ROMEO G. ROXAS:  THE MISDIRECTED REACTIONS OVER THE BUDGET DEFICIT

MANILA, September 7, 2004 (STAR) By Atty. Romeo G. Roxas - A budget deficit is not a bad thing. It even does not necessarily signal or lead to a fiscal crisis. In fact, a financial deficit should be as it is a natural occurrence in still developing countries where the revenues collected could not, for the meantime, match the money needed to finance the various physical and social infrastructure as well as the utilities that have to be put in place. It is the natural growing pains of a country as it transforms itself into a developed and progressive nation. The Philippines is in such a stage.

What is alarming, however, is not that we are in a budget or fiscal deficit but that some sectors in society seem to be acting and reacting in misguided convulsions creating a panicky atmosphere, where calmness and sobriety should prevail.

The truth of the matter is that the current situation is a golden opportunity to pursue an expansionary monetary policy by increasing the money supply so that the volume of business will increase, the level of employment will rise, as will government revenues through more tax collections. In short, the expansionary monetary measures will lead to an expanded economic base.

Sadly, though, we fail to see the golden opportunity in the situation instead choosing to focus on the glim scenario of an economic catastrophe. A misdirected government adds to the misery by pursuing stop-gap measures aimed at bridging the budget deficit thinking that it is the solution, when it only exacerbates the contraction of the economy. Government’s task, it perceives, is to cut down on expenses to keep expenditures low while taxing the people more to increase revenues in the hope of closing the gap between revenues and expenditures and thereby balancing the budget.

The twin measures, however, are self-defeating. In the case of government measures to cut-down on all expenses leaving only what it deems are the most necessary budgetary expenditures, its unintended effect and consequence is the further contraction and constriction of the economy as then government would be shying-away from investments, thereby grinding economic activities to a longer standstill. Poisoned by the spectre of an economic gloom, the private business sector itself reacts by holding back on investments, downsizing business and laying-off workers.

Government’s other act of imposing more taxes upon the people is the more tragic measure as the already suffering citizenry are coerced to surrender to the government what little they have left just to remedy a deficit that is not caused by them but by government itself. The people are thus left with correspondingly less in purchasing power, worsening the economic contraction. In the meantime, the so-called economists do not help by warning us of a doomsday scenario of the Argentina type.

There is, in fact, a happy solution to this condition in total opposition to the misdirected reaction of government, feeding as it does on a wrong apprehension of the fiscal situation. To start with, though, it must be made very clear that we can never achieve a lasting solution until and unless government recognizes, acknowledges and admits that the primary, primordial and original sin that brought us to where we are now is the continuous, persistent and unabated practice of borrowing from foreign funders for our local development needs.

This one track-minded approach in relying upon foreign borrowings to fund our infrastructure and utilities development needs has lunged the country deeper into the fiscal quagmire because as the peso is devalued against the dollar, as happens almost all the time, our budgetary deficit invariably widens. This happens because we service our foreign debt from our annual budgetary appropriations which increasingly eats a larger bite off the budgetary pie, leaving lesser and lesser amounts for the basic needs of the country and people. Stated otherwise, with the devaluation of the peso vis-a-vis the dollar, the servicing of our international debt catapults higher and deepens the budget deficit even more, leading thus to a fiscal crisis.

Equally as pernicious in effect, our total dependence on foreign borrowings has disenabled our local companies from acquiring the business opportunities out of the foreign funded development projects that are invariably awarded to the companies from whence the foreign loans come from. In consequence, our local companies are left with crumbs for business making them midgets, unable to expand and grow and be competitive with their foreign counterparts.

The permanent solution, clearly and plainly then, is to put an absolute stop to our destructive penchant for foreign borrowings. Instead, we must rely solely on ourselves, as did all the modernized countries, by generating the funds internally to finance our development requirements. As is worth repeating, this can be done only through government borrowings against future taxes via the mechanism of government bonds purchased by the central bank through the issuance of new local money.

