*An editorial written by Benjamin Diokno, Secretary of the Department of Budget and Management (DBM).
In economics, initial conditions matter. For the last three decades, the Philippines has not spent more than 3% of GDP for public infrastructure, and it is not surprising why.
From 1986 to 2011, the level of public debt was huge and the cost of servicing them was high. At the same time, the country’s revenue-to-GDP ratio was low. Worse, it did not help that a string of fiscal conservatives presided over its fiscal policy.
In the last few years, the macroeconomic picture has changed. The economy has grown faster amidst a low inflation environment. The cost of borrowing has hit rock bottom. The debt-to-GDP ratio has fallen and continues to fall. However, the revenue-to GDP ratio remains sticky at around 15 %.
Looking at the Philippines’ current state of affairs gives a glimmer of hope. The country has been growing at a rapid rate in recent years, finally turning the corner after decades of subpar growth. Favorable economic conditions and strong macroeconomic fundamentals have fueled the robust expansion of the Philippine economy, registering an economic growth of 6.2 percent from 2010 to 2015. This was punctuated by a robust 6.9 percent growth rate in 2016, higher than that of China, Vietnam, and its other peers.
In fact, our pitch to investors is that the Philippines is the “fastest growing economy in the fastest growing region in the world”, and rightfully so.
However, the bullish outlook on the Philippine market can only be sustained if a binding constraint is addressed: its poor and collapsing infrastructure.
The Philippines’ infrastructure indicators consistently result in dismal scores that pull down its overall competitiveness. For overall infrastructure, we lag behind our ASEAN-5 neighbors, especially Thailand, Malaysia, and Singapore. What is worrisome is that our overall infrastructure ranking has steeply declined from 94th in 2009 to 112th in 2017.
Next, our road infrastructure has also performed poorly, being the worst among the ASEAN-5 countries. We started out at 94th in 2009, declining to 106th in 2017. This is in contrast to Indonesia that has improved significantly from 105th in 2009 to 75th in 2017.
Rail infrastructure tells a similar story. Despite having one of the first rail systems among the ASEAN member countries, the Philippines has not been able to sustain its pioneering ways. The World Economic Forum (WEF) rankings show that our rail infrastructure is the worst among the ASEAN-5, stagnating from 85th in 2009 to 89th in 2017.
The Philippines failed to invest in infrastructure, and this tragic blunder has led to economic and social costs to Filipinos. According to a study by the Japanese International Cooperation Agency (JICA) in 2014, the traffic situation in Metro Manila alone costs the economy P2.4 billion daily, or P876 billion annually, in terms of vehicular maintenance costs and time costs from the traffic congestion. In dollar terms, this is $17.5 billion annually. More so, the terrible traffic congestion hampers the well-being of Filipino commuters, who have to spend a quarter of their day on the road, taking time away from more productive activities.
The same study hypothesizes that if the traffic situation is not alleviated, the cost will climb up from P2.4 billion daily to as much as P6.0 billion daily by 2030. This is a staggering amount, which could instead be utilized to more important uses.
The Philippines’ standing in the Global Competitiveness Rankings of the World Economic Forum (WEF) gives another reason to urgently upgrade the infrastructure of the country.
Data from 2009 to 2017 show that we have steadily rose in global competitiveness from 87thto 47th in 2016. That’s 40 notches in seven years. This is one reason why the Philippines is called the “next Asian tiger”. But, definitely, if we want to sustain this rapid development and modernization, our infrastructure has to keep up.
Aside from hard infrastructure, the Philippines also needs to upgrade its Information and Communications Technology (ICT).
These glaring statistics underscore the Philippines’ need to compensate for the past neglect in infrastructure. For many years in the past, our neighbors have been deepening their capital stock and investing heavily in public infrastructure. To put it bluntly, we have been left behind in infrastructure development.
A quick glance at Gross Capital Formation as a share of GDP, courtesy of World Bank data, confirms this observation. From the mid-80s to the 90s, gross capital formation as percent of GDP of our ASEAN-5 neighbors annually exceeded that of the Philippines by about 50 to 200 percent. The gap has somehow narrowed in recent years, but is still noticeable nonetheless.
Low public spending on infrastructure development has exacerbated this issue. From 2010 to 2016, government spending on infrastructure as percentage of GDP averaged a measly 2.9 percent.
For a country whose Achilles’ heel is infrastructure development, this level is unacceptable and the present government intends to turn things around.
