RP politicians grapple for solutions as fiscal crisis clock ticks

The threat of an Argentinean-style fiscal crisis has been raised over the Philippines but the country’s politicians, accustomed to handing out money and favors, are still struggling to come to grips with it.

While President Arroyo has called for belt-tightening and more revenue to head off a financial meltdown, legislators have mostly shied away from measures likely to make them unpopular, opting instead for unorthodox ideas such as public donation campaigns to taxing churches.

But financial authorities say such small-scale, piecemeal solutions are not enough and they are pushing for more drastic reforms – new taxes, reorganizing the revenue-collecting agencies, streamlining government and removing subsidies on services such as power rates and toll fees.

"This is the acid test for our politicians, if they are willing to be unpopular and do the right things," said Edwin Fernandez, a senior partner of CEOs Inc., a management firm.

Traditionally Philippine politicians, bankrolled into power by powerful tycoons, have been reluctant to raise taxes or pass laws that would harm their benefactors’ businesses or earn the public’s ire.

Arroyo last month though warned that the time for prevaricating and half measures to solve the country’s mounting debt problem was over.

"We are already in the midst of a fiscal crisis and we have to face it squarely," she said on Aug. 23 as she ordered aides to evaluate emergency measures such as withholding funds allocated to local government units.

Although Arroyo has long warned of the need to stop the flow of red ink in the government’s finances public attention had been focused elsewhere. Just weeks ago, the burning issue in Congress was the allegation by a sex starlet that legislators were patronizing "escort" services.

All this changed in late August when a group of economists at the University of the Philippines warned that the country faced an Argentinean-type debt default unless drastic steps were taken.

They warned a likely uptick in global interest rates will make it much costlier to repay the government’s overseas debt, raising the risk of default in two to three years time.

"While the economy is not yet on the brink at this time, it can probably afford at most three years to avert such a crisis – with possibly a year at most to convince financial markets it is doing something to reverse the situation," said the economists who include several former cabinet members.

Government debt has more than doubled since the mid-1997 Asian crisis to P3.36 trillion ($60.32 billion), or 130 percent of the gross domestic product, the paper said. Half of it is denominated in local currency.

The Philippines has largely resorted to loans to make up for the chronic budget deficits left behind by poor revenue collection, massive tax evasion, "pork barrel" allocations to legislators and support to money-losing government corporations.

Manila last fell into a debt hole in 1983-1984, when it defaulted on sovereign obligations and was cast off from global financial markets.

The economists acknowledged the huge challenge faced by government, commenting the issue may be too "arcane and removed from people’s daily experience," to get popular support.

"That many of the proposed solutions portend only collective sacrifice and pain means the only reaction they arouse is broad opposition and deep resentment," the economists warned in their report.

"And because the issue is crucial but esoteric, well-known but unpopular, it is almost inevitable for some politicians, media, and public intellectuals to make political capital of the situation by pandering to public ignorance," they predicted.

Arroyo had previously asked Congress to pass crucial measures to raise revenues and reorganize government agencies to reduce the deficit but congressmen have opposed many of her reforms.

"These taxes are not popular and the people and the legislators will shoot them down," warned Franklin Ysaac, president of the Financial Executives Institute of the Philippines (Finex), an industry association.

Arroyo has also imposed an austerity program on government, banning foreign trips for officials and imposing cost-cutting measures in government offices such as turning off air-conditioning. Power rates, long kept down by government, are also due to go up.

Some reluctant legislators though argue the government needs to merely improve tax collection or weed out chronic corruption to solve its deficit problem.

Other legislators, unwilling to risk a backlash from passing new taxes, have resorted to patriotic appeals to the public to help the government out.

A fund has been set up to allow ordinary Filipinos to donate money to the government while House of Representatives Speaker Jose de Venecia reportedly convinced a number of wealthy Chinese-Filipino businessmen to donate a million pesos ($18,200) each to the cause.

Ysaac however warns that officials must lead by example, tightening their own belts before asking the public to follow.

"If we don’t see that, you won’t convince the ordinary businessman, the ordinary worker," he said. — AFP