Unfunded

The stock exchange broke new records this week – notwithstanding net withdrawals of foreign hot money.

According to stock analysts, the spike in share prices of local corporations is due to two things mainly: expectation that the tax reform package will be passed shortly and improved earnings of listed companies.

What is apparently a “slower” GDP growth rate for the first half did not discourage investors. This “slower” growth rate is a year-on-year measure. The first half of 2016 was driven by election spending and therefore inordinately high.

Strong domestic demand is keeping our companies profitable. Enactment of the tax reform package will create additional demand from public spending.

The Senate version of the tax reform package, however, should be a source of concern. The package aims to create an additional P160 billion in public revenues to help fund the infrastructure program. With that new law that exempts students in state colleges and universities, the additional revenues needed could go up to P200 billion. The Senate version of the tax reform package could, at best, produce P60 billion.

The shortfall in new revenues should be a concern. The free tuition law is an unfunded mandate. Congress should at least accept budget cuts to help fund its own free tuition mandate.

Even more critical, we might be unable to fully fund the requirements of the ambitious infra program. Included in this program are upgraded ports and airports, new mass transport facilities to relieve the terrible congestion we experience everywhere and new roads.

The infra program – called Build, Build, Build – will help boost our growth. No other mode of public spending matches the multiplier effects of public investments in infrastructure.

The infra program will help clear the way for investment-led growth. It will bring down costs of production of everything, encouraging rural development and making our exports more competitive. The high cost of moving goods and people because of our poor logistics backbone discouraged investors from coming into our economy.

Investment-led economic expansion will create quality jobs and shrink poverty incidence. That is a key requisite to making our economy truly inclusive.

While the infra program relies heavily on official development assistance (ODA), it also requires spending from the national budget. This is where the weaker Senate version of the tax reform package could upset the general high growth strategy. It could cause our rapid growth to lose some momentum.

We could, of course follow the strategy for rapid growth of the Marcos government during the early seventies. Taking advantage of the low-interest rate environment created by the phenomenon of petrodollars, the Marcos government borrowed heavily to invest in infra.

The heavy debt load, however, could not be serviced when our economic growth slowed. We eventually found ourselves in a debt crisis, setting the stage for the ouster of the Marcos regime. Since then, we worked down our indebtedness, sacrificing investments in infra in the process. This explains why we spent much less than our neighbors in economic investments the past two decades.

Today, reckless borrowing is no longer an option. Credit rating agencies will cut down our sovereign ratings once our fiscal discipline fades. The practical effect of that is our lenders will charge us higher interest to reflect the higher risk they assume lending us money.

Nearly all the associations of professional economists and most of the business groups are urging the Senate to hew more closely to the original tax reform package. Failure to realize a more robust revenue flow will compromise the entire economic strategy.

There are political costs to substantially raising revenues. The increased excise tax on fuel, for example, will displease people. They will blame the administration for that. The administration must accept those political costs.

If less revenues are created next year because of the diluted tax reform measure, government might be forced to choose between giving away free tuition to freeloaders or fully funding the infra program, it is better to choose the latter.

The law giving away free tuition is probably the worst piece of legislation our Congress produced. It will cause more harm than good, forcing government to divert from economic investments to feed subsidies.

This law will cause migration from private tertiary institutions, undermining their financial viability. Private colleges and universities are an important pillar of our educational system.

When more qualified students coming from the private high schools migrate to the state-funded colleges and universities, they will crowd out poorer students. This makes this measure ultimately anti-poor.

If we want to build up the quality of our educational system, we need to rebuild from the primary education level while expanding our technology and vocational programs. If we subsidize at the tertiary level, this will exclude poorer students who went through substandard education at the primary and secondary levels. We end up subsidizing the rich students and abandoning the poor.

At any rate, I really hope we avoid having to make the painful choice between subsidizing tertiary education or building up our infra.

If our infra remains inferior to those of our neighbors in the region, we will be left behind. The economy will stagnate. Poverty will rise. We will again be relegated to the status of the Sick Man of Asia.

That should not happen. This is why it is preferable to give up the free tuition program than delay or diminish the infra program.

The former is a stupid mandate. The latter is the only way to move out of the rut of mediocre growth.