This is the golden opportunity we stated earlier by which government can and should address the current budgetary and fiscal deficit, not by constricting and contracting further the economy as the government is doing, but by expanding it through internal borrowings in an expansionary monetary approach. This has been the consistent approach of the now highly developed and modernized countries that successfully espoused the Keynesian theory and formula that it is precisely in periods of economic downturns, when private business is reluctant to invest, that government must do the investing and spending through new money raised from long-term bonds secured against future taxes in order to rev-up and expand the economy from its slumber. This spending, which is really investing, consists in the financing of the physical and social infrastructure of the country in roads, highways, ports, airports, schools, hospitals and in utilities such as that for water, power and telecommunications.

Our proposed alternative way of addressing the fiscal deficit through an expansionary monetary program is detailed and anchored in spouses Colin and Rosemary Campbell’s book entitled "An Introduction to Money and Banking" where it is explained that with modern central banking many countries finance fiscal deficits by creating money with the assistance of the central bank. The treasury department of the country typically would sell its bonds directly to its central bank in return for either deposits or paper notes. The central bank receives interests on the government securities it has acquired, but this is unimportant because modern central banks are almost always public institutions, and the additional income they receive would be returned to the treasury. Hence, the expansion of money supply is actually achieved without any cost to the government.

In addition to the halting of borrowings from foreign sources and the pursuit of an expansionary monetary policy through internal borrowings as effective and lasting government measures to address the budget and fiscal deficit, a third and concomitant solution is the eradication of graft and corruption.

Much of the government funds appropriated for impact projects in infrastructure and utilities are diverted form their intended use through graft and corruption. The root cause is traceable to the election system whereat candidates are made to spend horrendous amounts in order to win. With the compensation packages of government officials and employees so miserably inadequate and disproportionate to their responsibilities, the temptation to recover election expenses is high, if not irresistible, to some public officials. The result is graft and corruption that ultimately prejudices the Filipino people as seen in the budget and fiscal deficit. It is high time that we should disallow candidates from funding their campaigns and for their supporters instead to be themselves the ones to contribute to the campaign kitty of the good and deserving public office aspirants. Combining this measure with a proportionate increase in the salaries of government officials, the temptation to cheat the people through graft and corruption would dramatically be reduced, if not be totally eliminated. For then, we shall have the best people in government delivering the best governance to the people, and without need on their part for any pork barrel yet. The NEDA should the lead agency in identifying the priority projects for development without political interference at all from the legislators

As a fourth approach to address the fiscal and budget deficit, government’s manner of accounting for its income and expenses, which is much like that of a private company, should be re-modeled. Though there is a close similarity, government accounting should not be treated in the same way as that of private company accounting. Government accounting of its earnings or revenues, the equivalent of profit in private business, should not be accounted in a yearly basis unlike in a private corporation which must show its profit and loss in an annual manner. In the case of government, the return of its investments will not be immediately felt in one year but over a long period of time so that its revenues and losses should not be reflected on a year to year basis.

Additionally, government accounting as it appears in the annual budget should distinguish capital outlays or investments from operating expenses, instead of the current practice of lumping them both under expenses. Furthermore, government must put an end to the pernicious practice of servicing our foreign debt from revenue appropriations alone as this approach virtually leaves crumbs in the budget to appropriate for the basic services of the people, to their utter detriment and prejudice. Instead, the burden of servicing our foreign debt should be laid primarily from foreign currency earnings in income generating activities such as in tourism.

By way of summation, the solution to the budget and fiscal deficit is not through belt-tightening of government expenses or the imposition of additional taxes upon the people. The correct approach, instead, is to immediately resolve to halt the damaging practice of foreign borrowings and to, rather, generate local money for development purposes by borrowing against future taxes. Additionally, graft and corruption must be totally eradicated at the same time that we make remedial measures in the government accounting and budgetary system by separating capital outlays from operating expenses and relieving the annual budget as the source of payment of our foreign debt.

Still, in the end, it is the unity of all sectors of Philippine society that will deliver us to the dream of progress and prosperity.

You may write your comments / suggestions at 15/F Equitable Tower, Paseo de Roxas, Makati City or through e-mail at HYPERLINK "mailto:rgroxas2004@yahoo.com"

(Note: We beg the indulgence of our readers who are at times tasked to read a lengthy piece. The purpose of our writings, however, being advocacy and not merely commentary in nature, compels us to dissect a given problem, analyze its causes and effects, and offer studied solutions. The length of the article should be irrelevant to such an approach.)


Reported by: Sol Jose Vanzi

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