Imprudent

Before he was so unceremoniously gagged, Economic Planning Secretary Ernesto Pernia was making an important point about the possible effects of federalism on the fiscal space.

Pernia might have been impolitic when he fretted publicly that a quick shift to federalism could “wreak havoc” on the infrastructure program. But Pernia was hired as an economist, not as propagandist. By speaking as an economist, he shows he is worth his pay.

The havoc he speaks of very likely relates to the financing of the infrastructure program.

The ambitious Build, Build, Build program is made possible by the tremendous amount of work put in to achieve fiscal consolidation. We can build only because we can afford it. We can afford it only because tax reform produced a reliable revenue flow for national government. That reliable revenue flow allows us to borrow with confidence, knowing that public spending can be regulated with a single valve made possible by the unitary government format.

As we know, the infra program is only partly funded through budget appropriations. A large part of the capital outlay is sourced from official development assistance (ODA) and foreign currency denominated bonds.

The borrowing is sustainable only because we pay lower rates for them based on our sovereign credit ratings. We worked hard for those ratings by exercising discipline in spending and revenue-generation. When some doubt arises regarding our sovereign capacity to maintain that discipline, the interest rates we pay for financing our economic investments program will shoot up.

Should confidence in our ability to exercise fiscal discipline collapse, interest rates on our borrowing could become unsustainable. In which case, we could court a financing crisis.

Sen. Bam Aquino made an ignorant claim that government has so much money that the taxes on fuel should be withdrawn. The fact is national government has operated on a chronic budget deficit since we gained independence. We needed to borrow to cover that recurring deficit. Today we need to borrow wisely so that growth created by economic investments constantly outstrip the cost of borrowed money.

We need to borrow because the consequences of not doing so are graver. If government does not make economic investments, the domestic economy will stagnate. Poverty will spiral. Misery will multiply. Political instability will ensue.

The effort to maintain fiscal discipline often puts the economic managers at odds with the politicians.

Politicians, by their nature, think of appeasement first and sustainability last. They are inclined to give away public funds through every form of subsidy and dole-out program to keep their constituents happy even if this means sacrificing longer-term economic sustainability.

It is easy for grandstanding politicians to advocate free tuition, free health care programs, and subsidies for fuel and power. Yesterday, for instance, Sen. Sherwin Gatchalian proposed using the Malampaya Fund to reduce power rates by 70 centavos per kilowatt-hour.

That is an insane idea. The Malampaya Fund, generated from royalties on the finite natural gas extracted by Pilipinas Shell, is intended to fund programs that will ensure our energy security. If we deplete it now, with generating capacity in peril of falling short of rising demand, we will torpedo our own economic viability.

The economic managers, for their part, constantly risk unpopularity by advocating policies that will ensure sustainability. It is their task to save our economy from the disastrous populist policies politicians prefer.

Backlog

We have a serious infrastructure backlog. It keeps costs high. Our people bear those high costs eventually.

The infrastructure deficit inhibits our economy from being competitive. This is why we have the smallest share of investment flows among the ASEAN economies. If we do not address the infrastructure deficit today, our neighboring economies will leave us behind.

Vietnam, for instance, consumes seven times more steel per capita than we do. That says everything.

Since 1986, we invested only a little more than two percent of GDP in infra. Our neighbors spent over five percent. Because of that, our ports and airports simply deteriorated. Our roads became congested. The cost of moving people and goods across the archipelago rose, making everything more expensive for our consumers.

Over the next years, we expect to bring up our economic investments to seven percent of GDP. That is just to close the infra gap with our neighbors.

One of the reasons we underinvested in improving our economic capacity is the debt crisis we endured three decades ago and the startlingly low tax effort that burdened government finances. Now we have worked down our debt service ratio and improved our tax effort.

Another reason for the underinvestment is the Local Government Code. This forced the national government to yield a significant part of the revenues collected to local government units. This enabled local governments to somehow increase spending on “micro-infra” like bus stops and basketball courts. But it limited national government’s ability to invest in strategic infra such as modern airports and expressways.

This brings us back to Pernia’s concerns.

The Bangsamoro Organic Law, for instance, includes a “block grant” of P50 billion to the proposed regional entity and a fixed share of the revenue collected. If we do that for all the 16 “estados” proposed in the federalism arrangement, which is all it is about really, then the national government will never have enough to invest in strategic infra.

In which case, we fall back into the quagmire we are now trying to climb out of. We will be doomed to a stagnant economy with an ancient infrastructure base, back to being the Sick Man of Asia.