Underspending: Failure masquerading as success

Benjamin E. Diokno

Posted on March 18, 2015

ONE SHOULD BE unhappy with the government’s fiscal performance. During the last five years, from 2010 to 2014, actual government spending has been below planned spending. Yet, Finance Secretary Cesar Purisima is elated that actual budget deficit is much smaller than planned deficit.

In 2014, planned deficit, the difference between expenditures and revenues, was P266.3 billion, or 2% of gross domestic product; actual deficit was P73.1 billion, or 0.6% of GDP. Rather than being a sign of success, this is a sign of failure.

Lower deficit is a result of serious underspending, which is disastrous for a country that is trying to reduce joblessness, poverty and hunger.

Instead of admitting that the administration failed to meet its own fiscal goals, Mr. Purisima proudly announced that government actual spending has been below planned spending -- as if it was its ultimate goal. Planned spending is the product of careful planning and coordination of the economic managers. The planned spending of P2.284 trillion and deficit of P266.2 trillion (or 2% of GDP) is supposed to be consistent with a GDP growth rate of between 6.5% to 7.5%.

“Institutionalizing reforms across all agencies translate into favorable numbers that bode well for the Filipino people. Time and again, we have proven how this government is forward-facing and actively engaged in building our prosperous future,” Purisima said.

“The Philippines continues to stand on firm fiscal footing as we grow at a sustainable pace, owing to the reforms that we have put in place,” Purisima added.

These are nice words, but they can’t hide the brutal fact that revenue targets were unmet and public underspending continued to deny society of better infrastructure for the future, and more jobs, better income, and less hunger in the near term.

The revenue-collecting agencies of the government -- the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) -- have consistently failed to meet their respective revenue targets.

Last year, the BIR missed its full-year collection target by 8.3%: it collected P1.335 trillion versus its revenue target of P1.456 trillion. The BOC missed its revenue target by 9.5%: it collected P369.3 billion versus its planned revenue goal of P408 billion.

Yet, Mr. Purisima remains unperturbed. He promises the improbable: “We expect our fiscal performance to improve further as we roll out our comprehensive tax reform package this year, a holistic view at engineering an equitable and competitive Philippine economy.” What “comprehensive tax reform package” is Purisima talking about?

Why only now -- in the last 15 months of the Aquino administration? Election fever will hit in the next few months. Candidates for national positions have to file their certificates of candidacies in five months. The election selection process should start in a few weeks.

Would politicians in Congress who are either running for reelection or for higher office be willing to go along with the administration for real tax reform? Real reform means some degree of pain on the part of taxpayers. Are politicians willing to inflict pain on their constituents one year before the elections?

Past experiences dictate that it is unwise to do a comprehensive tax reform during the final year of any administration. Nearing an election, the tax reform proposals are likely to be full of compromises. There is a real risk that the new tax legislation coming on the heels of an election might result in a weaker -- not better -- tax system.

For the Aquino administration, underspending has been the norm. It should be spending more for public infrastructure to make up for past neglect and to bridge the Philippines’ huge infrastructure gap. Yet, it has notoriously underspent, resulting in further worsening of the existing decrepit public infrastructure.

Last year, planned spending was P2,284.3 billion while actual spending was P1,981.6 billion, or a difference of P302.7 billion.

It’s a pity that the Aquino administration failed to spend what Congress has already authorized it to spend for public infrastructure and investment in human capital.

Imagine what the unspent P302.7 billion can buy for the government in terms of new roads, bridges, airports, seaports, irrigation facilities, urban transport systems, and others. Higher spending could have pushed the economy on to a higher growth trajectory.

The opportunity cost of underspending is enormous. Imagine how many direct and indirect jobs could have been created with P302.7 billion worth of public infrastructure. Imagine how much of the P302.7 billion could have ended up in the pockets of poor and middle-income people.

Assume 25% labor costs for public construction, then the direct labor costs of P302.7 billion is approximately P75.7 billion. Imagine the multiplier effect of the P75.7 billion in terms of new consumption and investment.

Imagine how many Filipinos would have been pulled out of the poverty pit with the additional P302.7 billion government spending. Poverty rate and hunger incidence would have been cut significantly.

Given the present state of the Philippine economy, government underspending is a sign of failure, not success. And at this time when the credibility of policymakers are at rock bottom, it might be a good idea for the economic managers to admit that government underspending is bad -- not good -- for the economy and its people.

Admitting that the government has underprovided and underspent at a time when public needs are high might be a hard pill to swallow. But, at least, it could be a refreshing change.

Benjamin E. Diokno is a former secretary of Budget and Management.