lives of its people.
Some marked differences are also noted by the study such as National Security, Food Supply, and Debt Servicing. These are however brought by the different circumstance, both internal and external, that plays a vital role in the determination of allocations of expenditures. However, it is noted that both are exhibiting budget deficits and need to borrow some money to finance their expenses. Thus, there are some observations that are common to both countries and each of the countries can also learn from each other experiences.
Whatever this recommendation is worth, the study proposes the following:
A. FOR BOTH OF THE COUNTRIES
a. A public debt management strategy must be put in place to curb the increasing gap of expenditures to revenues and the debt to GDP rate ratio. While the Philippines can continue its strategy of not availing commercial loans due to its high interest rates and instead resort to Official Development Assistance due to its low interest rates, this strategy is not available for Japan. It is therefore recommended for both countries to resort to an alternative and better termed loan schemes such as hedging of existing loans to lower the existing servicing cost or to look into loans which offers concessional rates to structured transactions that will allow the government of both countries to reduce interest cost.
b. Revenue measures must also be put into place by both countries and increase their revenue to GDP ratio by double digit in a certain fixed medium term period otherwise it would be very difficult for both country to recover and the burden will be much felt by the taxpayers.
c. Diversification of currency of bonds may also helped and continues tapping of International Market Bonds as both government can take advantage of low levels of interest rate. Both countries can take advantage of the decoupling effect from the United States.
B. FOR JAPAN
a. Japan can tap the resources of the Business Sector to unburden itself of some socio-economic concerns such as SME development. The Government of Japan can appeal to the corporate responsibility of these large and mighty domestic corporations to assist the government in implementing some socio-economic projects. A partnership between the government, the business sector, the community and the recipient themselves can result to a more cost-effective and cost-efficient project financing and implementation.
b. Japan may also undertake several infrastructure projects under Built, Operate and Transfer Schemes to relieve itself from the heavy burden of Infrastructure expense cost.
c. Japan should also capitalize on the spells of low interest rate for it to enable to issue long term bonds or other long term debt instruments and lock in the low interest rates.
d. Japan can also conduct a debt buy back and issue new dated debt bonds at lower interest rate during periods of low rate thus lowering the interest swaps. This can be done especially on domestic debts. Another option open for Japan is to conduct interest rate swaps on the same principles.
C. FOR THE PHILIPPINES
a. For one, it can follow the lead of Japan in implementing the Fiscal Trinity Reforms it imposed upon the local government to increase its independency from the National Government.
b. Greater collection efficiency, transparency and accountability in the collection of revenues and in spending it should pervade the government system. Ex post control and Ex ante control must be put in place. Administrative priority must be separated from political priority.
c. The Philippines should also take advantage of the growing rate differentials between domestic and foreign interest rates. Through currency swaps, the government can effectively lower its interest rate thus will enable it to borrow at much lower interest rates.
d. The government must also adopt an effective public expenditure management system that has the capability to reconcile spending priorities. Effective budget management is needed in the Philippines to respond to the ever increasing private sector demand within a limited government fiscal capability.
e. Government should also streamline the government for effective and efficient governance. The bloated bureaucracy must be right-size through re-engineering of the government bureaucracy. Every penny of the tax that a Filipino spent must be paid back of the utmost quality of service that the government can provide.
f. There must be also efficient risk management of its debt to avoid the bunching of maturity of the bonds it issued. There must be an effective monitoring of its risk exposure in its debt portfolio.
g. It should allow the Local Governments to tapped Official Development Assistance from other foreign countries and should relax its control over issuance of bonds by the local government. This will in turn allow the local government to finance its much needed economic activities to foster growth in their respective areas, thus, decreasing its dependency from national government.
h. It should also continue the privatization of its non-performing assets to raise fund and plagued the hole that drain whatever income the government can raised.
These observations in order to be realized will need political will from the politicians and even gamble their future in politics. Several sectors that will be affected by these reforms have the means to muscle these reforms. They have too the capability to exert pressures and defy the good long term effects of these observations. Nevertheless, only the brave, and those of pure of hearts and minds, goes further.
True, public finance is just like a household budgeting albeit subject-countries are motivated by different objectives, poverty eradication and peace for the Philippines and increase of living standard and maintenance of the country’s optimal advantage for Japan. The fact still remains that Public Finance intricacies are but created by those people that can remove or change it. This study may have superficially touched only the tip of the iceberg but nevertheless, it had been proven by this study that regardless whether you are a developed country like Japan or a developing country like the Philippines, governments will face the same problems and intricacies such as budget deficit.
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