Quo Vadis, Diokno and Recto

On Friday, Jan. 12th, Ralph Recto replaced Benjamin Diokno as the Secretary of the Department of Finance (DoF). After months of speculation, rumors which Mr. Diokno dismissed, Malacañang announced the appointment of Ralph Recto as Finance Secretary. The announcement was done late in the evening, just hours before Recto’s scheduled oath-taking.

President Ferdinand Marcos, Jr. thanked Diokno for “doing a splendid job” and “setting the economy onto the right path.” Meanwhile, the outgoing Secretary Diokno said that he was “pleased” to turn over the DoF to Recto “at a time when the Philippine economy, in general, and the DoF, in particular, are in a better state of affairs than when [he] inherited them.”

Diokno’s exit comes at a time that several crucial tax measures are still pending in Congress. The Real Property Valuation and Assessment Reform (RPVAR) is going through interpellation in the Senate plenary session. The Passive Income and Financial Intermediary Taxation Act (PIFITA), Value-Added Tax (VAT) on Digital Service Providers (DSPs), and excise tax on Single-Use Plastic Bags (SUPs) are pending in the Senate Committee on Ways and Means. Senate counterpart bills have not been filed for the Mining Fiscal Regime Reform and the Motor Vehicle Road User’s Tax (MVRUT); while excise taxes on alcohol and sugar-sweetened beverages are pending in the House Committee.

Altogether, these pending reforms would raise about P146.89 billion in the first year of implementation, or about 4.6% of the total tax revenues projected for 2024. Given the administration’s macroeconomic assumptions, failure to pass these measures would result in an increase in the deficit by 10%, or half about a percent of GDP (Gross Domestic Product).

Just the Monday prior to his departure as Finance Secretary, Mr. Diokno said that he was “fairly comfortable that we’d increase new taxes plus increase our revenue efficiency collection” and expressed confidence that “those tax measures [would] be approved in the first quarter of this year.”

Suddenly, there is new leadership in the DoF that will navigate the quickly shifting political terrain in Congress to pass the administration’s fiscal reforms. Regardless of the change in leadership, several challenges beset the Department.

In September, then Finance Undersecretary Cielo Magno was forced to resign. Executive Secretary Lucas Bersamin issued an official statement on Magno’s termination, saying that “she clearly does not support the administration and its programs for nation-building.” Her resignation came in the wake of her social media post that indirectly criticized the policy of price control on rice. In truth, her position was vindicated, for the administration soon after lifted the price ceiling.

When she was still the Finance Undersecretary, Ms. Magno spearheaded the DoF’s efforts to forward fiscal reforms. But her exit resulted in a stalling or a dilution of the reform bills.

In December 2023, Frederick Go was appointed as Special Assistant to the President for Investment and Economic Affairs (SAPIEA). The Executive Order creating the Office of the SAPIEA designates its head to chair the Economic Development Group (EDG). The EDG is actually a renaming of the Economic Development Cluster (EDC). A noticeable change in creating the SAPEIA is that the role of the Finance Secretary in the EDG has been downgraded. In the EDC, the Finance Secretary was the Chair.

While many have acknowledged Mr. Go’s qualification as SAPEIA, questions have been raised regarding the new organizational leadership structure. One concern is the Finance Secretary’s role in the economic team. The Finance Secretary is presumably the primus inter pares.

In effect, Mr. Diokno, in his remaining days as Finance Secretary, was relegated to a secondary position.

Mr. Diokno already had big expectations to live up to as previous Finance Secretaries had successfully enacted major tax reforms within the first three years of their six-year tenure. It was during the first half of Finance Secretary Cesar Purisima’s tenure that the Sin Tax Reform Law in 2012 was passed. This law nearly doubled tax revenues from tobacco and alcohol — from P55.7 billion in 2012 up to P103.4 billion in 2013. As of 2022, tax revenue from the tobacco and alcohol taxes amounted to P256.2 billion. Further, this reform provided substantial funds for the Universal Health Care program.

Secretary Carlos Dominguez III, during the presidency of Rodrigo Duterte, succeeded in passing comprehensive tax reforms (called the Tax Reform for Acceleration and Inclusion or TRAIN Law) in 2017, a year after Mr. Duterte assumed the presidency. TRAIN provided personal income tax relief (e.g., lower personal income tax rates) to the greatest number of taxpayers but at the same time increased excise taxes and reduced further the VAT exemptions. This delicate balancing act yielded substantial revenues. From 2018 to 2021, TRAIN generated P476.1 billion in additional revenues for the government, which supported the government’s higher infrastructure spending and funded major social programs like universal healthcare.

As of this writing, the Marcos administration has yet to pass a significant revenue-generating measure, which is necessary to address the narrower fiscal space arising from the pandemic borrowing and new expenditures.

In light of this, Secretary Recto must succeed where former Secretary Diokno failed.

The replacement of the Finance Secretary is like a National Basketball Association (NBA) team firing the head coach, a common strategy in the face of unmet expectations or poor performance. Just as an NBA team would replace its coach to reinvigorate championship aspirations, this administration is seeking to rejuvenate its fiscal reform efforts by appointing a new Finance Secretary.

Firing a coach is often seen as the most convenient solution and quickest response to the demand for immediate improvement. However, this move doesn’t always address the deeper, systemic issues within the team such as leadership dynamics, weak governance, team culture, or strategy. Similarly, changing the Finance Secretary might offer a symbolic fresh start, but it really does not address the bigger governance and political economy questions that beset the Marcos administration.

And just as bringing in a coach with a fresh and clear vision and system can unlock the basketball team’s potential, appointing a new Finance Secretary with a strong and clear vision can jumpstart the reforms. A new Secretary can lead the DoF and persuade the President to resist pressure from vested interests and overcome political hurdles to achieve the desired policy outcomes and overarching goals.

The appointment of Ralph Recto as Finance Secretary brings with it the imperative of advancing the reforms previously endorsed by the Department of Finance. These initiatives, having experienced setbacks and diversions during Diokno’s short term, now require unwavering commitment and follow-through. The real test lies in whether Secretary Recto will be able to convince his former colleagues in Congress to pass the crucial tax reforms without severe compromises. This challenge is made all the more difficult by the shortening period to pass the reforms amid the increasing political tensions as the midterm elections approach.

The leadership of Finance may change, but regardless of changes, we must remain steadfast in pursuing the desired reform agenda.

AJ Montesa heads the tax policy team of Action for Economic Reforms.