Medium-term Philippine Development Plan 2011-2016

CHAPTER 1: MACROECONOMIC 1 POLICY EXECUTIVE SUMMARY

I. ASSESSMENT AND CHALLENGES A. Fiscal Sector For the period 20042009, major reforms were undertaken to improve the revenue situation such as the reform of the excise tax on alcohol and tobacco, an expansion in the base of and an increase in the rate of the value-added tax and the enactment of the Lateral Attrition Law. These increased tax effort from 12.5 percent in 2004 to 14.2 percent in 2008. Deficit fell from 3.9 percent of GDP during the period 2000-2004 to 1.1 percent in 2006 and to a almost balanced position of 0.2 percent in 2007. Likewise, the consolidated public sector financial position reached a surplus of P21.3 billion, or 0.3 percent of GDP, in 2007 from a deficit of Php235.9 billion, or 5.0 percent of GDP in 2004. The recent global financial crisis slowed down economic activities in the country, resulting in weaker revenue collection. Revenue effort went down from 16.2 percent in 2008 to 14.6 percent in 2009, back to the level before the implementation of reforms. Tax effort dipped to 12.8 percent in 2009. This is the lowest in the region given the ASEAN average tax effort of 14.9 percent. However, it was not only because of the crisis that tax effort is sub-par. Several tax eroding measures that were enacted in 2009 and 2010 in order to give tax relief to various sectors have, to some extent, reduced the revenues gained from earlier tax reforms. Also, revenues from taxes with specific rates either have remained flat or were not sustained in terms of their percentages to GDP because of the absence of indexation. Similarly, excise taxes on sin products and petroleum vaguely increased during the period, from 21 percent of total revenues in 2004 to 22 percent in 2009. The ability of the government to raise additional revenues from its non-tax sources has remained weak as well. For instance, the countrys income from its corporate sector and from its assets and investments amounts, on the average, to only 2 percent of GDP compared to the ASEAN average of about 5 percent of GDP. In addition, fees and charges which remained less than the actual cost of public service administration is not a dependable source of revenue. The 2010 revenue position remains precarious. While tax effort increased to 13.3 percent in the first nine months of 2010 from 12.8 percent in the same period in 2009, BIR and BOC did not meet their respective target for the first three quarters of 2010. The postponed privatization efforts reduced non-tax revenues relative to 2009. Dividends and interest income has not increased.

A sustained level of annual government spending that support a high economic growth is yet to5 be realized. Government spending contracted from 18.3 percent of GDP in 2004 to 17.2 percent of GDP in 2008, then improved to18.5 percent of GDP in 2009. Re-structuring efforts resulted i an increasing share of infrastructure outlays to as high as 15.2 percent of the budget. Interest payments significantly reduced from 5.4 percent of GDP in 2004 to 3.6 percent of GDP in 2009 given the declining budget deficits, favorable interest rates, and stable foreign exchange rate. As a result, the share of interest payments fell from 29.2 percent of the budget to 19.6 percent. In addition to countering the effects of the global economic slowdown, disbursements expanded in 2009 due to relief, rehabilitation and reconstruction efforts prompted by the destructive calamities. In 2010, total national government spending for the first three quarters amounted to PhP1,154.5 billion, 7.2 percent higher than in 2009. The share of interest payments in the total budget increased from 19.6 percent to 21.2 percent due to increased fiscal deficits. Higher deficit and weaker revenue effort are constraining budgetary allocations for the economic and social sectors. Thus, increasing the countrys effort to generate sufficient revenues to support growth requirements in the medium term remains to be the greatest challenge for the fiscal sector. The vision to further bring down the countrys debt ratio to a more comfortable level dictates that more effort be exerted in the area of revenue collection. A proactive debt management should also be continued in order to reduce debt service burden to free up some resources that could b channelled to a more productive spending. . B. Monetary and External Sector The inflation rate for the period 2004-2009 ranged between 2.89.3 percent, averaging 5.9 percent per year. Year-to-date inflation (January - November 2010) rate stood at 3.8 percent. For the period 2004-2006, much of the increase in inflation was due to supply shocks arising from increases in global oil prices that pushed up domestic pump prices, minimum wages adjustment, hikes in transport fares and utility charges, and the El Nino phenomenon. When inflation rate hit 9.3 percent on 2008 due to sharp increases in global commodity prices, monetary authorities adjusted the policy rate several times, always on the lookout for upside an downside risks to the inflation outlook. Timely and appropriate monetary responses supported growth and helped in avoiding a recession at the height of the global financial crisis. On the external sector, the Philippines balance of payments (BOP) remained on a surplus position since 2005 at US$2.4 billion, reaching US$5.3 billion in 2009. Data for the second quarter (2nd81 ) of 2010 showed a surplus of US$3.3 billion on account of the US$4.4 billion current account balance, and the capital and financial account balance improving with a net outflow o US$192 million from US$2.4 billion in 2009. Merchandise exports growth performance is4 relatively volatile as the country remained vulnerable to global developments. Annual average growth rate reached only 1.6 percent for the 2000-2009 period, with growth rates ranging from 22.1 percent (2009) to 15.6 percent (2006). What has been gaining in the past decade is the exports of services, growing annually by 12.9 percent from 2000 to 2009 mainly on account of transportation, travel, and other business, technical, and professional services.