As soon as President Duterte organized his economic team, the current administration has made it a point to prioritize infrastructure development. And, as the Secretary of Budget and Management, I will ensure that public infrastructure gets its rightful share in the spending program of the Philippine government.
The Duterte Administration is embarking on an ambitious infrastructure program unmatched in our country’s history. In the next six years, we will devote our efforts to ushering in the Philippines’ “Golden Age of Infrastructure.” And for this year, the first bold step we took was to appropriate an amount of P847.2 billion, or $17 billion, for infrastructure in the 2017 national budget, the first one crafted under the Duterte Administration. This level is equivalent to 5.3 percent of GDP. Let me emphasize also that this is the first time the Philippines will reach the 5 percent of GDP threshold for infrastructure spending.
We will sustain this level of investment such that P8 to P9 trillion, or $160 to $180 billion, will be spent on public infrastructure for the next six years. Likewise, as a share of GDP, infrastructure spending will rise from 5.3 percent in 2017 to as high as 7.4 percent come 2022.
Besides the heavy funding, we will also put in place implementation reforms to successfully translate resources into concrete infrastructure facilities. For instance, we have streamlined the release of funds to line agencies, reformed the Implementing Rules and Regulations of our Procurement Law for better efficiency and transparency, leveraged technology for improved project monitoring, and have mounted capacity-building efforts to professionalize our bureaucracy.
Through our policy reforms, combined with speedy and efficient implementation, we will lay the groundwork for the “Golden Age of Infrastructure” in the Philippines.
The unprecedented level of spending we plan to implement poses a great challenge to the Duterte Administration. And the government is ready to overcome this challenge through a proper strategy.
First, we have increased the planned deficit from 2 percent to 3 percent of GDP. Our borrowings will have an 80 to 20 mix, in favor of domestic borrowing. This financing mix will minimize our exposure to foreign exchange fluctuations and enable us to better manage our debt. Furthermore, as we strengthen our friendship with our Asian neighbors, particularly China and Japan, we have secured numerous avenues for Official Development Assistance which will greatly assist in our national projects.
The bigger deficit and borrowings may not sound appealing to some, but we have faith in the capability of the country and we will adhere to fiscal responsibility. The debt-to-GDP ratio will continue to fall as GDP growth is projected to outpace the rise in debt accumulation. The debt-to-GDP ratio is expected to shrink from 42 percent in 2016 to 36 percent in 2022. With this debt profile, the Philippines will become the envy of many developed and developing countries in the world facing much higher debt-to-GDP ratios.
Second, we will complement our borrowings with increased revenue collection resulting from tax policy and tax administration reforms.
At present, we have a Comprehensive Tax Package (CTRP) pending at the House of Representatives. This tax package will be instrumental in raising additional revenues for our spending program. At the same time, this will replace the Philippines’ outdated tax system with a simpler, fairer, and more efficient tax regime that will attract more investments in the country.
Among the reforms included in the first tax reform package are:
Lower personal income tax rates with fewer brackets. As you know the Philippines has one of the highest income tax rates in the ASEAN region, with a maximum marginal tax rate at 32 percent. It is time that the government does something about this and alleviate the burden of the Filipino people.
A broader Value-Added Tax Base. The CTRP will retain only the necessary exemptions. And,
Adjusted excise taxes on oil and automobiles. The proposed tax reform is progressive, but more importantly it favors the poor. Low-income households will be charged with minimal increase in excise tax payments. Specifically, the bottom 10 percent of households will be charged only a P160-increase in excise tax payments per year, whereas the top 10 percent households, who consume around 51 percent of fuel in the Philippines, will see an increase of P4,316 per year. Furthermore, the revenues from the adjusted excise taxes on oil and automobile will be utilized on cash transfer programs that will benefit Filipinos who are along the poverty line and on the infrastructure projects scattered across the Philippines.
With sound macroeconomic fundamentals, effective policy reforms, and an aggressive infrastructure program, the Philippines is poised for an economic breakthrough.
We now have the right ingredients and the right leaders to catch up with our ASEAN-5 peers, and ultimately transform the Philippines into the “Asian tiger” we are capable of becoming.
This is a truncated version of a paper I presented to the Global Think Tank Summit held on May 1-3, 2017 in Yokohama Japan. The theme of the Summit is “Achieving Balanced Growth in Asia.” In it, I talked about the prospects of the Philippine economy and our goal of investing heavily in public infrastructure in the next six years, consistent with our desire to catch up with our ASEAN-5 neighbors.
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