How would you describe an entity that has accumulated substantial borrowings, continues to be burdened by much-needed expenditures for essential requirements, and is unable to generate the commensurate finances and earnings to shoulder these obligations? I call this a “bankrupt state” or something close to this.
I believe that this is the dire situation that the Philippines is in at this stage. It may seem like I am exaggerating the problematic state that our government is presently encountering, but let’s look at the realities and the numbers.
The Bureau of Treasury recently announced that the country’s total debt reached P12.03 trillion as of end January 2022. This consists of P8.37 trillion of domestic debt and P3.66 trillion of external loans, consisting mainly of foreign borrowings. This is the 16-year high level of debt to gross domestic product. Prior to the impact of the Covid-19 pandemic, the country’s outstanding debt was P8.2 trillion. The increase in debt over the past two years during the pandemic comes up to a significant level of 46.7 percent. This national debt of the Philippines is 60.5 percent of the GDP for 2021. Do we need to be concerned about this level of borrowing? While the International Monetary Fund statistics indicate that a greater number of countries have debt to GDP level exceeding 50 percent, it is quite worrisome for us in the Philippines that our debt level stock substantially increased over the past two years without any marked increase in developmental and infrastructure projects or standard of living of the citizens for which these loan proceeds could have been utilized. These are troubling signs for a bankrupt state.
The 2022 expenditure budget calls for the allocation of P5.024 trillion. This budget is higher by 11.5 percent than the 2021 national budget. A significant sum has been budgeted for the country’s Covid-19 pandemic response and the recovery efforts in the aftermath of Typhoon Odette. Furthermore, the sum of P541 billion is set aside for interest on loans, while amortization of debts falling due in 2022 amounts to P785 billion. The amount allotted for debt and interest payments alone represent a significant 42.4 percent of projected tax collections for 2022. This is a clear indication of a state pursuing priority programs that are focused on funding the basic needs of the public and servicing the country’s debt. These expenditures do not directly result in the medium or long-term benefits for generating economic developmental gains. A lot of challenges indeed for a bankrupt state.
For 2022, as per Department of Budget and Management records, the national government has set its revenue target at P3.289 trillion, with P3.125 trillion coming from tax and duty collections. Comparing the revenue estimates with the approved budget of P5.024 trillion, this will result in a fiscal deficit of P1.665 billion, which will result in a projected deficit ratio of 7.5 percent of GDP. This is worse than the pre-pandemic rate of just over 3 percent deficit ratio. Total revenues collected before the pandemic in 2019 were P3,137.5 billion. The targeted collections for 2022 represent only a small 4.8 percent increase over the 2019 collections. A vivid picture of this bankrupt state shows that the expenditures for 2022 are expected to exceed by over 50 percent of what the government is expected to collect in terms of revenues and earnings. Taking into account the debt servicing for 2022, total disbursements of expenditures and debt servicing amount to P5.809 trillion, or 76.6 percent over what the government will earn for 2022.
The government funds come from a number of sources. These include tax revenues from collection of the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC); non-tax revenues from income from treasury operations, from government-owned and -controlled corporations; and from fees and charges and other non-tax earnings of the government; and from privatization proceeds from the sale and lease of government assets, among others.
Tax revenues account for the largest share of the sources of government funds. For 2022, the tax collections of the BIR and BOC come up to about 87 percent of the total revenues. Clearly, for a bankrupt state to ease its precarious financial situation, one of the immediate and effective solution is enhancing the collection of tax revenues.
What can be done to tax finance a bankrupt state?
(To be continued)
Joel L. Tan-Torres is the Dean of the University of the Philippines Virata School of Business. Previously, he was the Commissioner of the Bureau of Internal Revenue, the chairman of the Professional Regulatory Board of Accountancy and partner of Reyes Tacandong & Co. and the SyCip Gorres and Velayo & Co. He is a Certified Public Accountant who garnered No. 1 in the CPA Board Examination of May 1979.
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