Editorial: Fiscal house in peril

Editorial:

Fiscal house in peril

THE departure from office of National Treasurer Omar Cruz, though couched as having been made “for family reasons” (they said he wants to join his family abroad) marks yet another dent on the fiscal armor that the administration has so carefully burnished. Hours after the first news bulletins came out, quoting Finance Secretary Gary Teves telling reporters he got a letter from Cruz offering to resign, hundreds of thumbs were busy texting various spins to the matter. The most pungent speculation was that he refused to fund the campaign of the Team Unity (TU). Most reporters were inclined to believe that it was over his policy differences with some officials in the economic team, considering how Omar Cruz had taken a hard-line stance on his don’t-blink strategy in the sale of government IOUs, allowing domestic interest rates to move down to all-time lows. That salutary effect, though, did not come without its own complications, as it discouraged banks from buying government securities, especially the shorter-dated ones. Initially, analysts were saying, as reported by this paper, that something had got to give as the Treasury had to have the money somehow, with the national coffers still in deficit. But whatever the reason for Mr. Cruz’s departure, the government doesn’t just have to deal with its impact on investors’ confidence. It must attend to the further deepening of the fiscal gap as the government’s cost of borrowing rises, leaving it scrambling even harder for funds for its avowed “payback” agenda in terms of more infrastructure and social services this year. Already, a shadow has been cast on that promise by the government’s failure to meet its first-quarter deficit target by P7 billion; and with Cruz leaving, the signal becomes even stronger to the public and the markets that the government’s fiscal house is in peril, notwithstanding how much it trumpets recent positive “fundamentals”. The fragile state of such fiscal condition started to become apparent even before the first-quarter deficit data came out this week. Recall how finance officials tried to play down an exclusive story in this paper about how internal discussions among experts in the agencies comprising the Development Budget Coordination Committee (DBCC) had led to a downscaling of the revenue assumptions of the national government by a whopping P110 billion. Finance people said they had not changed their “revenue targets,” yet in two separate occasions, the former national treasurer, Leonor Briones, told BusinessMirror and ANC that DBCC’s technical people normally would not scale down assumptions on such a huge scale (P110 billion) unless they were seriously concerned that there was no place where that money could be found—or collected, assuming it was available but people would not pay the right taxes. Weeks before the DBCC decision to cut by nearly P100 billion the revenue assumptions, data had shown that collections in recent quarters owed more to such built-in “advantages” as the E-VAT and the sale of government assets, notably the P25-billion share in the PITC, rather than to real hard work and greater, more creative collection efforts. In fact, all three agencies whose contributions to the state coffers make or break the deficit targets—BIR, Customs and Treasury—have problematic issues hounding them. In the first quarter, only BIR met its target, but even then, analysts keep attributing this to the E-VAT windfall. Customs, Teves reiterated in an interview with DWIZ’s Karambola, was affected by declining oil imports, which meant lower taxes to collect. And of course, BTr had cancelled the sale of T-bills and T-bonds on several occasions, refusing to raise money that way if it meant calling the rates offered by banks. Customs is doubly complicated because of the deadlock between its top brass and the 15 port collectors over the interpretation of the lateral attrition law, which rewards overperformers but punishes with dismissal those who repeatedly fail to deliver on targets. As Professor Briones noted, citing a landmark study on fiscal administration, the periods in the country’s fiscal history that were rocked by disputes over reforms, also coincidentally, were those when collections were poor. In short, reforms may improve collections over time, if successfully pursued—but when they bog down on implementation, there could be short-term disruptions in collection. All these simply indicate that the fiscal landscape remains very much at risk, more so with Mr. Cruz’s departure. It is good he agreed to stay on until June 1, but his successor—and the entire finance team for that matter—will have a tough hurdle ahead. They can’t even have the luxury of waiting after the elections, especially when one considers that fiscal problems may worsen after May 14, if fresh allegations of funds misuse and overspending surface. The well-thought-out suggestions of the Consumer and Oil Price Watch, as detailed in its full-page ads on Wednesday, may present a good starting point for crafting the post-election agenda. To be sure, they call for some hard reforms too, but this is a case where not doing anything—or denying a problem exists—would be a much worse option.

 

http://www.businessmirror.com.ph/04262007/opinion01.html