STORY BRIEF November 21, 2007 REFERENCE: Prof. Leonor Magtolis Briones – 0917-5359884 “Domestic resources alone will not be sufficient to meet the targets under the UN Millennium Development Goals with the inadequate national budget, and consistent revenue shortfall from tax collection and foreign direct investments,” said Prof. Leonor Magtolis Briones, Co-convenor of the Social Watch Philippines. In a paper presented during the National Consultation on Financing for Development today, Prof. Biones said the availability of financial resources for the national budget is determined by the degree of domestic resource mobilization that is presently clearly inadequate even for just the MDGs. Social Watch led the Alternative Budget Initiative (ABI) and proposed an increase in the 2008 budget by P20 billion. As of this writing, Congress has proposed additional allocations which can be traced to the ABI proposals, amounting to P13 billion. Nevertheless, in relation to the study conducted by Dr. Rosario Manasan, the P94 billion projected resources to meet the MDG targets in 2008 will not be sufficient. According to Manasan, the resource gaps to meet the MDGs from 2007 to 2010 is P394 billion and P726 billion for 2011-2015 period. Revenue generation Tax revenues more than doubled from P412 billion in 1997 to P859.8 billion in 2006. Non-tax revenue likewise doubled from P59.6 billion in 1997 to P119.7 billion in 2006. The deficit is apparently going down but expenditures not including principal payments on debt should be noted as well. Meanwhile, the two major tax collection agencies, Bureau of Internal Revenue and the Bureau of Customs are not achieving their revenue targets. Shortfalls in tax collections reached P56.020 billion from January-September 2007. Ironically, during a period when the government was rejoicing in a hefty GDP growth rate for the first half of 2007, revenue shortfalls were building up as well. For the month of September 2007 alone, BIR had a shortfall of P4.566 billion. The deficit was controlled by increases in Bureau of Treasury income, privatization and under spending of programmed expenditures. One of the obstacles to increase in domestic resource mobilization is the regressive tax system. The trend among many countries is to rely on consumption taxes as major sources of revenue because these are convenient and administratively easier to collect. Foreign direct investments The Philippines adopted a policy of attracting direct foreign investment much earlier than other developing countries. The major policy strategy adopted was to offer tax holidays, incentives and other perks to lure investors to the Philippines.

As usual, the Philippines went overboard in offering incentives. Losses from foregone revenue far outweighed expected benefits. Government policymakers had differing and contrasting views on incentives. The Department of Trade and Industry and related agencies see incentives as a way to strengthen the Philippines’ competitive edge over the other countries. Congress tends to have the propensity to offer incentives. Because incentives result in foregone revenue, the Department of Finance prefers to limit them. Clearly, there is a need to harmonize policy initiatives of institutions which have different responses to incentives. One study of Rafaelita M. Aldaba stated that tax incentives were not able to compensate for the relatively weak fundamentals and poor investment climate. Tax incentives have direct negative effect on revenues even as some address the need to reduce economic distortions. Renato E. Reside, Jr. said a large amount of incentives provided to investors are redundant. These are given to firms that would invest anyway even without the incentives. Reside said many of the firms were found to have high rates of return by international and even domestic standards, even before receiving incentives and a large number of firms in the Philippines have low sensitivity to fiscal incentives. To ensure that domesic resources will significantly contribute to the MDGs, Prof. Briones called for the harmonization of conflicting policies on investment incentives; resolve revenue administration so that the government will not be dependent on consumption taxes such as, VAT; identify the causes of perennial revenue shortfalls and formulate appropriate solutions; review the methodology of determining revenue target and hold the agency accountable to these targets. Revenues from taxes are clearly not enough for the huge development requirements and recovery of stolen wealth, acceleration of debt service reduction and the MDG proposals of Alternative Budget Initiative (ABI) in Congress are necessary. Prof. Briones said the initiatives in combating corruption have to be a part of the larger solution to the problem of national corruption.

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