2004 Budget Based on Flawed Speculation

Published on January 31, 2004

A review of the macroeconomic assumptions prepared by the Department of Budget of Management (DBM) shows that there are glaring contradictions in government projections.

By DANILO ARAÑA ARAO
Bulatlat.com

According to news reports, the Senate took only five days to approve the national budget for 2004. A senator says that its swift passage “would ensure stability in the country and assure the continuity of government operations even if there is a changing of the guard on June 30.”

This year’s P862.8-billion budget is P2.5 billion less than the budget proposed by the House of Representatives since the Senate decided to cut the budgets of the transportation and agriculture departments. The Commission on Elections (Comelec) was also denied an additional P300-million for reverting to manual counting in the May elections.

Even prior to its passage, various groups have criticized the election budget, originally pegged at P864.8 billion because of its inherent flaws. A study by Bayan Muna party-list stresses that, as in the past, debt service has the biggest single expenditure which accounts for nearly one-third of the entire budget.

The allocations for various items may have been adjusted but it is apparent that the lawmakers harp on the macroeconomic assumptions behind the formulation of the budget. The only legislator who voted no, Sen. Aquilino Pimentel, merely explains that the budget leaves “so much to be desired for the development of Mindanao.”

A review of the macroeconomic assumptions prepared by the Department of Budget of Management (DBM) shows that there are glaring contradictions in government projections.

High growth rate

It assumes, for instance, a relatively high growth rate in national income at 6.0 percent but at the same time acknowledges a trade deficit of $1.4 billion. (See Table) Although it is not included in the DBM’s macroeconomic assumptions for 2004, the budget deficit is expected to reach P197.8 billion by end-2004 ($3.55 billion, based on an exchange rate of P55.75 per U.S. dollar).

The exchange rate is expected at P54 per U.S. dollar, but the current rate is already beyond the P55 mark. As regards inflation rate, the government acknowledges a higher rate of 5.0 percent to 6.0 percent for 2004 compared to last year’s 3.0 percent. This implies higher prices at a time when prospects for a wage increase are dim, based on government’s repeated pronouncements that it is not investor-friendly.

The kind of economic growth that will be attained, if at all, could therefore be debt-driven to offset the deficits expected to be incurred as early as now. There is also a possibility of new or higher taxes to generate more revenues for the government.

According to Bayan Muna, the government may need to “borrow some P411.9 billion ($7.39 billion)… (P288.1 billion or $5.17 billion from domestic and P123.8 billion or $2.22 billion from foreign sources) to finance its expenditures for this year. Around 66 percent of…borrowings will be used to finance debt obligations while 33 percent will be used to finance the budget deficit.”

Four reform measures

Before Congress last year, the Department of Finance (DoF) proposed four reform measures that would result in additional revenues. These are the creation of a National Revenue Authority (NRA), a semi-private tax collection body to replace the Bureau of Internal Revenue (BIR); restructuring of excise taxes on automobiles (additional P1.4 billion or $25.1 million); indexation of sin taxes or higher taxes on cigarettes and liquor (additional P7.0 billion or $125.6 million); and rationalization of documentary stamp taxes (additional P5.0 billion or $89.7 million).

The highest revenue-generating bill, the indexation of sin taxes, is an indirect tax that is inherently biased against the poor given their low purchasing power. Just like the value-added tax that was imposed in the late 1980s and whose coverage was expanded through the years, government may expect opposition from concerned groups and individuals if this will be enacted into law.

The 2004 budget must therefore be analyzed not only along the lines of how it reflects government priorities based on the allocations for every item. Equally important are the macroeconomic assumptions because these concretely manifest the government’s views on how development will be pursued and for whose purpose its development thrust serves.