Turning crisis into opportunities

If we are, indeed, in a fiscal crisis as the government portrays the country to be, we could be comforted with the realization that it is in such critical situations that the best of us and the best in us are put to the test, and many do come out in a better shape because of it. It matters less then that we are in a financial bind than that we are in a position to confront, defeat and overcome the menace.

Fellow columnist Wilson Lee Flores aptly quoted John F. Kennedy who said, "When written in Chinese, the word "crisis" (wei-ji) is composed of two characters – one represents danger, and the other represents opportunity." The fiscal crisis can either destroy the Philippines or rebound the nation to prosperity. We can choose to either be engulfed in its dangers or be riding in its opportunities. Yes, indeed, there are golden opportunities even in a fiscal or budgetary crisis.

At once we are appalled that the government opts to enmesh the country further into the dangers and pitfalls of the crisis by its action at attempting to forthwith bridge the budgetary gap between government revenues and expenses.

For government has embarked on a dual program to balance the budget. First, by minimizing its expenditures at the expense of the effective maintenance of government essential functions, the delivery of basic services to the people and the expenditure of investment needs for our infrastructure and utilities. And second, by increasing the revenues by imposing more taxes upon the people. These two measures, while ostensibly meant to balance the budget, invariably lead to a graver deepening of the fiscal crisis as the economy further contracts and constricts to the greater prejudice of everyone. Yet, the worse measure government has continuously adopted which has largely brought the country to its fiscal mess and which, even now, it insists in pursuing, is the borrowing from foreign sources to fund our domestic needs.

As we had explained ad nauseam in our earlier articles, government’s belt-tightening and its intentional refusal to invest in infrastructure and utilities development projects grinds economic activities to a longer standstill. With an anemic economic atmosphere, the private sector itself holds back on its investments, laying-off unaffordable labor and paying lesser in taxes. The imposition of more taxes, on the other hand, upon the people, leaves them in these bad times with less in purchasing power and disposable income, thereby forcing them to spend less, paying less taxes, and thus, asphyxiate the economy even more. The final whammy, of course, is the evil of foreign borrowings that exponentially worsens the budget deficit as the peso is devalued as against the dollar, which is almost always the case.

As much as we try, we cannot make logic or sense in government’s dogged insistence to embrace and implement measures that have time and again proven to be unsuccessful and, on the contrary, detrimental, if not disastrous, to the economy. As Bill Goodwin said, quoting him from Wilson Flores’ article, "The highest form of insanity is doing the same thing over and over, expecting different results. The point is, if you want different results – you have got to make some changes." Indeed, changes in approach are urgently needed now, if not long ago. We have to think "out-of-the-box" from hereon.

In fact, we do not have to look far and wide for the solution. We need not reinvent the wheel. The advanced economies all around the world have shown us their uniform, consistent and successful formula for modernization, which is an expansionary monetary policy that enables their central bank to create new local money by directly purchasing government long-term bonds that are secured against future taxes. In short, growth as spurred by local borrowing and financing.

Illustratively, Europe, that was in shambles after World War II, successfully pursued the Marshal Plan which is not nothing more actually than the financing of the reconstruction of the continent through internal borrowings collateralized against future taxes. And look where Europe is now because of it! Japan, Taiwan, Singapore and Switzerland, to name but a few, developed themselves to be economic powers that they are now through this same method of internal borrowings securitized against future taxes. These countries have no foreign debt at all and yet have achieved economic might and stature.

Why don’t we then just follow this proven road to progress and prosperity? That we insist on the old failed ways of doing things is nothing less than treason.

To this late date, there are economists who hold steadfast the ancient view that money cannot be printed or issued without the corresponding metal value to back it up forgetting that all paper money the world-over had been freed from metal base and are, instead, merely fiat money. This means that every nation has the freedom to print its calculated proper money supply and the strength of each nation’s currency is dependent only upon the strength of the economy of the issuing country. In such a case, all countries, the Philippines included, should be able to determine their own monetary level that is consistent with their financial needs for the development of their infrastructure and utilities for roads, highways, ports, airports, schools, hospitals, including power, water and telecommunications facilities.

The key, in this respect, is the determination of the proper level of M1 (that is, cash and demand deposits) that should be in circulation consistent with the needs of the people for quality living as well as the development needs of the country. It is alarming to note that the Philippines to this day has one of the lowest money supply per capita in the region which deficiency already explains our low level of development vis-a-vis our progressive neighbors.

Our anemic money supply is ridiculously revealed in government’s tax allocation target which is twice higher in amount than the actual money in circulation. Hence, even if the entire money supply is collected by way of taxes there will still be a deficit in tax collection. The ideal proportion, really, of M1 and the collection target is that for every peso government wants to appropriate for itself there must be two pesos in the hands of the taxpayer.

What we are advocating, plainly, is not an irresponsible printing of local currency but a managed increase in money supply that will not be inflationary as it will not be directed at the consumption sector, but will be guided towards the production sector where it is urgently needed most. As we keep repeating without let-up, the mechanism to do this is through government borrowings against future taxes through floatation of long-term bonds that the central bank will directly purchase through the issuance of the corresponding new local money.

The money thus newly-created will then prime-pump business and the economy as they shall be used for the construction of vital government infrastructure projects such as that for roads, highways, bridges, ports, airports, schools and hospitals as well as the establishment of utilities such as for power, water and telecommunications. As taxes are a dead certainty, the bonds will eventually be paid and retired as revenues are generated from the use of said facilities over time. This explains why the term of the bonds should be long enough so that the government will have the time to recover by way of taxes what has to be advanced by it to run its affairs and to develop our infrastructure and utilities.

This brings us then to the all-important subject of government budgetary accounting. As is, our budgetary accounting method is seriously flawed as capital outlays for investment projects such as in infrastructure and utilities are lumped together with operating expenses in the current budget year. This is a grave mistake because applying such method will surely lead to a budget and fiscal deficit as the capital outlays are all charged to the current year. It must be understood that capital outlay investments in infrastructure and utilities have naturally long gestation periods before returns can be realized. Investments for an airport or a power plant, for example, cannot be expected to be recovered in a year or so from the time it was expended in the budget. As in private business, the expenses will be recovered from the revenues generated out of the project so that the expenditures thereon must be correspondingly spread out each year in the budget throughout the project’s lifetime as and when revenues are realized. This manner of correct government budgetary accounting will drastically lessen the deficit as capital outlays could then be properly separated from operating expenses in their accounting.

By way of summary, we have shown that a crisis produces the worst or the best in us. A dangerous response as is government’s current tack of belt-tightening, imposing more taxes and borrowing from foreign sources for our local needs exacerbates and worsens the situation. The alternative response of pursuing an expansionary monetary policy by government borrowings against future taxes to prime-pump the economy and develop the country, as well as the corrective accounting measure of separating capital outlays from operating expenditures will produce the best results and keep us ahead inspite of the crisis by concentrating on the golden opportunities at hand.

The choice is in our hands.The choice for the people is obvious. It seems only that government is in the way.

You may write your comments / suggestions at 15/F Equitable Tower, Paseo de Roxas, Makati City or through e-mail at [email protected]

(Note: We beg the indulgence of our readers who are at times tasked to read a lengthy piece. The purpose of our writings, however, being advocacy and not merely commentary in nature, compels us to dissect a given problem, analyze its causes and effects, and offer studied solutions. The length of the article should be irrelevant to such an approach.)