Deficit is government's biggest headache – NEDA

Financing the budget deficit will be the biggest problem of the administration regardless of the outcome of the ongoing impeachment trial of President Estrada, the National Economic and Development Authority said over the weekend.

After missing its deficit target this year by a wide mile, NEDA said that government will encounter difficulties approaching financial institutions for financing since internally generated revenues’ will not be enough of any help.

NEDA Director General Felipe Medalla told reporters that government does not expect much in the way of higher revenue collections next year and might have to depend on non-traditional sources such as freeing up seized assets from the Marcos board.

According to Medalla, this would have far-reaching implications as government has began to hold back on its pump-priming activities to spur growth.

Medalla explained that the changing structure of the economy, heavy corporate sector debts and the institutional weakness of the Bureau of Internal Revenue (BIR) give little cause for optimism in revenue generation.

These factors will make it even more difficult for government to meet its revenue targets in 2001. This year, government has had to revise its revenue targets at least four times from P440 billion to P397 billion and then to P377 billion before going down to the present target of P360 billion.

Medalla said that despite the modest growth in GNP, there were fundamental changes in the country’s economic structure that would rule out better revenue performance because the growth was heavily concentrated on the least-taxed sectors: Agriculture and exports.

"This year, what really saved the economy is the agriculture sector," Medalla said. "Its performance assured that there would be no increases in food prices and this kept inflation down while staying the need for wage increases."

"The downside of that is the fact that agriculture is not taxed so this growth will not translate to higher revenues for government," he pointed out. "The same is true for the export sector which we don’t tax that much either."

Under the government’s export development programs, export industries are able to avail of various tax exemptions.

Medalla said government will also start feeling and debt hang-over in the corporate sector as companies avail of tax remedies to ease their burden.

"When the Ramos Administration took over, corporate indebtedness stood at $6 billion," he explained. "Foreign currency deposit units are even higher at $18 billion. "When the peso depreciated, the corporate debt stock increased and so did the debt servicing burden," Medalla pointed out. "Naturally, this would affect the tax payments of the corporate sector. We will definitely feel this even more in the coming years."

Aggravating the low revenue capacity of the economy, Medalla said, was the age-old weakness of the BIR which prevented it from collecting whatever taxes could be collected.

According to Medalla, this has forced government to look at other revenue sources, including the release of ill-gotten wealth seized from estate of the former President Ferdinand Marcos.

However, this would require a decision from the Supreme Court allowing government to use the frozen assets to finance the budget, a possibility made even slimmer by various claims against the assets.

This year, government had depended to a large extent on the privatization of some P22-billion worth of public assets but the weakness in the market coupled with the problematic nature of the assets up for sale prevented the target from materializing.

"Even more serious is the fact that we missed our deficit target by a large margin this year," Medalla pointed out. "This is a serious loss of credibility and it would make it very difficult for us to go to financial institutions asking for more loans."