Inequality, debt and tax injustice

Talk Inequality2B 800x433A slum in Baseco, Tondo in Manila, with high rises in the background. EDWIN BACASMAS (Philippine Daily Inquirer photo)

One of the most cynical projections on how the Philippine economy will fare in 2016 was made by a Bank of the Philippines economist who predicted that the country would grow by 6.2 percent “on the back of election spending,” particularly in the first half of the year.

This view was echoed by the Department of Finance, analysts at Standard Chartered Bank, Sun Life of Canada Philippines and business leaders with the added calculation that election spending will add 1 percent to the country’s gross domestic product (GDP).

What is dumbfounding about this shared prediction by mainstream economists and business persons is that what to common sense passes as a cruel joke is being touted as a scientific and serious analyses that Filipinos should be proud of.

Euphemism

“Election spending,” of course, is merely a euphemism for massive vote-buying, the improper and unethical use of government resources for the campaigns of proadministration candidates, and the splurging by big business and other vested interests of corporate and personal funds by donating to all candidates with a chance of winning (never mind that they may be on opposite sides of the political fence).

It is also a euphemism for overspending by rich and propertied candidates and their supporters, funding the use of violence to increase the chances of winning, and many other counterproductive use (or misuse) of financial and other resources.

All these, obviously, serve only to undermine the integrity of the electoral process and make a mockery of democratic principles, issues the above observers don’t seem to care about.

These types of “election spending” do not benefit the poor whose dismal and disempowered status is being used by traditional politicians and the ruling classes to advance the latter’s elite interests.

Major beneficiary

A major beneficiary would also be the giant media networks as they are swamped with orders for precious airtime by the candidates.

The inevitable outcome of this electoral circus, masquerading as a popular democratic exercise, is that the elected officials, once in power, will either try to recoup their election expenses by plundering the public treasury or meekly pander to the wishes and demands of their corporate and special-interest campaign donors for special privileges and appointments to critical public offices.

In the meantime, the candidates have ignored three important issues that have a direct bearing on the well-being of the majority of Filipinos.

Social inequality

The first of these is social inequality.

Within the Association of Southeast Asian Nations (Asean), the Philippines registered the highest inequality ratio as of 2011 based on the Gini coefficient index. An Asian Institute of Management finding on the Philippine social pyramid reveals that only 0.1 percent of Filipino families or 21,700 families constitutes the upper class with per capita incomes of more than P700,000 per year. The rest or 99.9 percent (18.7 million families) make up the middle and lower classes of society.

While the middle class comprises 25 percent of Filipino families (4.7 million), the lower class takes up the bulk, with 74.3 percent, or 14 million families.

The combined net worth of the 50 richest Filipinos was $74 billion in 2014, a staggering 26 percent (one-fourth) of the country’s gross domestic product. The wealth of only three families—Sy, Ayala and Aboitiz—has a combined market value equivalent to P1.5 trillion or about 12 percent of the Philippine economy.

The conglomerates owned by these three families are involved in banking, property development, retail business, telecommunications, utilities, power generation, infrastructure, electronics manufacturing, education, food, cement and shipbuilding.

Debt

The second issue neglected by candidates is the country’s debt situation. So-called experts have written off the debt issue as no longer important and critical as in the past. But the Freedom from Debt Coalition (FDC) argues that the Philippine debt deserves closer scrutiny and critique and should be a major election issue.

FDC reports that the total national government debt as of December 2015 stood at P5.955 trillion ($126.289 billion) of which P3.884 trillion (65 percent) was domestic debt while P2.1 trillion (35 percent) was foreign obligations. While the balance of government debt now consists mainly of domestic debt, the Philippine debt problem is not over.

P58,608 per person

The debt service for 2015 was P775.826 billion or P2.126 billion per day and each Filipino was indebted to the tune of P58,608.

In addition, the public sector debt was P7.434 trillion or 58.80 percent of GDP. Public sector debt in 2014 was 13.17 percent higher than the 2010 figure, when Benigno Aquino III took over as President. The Aquino regime has actually become the biggest borrower among post-Edsa Presidents with total borrowings of P4.24 trillion from 2010 to 2014.

As reflected in the government budget, the issue of debt figures prominently. Outstanding debt of the national government under the Aquino administration has been growing at an average annual rate of 4.8 percent. As of end-December 2015, the national government debt had reached P5.955 trillion, 3.8 percent higher than the 2014 level.

Heaviest borrower

Mr. Aquino now has the dubious distinction of being the heaviest borrower among Philippine Presidents and will leave office with P6.4 trillion in debt, P4.16 trillion (65 percent) of which was borrowed during his term.

The government’s dependence on new borrowings for the principal amortization of existing loans and to plug annual budget deficits is what drives up the debt stock. From 2011 to 2015, amortization ate up an average of 48.2 percent of the Aquino administration’s yearly borrowings.

For 2015 alone, P414 billion or 58.2 percent of the P710.8 billion that the government planned to borrow would go to amortization. The remaining P296.8 billion would be used to finance the budget deficit.

Social Watch Philippines reports that of the P3-trillion government budget for 2015, as much as P812 billion or 13 percent went to debt repayments. Principal payments totaled P419.3 billion, while interest payments would be P392.8 billion.

The automatic appropriation provision for debt servicing in the national budget has been a major concern as the Philippines remains the only country in the world with such a rider in its government budget.