There are indications of a structural shift in the countrys external payments towards a current1 account (CA) surplus. This is due largely to the resilience of overseas Filipino (OF) remittances, increased services receipts from business process outsourcing and strong tourism receipts. II. STRATEGIC FRAMEWORK The main task of macroeconomic policy is to address the narrow fiscal space and get on a sustainable revenue-and-spending path. On the monetary and external side, this means commitment to low and stable inflation conducive to balanced and sustainable growth, reduced external vulnerabilities, and stronger financial market capitalization, supervision and market discipline. A. Fiscal Sector 1. Tax administration reforms To improve tax administration, numerous reform measures are being lined up. These measures include the following: a. To establish a tax registry that includes all taxpayers; b. To prepare a comprehensive third party data as source to determine the potential tax base; c. To maintain a transparent and productive tax audit program; d. To fully complement BIR and BOC with competent and adequately trained staff; e. To formulate transparent and consistent tax rulings; f. To revitalize the RATE, RATS and RIPS programs of government; g. To establish appropriate performance standards and evaluation; and h. To institute a more effective system of rewards and penalties under the Lateral Attrition Law backed up by performance standards. 2. Tax Policy Reforms The rationalization of fiscal incentives will save revenues for the government by doing away with redundant incentives. A fiscal responsibility law is necessary to hasten the fiscal consolidation process and impose fiscal discipline at all levels of government. Adjustments in the excise tax on alcohol and tobacco products, as well as the excise tax on petroleum shall be pursued. The use of the so-called PAYGO system as a collection handle must also be6 maximized. In order to correct distortions in the tax system brought about by the enactment of piecemeal exemption laws, reversal of these unnecessary tax exemptions will not only restore revenues but will also render the tax system more efficient and equitable. A review of the tariff reduction program is also in order. 3. Non-tax revenue reforms Fees and charges collected by the government need to be adjusted to cover the cost of administering government services. Government will be more aggressive manner in auctioning off assets such as air frequencies, mining rights and permit to develop renewable energy resources. GOCCs need to promptly remit dividends.

a. Medium-Term Expenditure Framework (MTEF). Continued adoption of the multi-year budgeting system or the MTEF will improve predictability of funding and integrate policy with resource allocation. The main components of the MTEF are the Paper on Budget Strategy (PBS) and the Forward Estimates (FEs). 1) Paper on Budget Strategy will link budget allocation with the national agenda of the government to identify the priority areas for spending. 2) Forward Estimates (FEs) are the estimated annual costs of ongoing programs and projects will ensure continuous funding of program requirements beyond a given fiscal year, providing a sound basis of future years budget trends b. Organizational Performance Indicator Framework (OPIF) enables the channelling of resources to where it best produces the desired results and outcomes as indicated by agreed upon performance indicators. c. Fiscal Responsibility Bill (FRB). The bill aims to strengthen fiscal discipline in the public sector by prescribing principles of responsible fiscal management, establishing control mechanisms on spending, and adopting preventive measures against the erosion of the tax base of the government. d. Government Rationalization Program (RP). Continued implementation of Executive Order No. 366 issued on October 4, 2004, which aims to build a smaller bureaucracy and improve public service delivery. e. Procurement Reforms. Starting 2011, the following functionalities in the Philippine Government Electronic Procurement System (PhilGEPS) by all government entities as provided for in Republic Act No. 9184 or the Government Procurement Reform Act will be implemented: (a) virtual store for electronic purchasing; (b) expanded supplier registry as a centralized electronic database of all manufacturers, suppliers, distributors, contractors and consultants registered in the system; (c) introduction of charges and fees to sustain operations and maintenance of the system; (d) e-payment system to enhance the functionality of the virtual store; (e) e-bid facility for electronic bid evaluation of all types of procurement; and (f) uploading of the Annual Procurement Plan (APP) for every government procuring entity. f. Strengthening of the Internal Control System (ICS). The DBM, in partnership with the Office of the President-Internal Audit Office completed and issued the National Guidelines on Internal Control System (NGICS). A Philippine Government Internal Audit Manual (PGIAM), consistent with the NGICS, shall be finalized to assist government establish fully functioning internal audit offices in the public sector. g. Zero-Based Budgeting (ZBB) Approach. Complementing the MTEF and the OPIF, the ZBB approach is geared towards assessing the continued relevance and priority of programs; ascertaining whether the program objectives/outcomes are being achieved.

