Delivered before the Senate Committees on Finance and on Economic Affairs
IBON Foundation (updated)
We would like to thank the Senate Committees on Finance and on Economic Affairs for the chance to share our comments on the following measures:
- SBN 1414 entitled: “An Act Establishing the Emergency Response and Recovery Package to Counter the COVID-19 Pandemic Also Entitled, “Pag-Asa: Alaga, Sustento, At Angat Sapanahon Ng Covid-19 Crisis” Package, And For Other Purposes”, introduced by Sen. Marcos
- SBN 1417 entitled: “An Act Appropriating The Sum Of One Hundred Eight Billion Pesos (P108,000,000,000) For The 2020 Fiscal Stimulus Package To Address The Economic Impact Of Covid-19”, introduced by Sen. Angara
- SBN 1427 entitled: “An Act Amending Republic Act No. 11469 Otherwise Known As The ‘Bayanihan To Heal As One Act”, introduced by Sen. Marcos
- SBN 1431 entitled: “An Act Establishing An Economic Recovery Package To Businesses In The Hardest Hit Sectors By The Coronavirus Disease 2019 (Covid-19), Appropriating Funds Therefor, And For Other Purposes”, introduced by Sen. Imee Marcos
- SBN 1449 entitled: “An Act Appropriating The Sum Of Three Hundred Seventy Billion Pesos (P370,000,000,000) For The 2020 Fiscal Stimulus Package To Address The Economic Impact Of Covid-19” introduced by Sen. Angara
- SBN 1474 entitled: “An Act Providing An Economic Stimulus Strategy For The Effects Of The Corona Virus Disease (COVID-19) and Appropriating Funds Therefor”, introduced by Sen. Ralph Recto
The Senate proposals for fiscal stimulus are welcome in being more real than just the pseudo-stimulus corporate tax breaks proposed by the Department of Finance (DOF) speaking for the administration’s economic managers.
The pandemic is severely hitting both the supply and demand side of the economy. Direct demand-side measures of increased government spending and actually also increased consumer spending are thus critical to support the economy. Relying on mainly tax cuts is too one-sided and, while boosting narrow corporate profits, will be a very weak and ineffective stimulus. It is difficult to expect businesses to invest and produce if no one is buying because of high unemployment and falling incomes.
IBON Foundation fully shares the declared intent of all the measures to cushion the adverse effects of the COVID-19 pandemic on the economy — especially on the poorest and most vulnerable Filipinos. The crisis has magnified the burden on government to ensure the well-being of every Filipino in need many times over.
The current public health and economic crisis is unprecedented. While no one can yet say with any accuracy what the exact magnitude of the impact will be, it is already certain that it will likewise be unprecedented. The government’s response must be proportionate to the crisis at hand.
We would like to raise six main points towards improving the government’s emergency response and recovery package. They pertain to the five main areas of the various proposals: 1) health-related measures; 2) income support; 3) business and enterprise support; 4) infrastructure; and 5) financing.
There can be more detailed reference to the specific bills and their corresponding provisions but these are our comments in broad strokes. They apply to all and any differences with respect to specific bills are only a matter of degree.
1. The COVID-19 crisis is most of all a health and medical crisis, yet there is virtually no support for strengthening the public health system. This will cause the coronavirus to spread more than it should, lead to more otherwise preventable deaths, unduly repress confidence and economic activity, and hinder not just a return to normalcy but economic development.
The requirements for testing and tracing, targeted quarantines and isolation, precautionary measures in community spaces and work places, and treatment of infected are considerable. Safely approximating normal social and economic life is expensive and unaffordable for most people and micro, small and medium enterprises (MSMEs). The government should help millions of poor Filipinos and hundreds of thousands of MSMEs meet these urgent public health needs.
SBN 1474 comes closest to acknowledging the problem but does not allocate any funding for this – in contrast to, for instance, Php400 billion in loans for businesses and Php650 billion for enhanced Build, Build, Build (BBB). The supposed Php250 billion in SBN 1414 meanwhile seems large but does not provide any details.
2. The country is facing the worst crisis of unemployment and underemployment in at least four decades and perhaps even its history, yet the proposed income support is only enough for a small proportion of tens of millions of distressed Filipinos and their families. This will result in untold difficulties and suffering, regression in many income and non-income dimensions of poverty, and millions of additional poor Filipinos.
IBON estimates 12-19 million unemployed and underemployed Filipinos in 2020. The Php110 billion in wage subsidies in SBN 1474, for instance, will only help 5.2 million for two months assuming they receive Php10,727 each monthly, or the equivalent of the average national poverty line.
The wage subsidy scheme is moreover biased towards regular workers in formal enterprises who are a minority of the labor force and also already tend to earn more than irregular workers and informal earners. Farmers and fisherfolk are notably not covered. As it is, we estimate around 11.8 million workers in the formal sector versus 30.6 million in the informal sector (including farmers and fisherfolk).
A much larger cash transfer scheme that is not so enterprise-biased appears called for on humanitarian considerations – for instance as proposed by SBN 1414 but with a higher cash amount. If a narrow economic argument is needed, this can also be considered as boosting effective demand and averting a deterioration in human capital. This also means that the fragmentation and shallowness of the country’s current social protection mechanisms need to be addressed.
3. The proposals for business and enterprise support can be improved to take into consideration that the economy was failing even before the pandemic and that global economic conditions are drastically changed. The proposed economic stimulus measures seem to be premised on ‘bridging’ the economy for a couple of years while a vaccine is developed and enters widespread use, and then returning to a presumed favorable pre-pandemic trajectory. The underlying premises may not stand scrutiny.