This provision was enacted through Presidential Decree No. 1177 issued by the dictator Ferdinand Marcos way back in 1977, when the country was still under martial law. Given the magnitude of the national debt and the problems that it brings to the economy and society, the FDC has repeatedly called for a comprehensive and external audit of Philippine debts to find out whether these have benefited the people. But more important is the immediate and unconditional repeal of the automatic debt appropriation law.

Tax injustice

The third important issue disregarded by the current crop of candidates is the absence of tax justice. While the poor are burdened with various indirect and direct forms of taxes, the rich and powerful are able to get away with creative means of tax evasions or huge deductions.

For the latter, this is particularly true of giant transnational corporations, local big businesses and super rich individuals.

The Philippine government is party to this scandalous and unjust situation by offering huge tax breaks to foreign and local corporations to the detriment of providing funds for public services and welfare.

Global campaign

In response to this tax injustice, social movements and civil society groups are demanding “Tax Justice for Social Justice.” This is the rallying cry issued by the World Social Forum (WSF) in 2013 and reiterated in the 2015 gathering in Tunisia. As early as 2002, a Universal Declaration on Tax Justice for Social Justice came out from the WSF in Porto Alegre.

There is also a parallel and related effort on the part of the Global Alliance for Tax Justice, organized and driven by major regional networks in Africa, Asia, Latin America, North America and Europe, to collaborate with civil society organizations in building global synergy in pushing for tax justice and equality.

In the Philippines, trillions of pesos is foregone by government which could have been utilized for social protection programs, like education, healthcare, public transportation, reducing social inequalities and financing sustainable development.

Tax breaks

Tax breaks enjoyed by corporations through tax holidays, reduced income tax rates and duty exemptions amount to 1.5 percent of GDP. In 2011 alone, this amounted to P144 billion. Uncollected tariffs from illicit inflows of capital and merchandise through misinvoicing of imported goods and outright smuggling reach about P400 billion each year.

The government also loses from foregone tariff revenues as a result of the many free trade agreements it signed with other countries. An example is the P3 billion to P4 billion in estimated yearly losses from the Japan-Philippines Economic Partnership Agreement. The tax liabilities of 581 cases filed for tax evasion and smuggling were worth P95 billion while estimated tax revenues lost to cigarette smuggling alone was P40 billion.

Special zones

The phenomenal growth of special economic zones (SEZs) has resulted in huge revenue losses for the Philippine government due to income tax holidays, such as zero-percent duty on imports of equipment, and exemption from export taxes and freight charges and other fees. Corporations (both local and foreign) that locate in these SEZs pay only 5 percent of their gross income to the government.

In 2011, the government gave up P61 billion in foregone revenues from just 29 percent of reporting locator firms in SEZs. As of 2015, a total of 317 SEZs had been set up in the country from Luzon down to Mindanao. It is not surprising that, while foreign direct investments (FDIs) as a whole have been declining, FDIs in the SEZs have been growing.

Low-value added

Despite all these incentives, SEZs have been found to be deficient in spurring overall economic growth, provide only low-value added products, are concentrated in only two sectors (electronics and garments/textiles) and “have costs that far outweigh their benefits.”

Some SEZs have also become conduits for smuggling activities or are the favored projects of political kingpins. Their social costs along with environmental degradation have also been mounting, with human rights abuses taking place via the displacement of rural communities (including peasants and indigenous peoples) from their lands.

As early as 1990, Sixto Roxas Jr. pronounced the strategy of building industrial estates as harmful to the overall development of the Philippine economy because it was being planned and implemented at the expense of agricultural development.

Vulnerable

The Philippine economy, meanwhile, remains highly vulnerable to external factors. The peso is considered the “most overvalued currency in Asia.” Slower growth and slower remittances from overseas workers will be brought about by (1) an increase by the US Federal Reserve of interest rates, (2) China’s economic slowdown, and (3) the slump in global oil prices.

In addition, the country’s major trade and investment partner, Japan, has slipped into recession anew after a fleeting recovery. With the oil slump and the decision by the region’s top oil producers to freeze production, the 1.5 million overseas Filipino workers in the Middle East face the grim prospect of losing their jobs and having to come home to a fate of dire unemployment.

External events

The Philippines’ development strategy based on an outward-looking and external-trade dependent model hewing to a neoliberal paradigm is at the root of the country’s economic vulnerabilities.

Gilbert Llanto, head of the government think tank Philippine Institute for Development Studies had this to say about this strategy: “As the Philippines integrates more with the global and regional economy, external events will have a bigger impact on domestic growth processes. Weak external demand will have a negative impact on the growth of trade and services.”

China’s slowing growth and recession in Japan do not bode well for the economy. Asean’s major trading partners will also have negative spillover effects on Asean-member states like the Philippines. Because of this, there is a great risk that trade-led growth may not be a viable option for the Philippines in the immediate future.

Eduardo Climaco Tadem is president of the Freedom from Debt Coalition and professorial lecturer in Asian Studies, University of the Philippines Diliman. He has a Ph.D. in Southeast Asian Studies from the National University of Singapore. This article is a revised version of a presentation at the launch of the FDC Electoral Agenda on “Electoral Insurgency for Justice, Human Rights and Freedom from Debt” on Feb. 19 in Quezon City.


This article was originally published in the Philippine Daily Inquirer and shared here with permission.