Is ‘Dutertenomics’ good for the country?

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HOW will the economy and business fare under incoming President Rodrigo Duterte?

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As his administration’s economic and business agenda emerges, including its 10-point agenda outlined before 300 corporate leaders attending the Sulong Pilipinas workshop in Davao City this past Monday and Tuesday, there is reason to see better prospects for growth and investment in the coming six years. Among key thrusts:

• Higher infrastructure spending, with 5 percent of gross domestic product targeted

• Lower income and corporate tax rates to better compete with other Asian nations

• Less red tape and corruption, including permits and land titles crucial to business

• More state resources for the countryside, reducing poverty and boosting rural growth

• Strong law enforcement and peace efforts to enhance the business environment

• Small business gains with GoNegosyo’s Ramon Lopez as Trade & Industry Secretary

• Better China relations enhancing Chinese trade, tourism and investment flows

• Charter change to devolve power to the regions and ease foreign investment limits.

These planned initiatives dovetail well with the wish-list presented by business leaders meeting with Duterte and his Cabinet: comprehensive tax reform, a national ID card system, automation of business permits and licenses, better support services for farmers and fisherfolk, and major transport and communications projects.

Making ‘Dutertenomics’ work
The first two agenda items—more public works and lower taxes—look set to boost growth. At the Davao meeting, International Monetary Fund country representative Shanaka Jayanath Peiris expects upward revision of growth forecasts with the higher spending planned by the next regime.

With infrastructure outlays up—P1 trillion next year, double the 2016 outlay, says returning Budget Secretary Benjamin Diokno—and consumers and companies keeping more of their earnings to be spent, all three GDP components of consumption, investment and government expenditures should expand.

That would end the chronic underspending perennially hobbling the economy under President Benigno Aquino 3rd. In 2011, his first full year in office, public works expenditures fell by half for the first time, also halving GDP growth. In most of the succeeding years, state expenditures contributed less than 1 percentage-point to annual economic expansion, despite constantly rising budgets.

But will boosting outlays and cutting taxes hurt fiscal health? Incoming Finance Secretary Carlos Dominguez and his Budget counterpart Diokno see room for a larger deficit, now well below the acceptable gap of 3 percent of GDP. And they can offset tax breaks with revenue measures, including perhaps raising the value-added tax.

Of course, what’s really needed to make the Duterte plan work is more business investment, creating jobs, lifting overall spending, and thus generating more taxes even at lower rates.

Hence, the next government must finally address investors’ constant complaints over shoddy infrastructure and bureaucratic delays, while also making tax rates and investment rules more competitive.

After receiving the business leaders’ wish-list in Davao, Duterte said it was “doable.” So let’s do it, especially the priority infrastructure projects, and continue the Philippines’ 17 years of unbroken growth since 1999 that is one of the fastest in Southeast Asia after the 2006 fiscal reforms.

That means more presidential prodding to fast-track implementation, sorely lacking from Aquino, and no unnecessary delays, like the years he spent pondering the elevated highway project to link North and South Luzon Expressways—so crucial to alleviating city traffic and ports congestion—proposed at the start of his term in 2010, yet still awaiting final approval.

More warm bodies, please
A further ingredient is needed to expand state programs and projects: more warm bodies in government. While the national budget has quintupled since 2001 to P3 trillion, state personnel has actually declined slightly from 1.5 million to 1.4 million today.

Duterte’s business audience would be quick to tell him that trebling public works and state programs would be hard with no increase in the number of competent engineers and managers, doctors and nurses, teachers and extension workers, police and soldiers.

Take infrastructure: there are already delays in awarding and implementing contracts, with not enough engineers to draft the terms of reference, review project bids and proposals, oversee construction, and investigate shoddy or anomalous work.

Other agencies need to bulk up, especially in poor regions, where living standards are not as attractive as those in major urban centers. The ratio of police to population is well below the recommended one law enforcer for every 500 people.

In adding two more years to basic education, public schools have to hire more teachers. And expanding health services, as planned in the Duterte 10-point agenda, would require deployment of more medical personnel in less-served areas.

Hence, in his push to expand infrastructure and regional development initiatives, new President Duterte has to address the size and deployment of the bureaucracy, to ensure that there are enough qualified staff to implement more projects, especially in places where they are sorely needed.

What could derail growth?
What can derail the Duterte plan?
Global and regional economic disruption can undercut exports and remittances, as seen in the threat of joblessness among overseas Filipino workers in the Middle East. China’s current malaise, if it escalates, would have regionwide impact, and would limit the gains in trade, tourism and investment expected from Duterte’s rapprochement with Beijing. Then there’s the possible fallout from Europe if Britain exits the European Union.

Duterte’s war on crime, while addressing law and order concerns affecting business, could escalate into bloody carnage on the streets. If that happens, it would affect tourism and local business, and possibly disrupt foreign investment if expatriate executives feel threatened.

The plan to revamp and reform graft-ridden agencies may face mass action by segments of the bureaucracy. Personnel of the Bureau of Internal Revenue, the primary tax collection entity, have reportedly threatened mass resignation, holding state revenues hostage. Notably, they slowed tax collections in 2002 to force out then-reformist BIR Commissioner Rene Bañez.

The anti-reform forces may even gain support in Congress and try to oust Duterte. Clearly, the opponents of change will not go down without a fierce battle. We must join hands with our new President to defeat them.

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7 Comments

  1. if du30 wants to increase the vat rate, it should be to luxury items that the rich can only afford like luxurious vehicles, high end jewelry and clothing(including branded clothes and shoes) etc. my wish is for du30 to decrease the vate rate for fuel and electricity. the middle income and poor should be excluded in the vat rate increase.

  2. arthur keefe on

    A good analysis. My priority would be to substantially reform the tax system. Reducing the burden of tax on the lower paid should be a priority, offset by increased taxes on wealth. The scale of tax avoidance is huge. Many-most?- businesses under-declare their income significantly. Tax avoidance is theft just as much as shoplifting. It should be treated the same, as a criminal offence with heavy penalties.

    • If you know how Pilipinos spend their money, I am 100 percent sure that any saving in taxes paid will be use to buy items which will then transform to more sales taxes and will induce more production. This will increase economic growth a few hundred folds. Pilipinos are known spenders not savers.

    • True. Tax avoidance(if not tax evasion) is huge among business people and the rich. Pres. Duterte should have made them aware during their gathering in Davao City.

  3. Lowering taxes does not necessarily boost economic growth. It is a powerful way to redistribute wealth to the upper class. Instead of having more tax revenue to spend on the majority of people, it is a way to put more money in the pockets of the rich. Whether the increase in after tax moneys will result in the rich putting it back in the economy by way of capital spending or job creation has never been proven. Better yet, this idea of trickle down economics has been proven to be a farce in the U.S.

    • I do not agree . Any money in addition to the regular wages will be use to buy things. That is a given. Pilipinos are not known savers. More purchases , more economic activity. That is also a given. More economic activity means more economic growth. That is also a given. If the monies stay with the government, they steal the money. they will make the politicians wealthier that is also a given.

    • i think the lowering of tax they are talking about is just to be at par with the rest of the countries in asia. the phil. has the highest tax rates in asia and most of the tax burden is carried by the middle income and lower income groups. high taxes deter investments