The economy was in many respects already failing even before the pandemic. Economic growth was falling for three consecutive years and heading for a fourth such year. The main reasons for this were slowing remittances, weakening manufacturing and service exports, and over-reliance on foreign direct investment which was also falling. Growth was slowing despite steadily increasing infrastructure spending both in absolute terms and as a share of gross domestic product (GDP).
Seemingly favorable employment figures meanwhile masked a rising share of irregular and informal work, in the same way that seemingly favorable unemployment figures excluded millions of hidden unemployed Filipinos. These were among the factors driving real wages down to as low as nearly two decades ago at the start of the 2000s.
The so-called strong fiscal position and financial stability was meanwhile on the back of a regressive consumption tax-biased system and an extreme over-reliance on cheap labor export and foreign exchange from the labor of overseas Filipino workers.
The prior condition of agriculture that was the smallest share of GDP in history, and manufacturing that is not just foreign-dominated but as small as it was in the 1950s, is not a desirable trajectory to return to.
It may not even be possible in currently deteriorating global economic conditions. Our accustomed external sources of growth are threatened by the worst global recession since the Great Depression. A new Global Depression may even already be underway with dramatic economic collapse in the United States (US), China and Europe, drastically falling global trade and investment, and unprecedented global debt-to-GDP levels and risk of renewed financial turmoil.
Business and enterprise support can be oriented better to transitioning away from old industries (such as tourism and low value-added foreign manufacturing) to ones with more strategic importance (such as food self-sufficiency, domestic manufacturers, and more science-based industries). It can also be made more explicitly conditional on recipients respecting workers’ rights and welfare and promoting sustainable production practices.
4. We would also like to raise the question of why Filipino taxpayer money might potentially be used to support foreign businesses. We presume that this kind of support is best given by their respective governments rather than the Philippine government. Yet the various stimulus proposals are clearly designed to allow assistance to them directly and even indirectly to their dedicated arms-length contractors in captive global supply chains.
It must be better use of public funds to focus support mainly on Filipino firms.
5. The attitude to the old Build, Build, Build public infrastructure program can also be improved to take into consideration that national and global economic conditions have changed. The public infrastructure program was drawn up under very different and arguably even overoptimistic scenarios.
The premises of many BBB projects – especially the big-ticket flagship projects – should presumably be revisited given the coronavirus crisis. It is highly likely that many projects will no longer be economically or financially viable as originally projected.
On the other hand, the coronavirus crisis has presumably given rise to infrastructure of more direct social importance – such as more and bigger public hospitals and public schools, as partially acknowledged already by SBN 1474. Lower incomes from the economic crisis will likely drive many Filipinos to public hospitals and schools making expanding these more urgent than ever.
The oft-made claim that infrastructure has the most multiplier effects should also be scrutinized and not be applied indiscriminately. For instance, infrastructure projects that heavily import construction materials, equipment, and foreign experts represent large leakages and, in effect, stimulus for foreign economies rather than our own.
In contrast, investments in our people through substantial income support not only supports their welfare amid difficulties but has a clear domestic multiplier effect. Cash transfers to poor and low-income households will almost certainly be wholly spent and wholly domestically. In short, it is likely that a larger amount of cash transfers has become more socially desirable and urgent than some infrastructure projects made obsolescent by the coronavirus crisis.
6. Lastly, the funding requirements for the comprehensive, humane and strategic response to the pandemic needed are huge. Bolder measures to raise financing are needed. The pandemic has seen the ideas of solidarity, unity and compassion raised repeatedly. These can inspire genuinely pro-poor and pro-development tax measures.
For instance, taxing wealth above Php1 billion will not adversely affect the well-being and welfare of the super-rich. A wealth tax of 1% on wealth above Php1 billion, another 2% above Php2 billion, and another 3% above Php3 billion can theoretically raise Php236.7 billion annually just from the country’s 50 richest. In the context of cash transfers, these can be part of a substantial stimulus to effective demand based on transferring income to poor and low income households with much higher propensities to consume.
A two-tiered corporate income tax (CIT) scheme with higher taxes on large firms and lower taxes on micro, small and medium enterprises can be designed to generate about Php70 billion annually. We note positively that SBN 1474 proposes a progressive CIT scheme. Similarly, a personal income tax scheme adding 10-20% on just the richest 2.5% of Filipino families may raise about Php127 billion annually.
At the same time, we would also question why we will repeat what is opportunistically done during times of economic crisis such as in 1997 and 2009 – lower corporate income taxes. Undertaking the biggest corporate tax break in the country’s history as proposed by the DOF’s Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) drastically undermines revenues at a time when they are so needed and actually for extremely uncertain gain. And once they are cut, they will unfortunately tend to stay cut.
Government borrowing also need not be on strictly market terms. The crisis can be seen as an opportunity to issue tax-exempt, long-maturity, zero-coupon COVID-19 solidarity bonds with very low, zero or negative interest rates. Proceeds can be specified to be only for COVID-19 response.
Moreover, the huge amounts being raised and spent for these packages presumably demand higher levels of public transparency than normal. The recipients of assistance should be made as public as the Department of Social Welfare and Development is doing for its social amelioration program which involves a much smaller amount.
IBON Foundation has been working closely with a wide range of health, environment, education, farmers, workers, urban poor, indigenous peoples, women, youth and children, and other civil society groups since 1978 or for over 40 years now. We cannot speak for them but our position is very much influenced by our constant interaction with these groups and their constituencies.
Which is why we are sure that they will share our sentiment that the stimulus the economy needs is not just for businesses, and certainly not for foreign corporations, but for the people in greatest difficulty most of all.
Fiscal decisions are critical especially in times of crisis – when the need is greatest for the State to commit to its obligation to respect, protect and fulfill the social and economic rights of the people.