h. Transparency and Accountability Safeguards in the Budget Process. Special provisions under the budgets of agencies and GOCCs with key programs and projects shall require the posting of the details of program beneficiaries and locations of projects in their websites for better information and appreciation of the public. i. Public Financial Management (PFM) and the Government Integrated Financial Management Information System (GIFMIS). This initiative aims to harmonize and integrate the budgeting, accounting and auditing systems of the government by undertaking reforms in the PFM system, to make it more transparent, accountable and performance195 oriented. j. Contingent Liability Management (CLM). Considering the fiscal impact of realized contingent liabilities (CL) from existing BOT and GOCC projects that are guaranteed by NG, a joint ICC-DBCC resolution shall be issued to strengthen CLM through the preparation of the CLM Plan. k. Timely Approval of the Annual Budget. To be able to do this, the government shall revise its budget schedule in anticipation of early budget preparation activities to give ample time for the DBM and the agencies to conduct consultations with sectoral groups, Civil Society Organizations (CSOs), and Regional Development Councils (RDCs). l. Rationalization of GOCCs/GFIs. The DOF and the DBM shall be collaborating in the passage of a law to strengthen oversight functions on GOCCs/GFIs leading to the creation of a Government Corporate Council. Administrative and legislative measures will also be proposed to amend/restructure GOCC charters. 5. Debt management reforms A dedicated unit in the DOF needs to be set up to conduct more aggressive options such as debt 215 exchanges and swaps to optimize savings. More diversification of modes, instruments used and currency mix and introduction of innovative terms and features also need to be put in place. Projects funded out of borrowing whether or not these are government-to-government arrangements, automatically guaranteed under GOCC charters, and under BOT (Build-OperateTransfer) or PPP (Public-Private Partnerships) arrangements shall be subject to the rigid test of project viability and procurement processes. Over the medium term, revenue performance will be gauged against the target of increasing tax effort to at least 16 percent of GDP. Non-tax revenues shall be targeted to reach at least 4 percent to as high as 5 percent of GDP by 2016. Correspondingly, the National Government deficit should decline to 2 percent of GDP by 2013 and must be maintained at this level until 2016. Beginning 2013, the consolidated public sector deficit must be brought down to 1.5 percent of GDP.

B. Monetary and External Sectors Inflation management remains to be at the core of the countrys monetary policy. This entails properly mitigating supply cost factors that contribute to the build-up of inflationary pressures within the policy horizon. To this end, the government, through the Bangko Sentral ng Pilipinas, shall pursue policies in support of the further strengthening of the price stability objective. a. Continuous enhancement of macroeconomic surveillance efforts is essential for a more effective management of risks in monetary policy formulation. b. Pursuing amendments to the BSP charter, including the issuance of its own debt instruments, will enhance the flexibility and efficiency of monetary policy. c. Sustaining the improvements in the communication and transparency practices are vital to the success of inflation targeting. d. Safeguarding central bank independence is important in ensuring greater credibility in combating inflation. On the external sector, the government, through the Bangko Sentral ng Pilipinas, shall adopt measures that will cushion the economy from external shocks and ensure the health of the countrys balance of payments position and the sustainability of its external debt over the medium term. Ratio of exports to GDP shall be increased to fifty (50) percent over the medium term. The countrys external debt shall be maintained at a more manageable and sustainable levels by designing an external debt structure that will minimize risks emanating from currency and maturity mismatches. On the other hand, the Bangko Sentral ng Pilipinas (BSP) will continue to push for maintaining the external debt stock and the external debt service burden at sustainable levels and that loan proceeds are supportive of the countrys development goals. The countrys external debt management is focused on three primary concerns: identification of key areas to be prioritized for foreign financing; assessment of the feasibility of projects and borrowers capability to pay; and evaluation of the countrys capacity to service maturing foreign currency-denominated obligations. The government through the BSP shall continue to adhere to a freely floating exchange rate. In other words, the interplay of supply and demand for the currency shall determine the exchange rate with BSPs participation limited only to avoid unnecessary fluctuations in the exchange rate.