Thank your for inviting me to this forum.
Every opportunity to sit and discuss the direction of events is valuable. The world seems to be shifting at a faster pace each day. This reflects in the pace of innovation as well as in the sharpness of disruption.
I was reading an article in The Economist last month. It was a preliminary effort to tackle what is likely to be the key question of this day: the great success of the new economy to create wealth and its utter failure to spread it.
With all the tools of modern finance, with all the instruments of digital technologies, there is nothing easier than to profit from an idea. This is why, over the last two decades, the global economy produces billionaires like rabbits.
The power of modern finance, however, is not matched by an ability to be inclusive. Poverty rates rise at a faster rate than wealth is created. Disparities sharpen. Communities that could not cope are obliterated. Nation-states are shredded as in Syria or defended as in Britain.
In the confusion, old concepts clash. Globalization has been pitted against the nation. Modernity is pitted against ancient wisdom. Orthodoxy is challenged; novelty is not always welcome.
We have much to sort out in our own society.
Over the recent past, we seemed to have cured the problem of a boom-and-bust economy. For a decade-and-a-half, the have sustained our quarter-on-quarter growth. We brought our credit rating to investment grade. We have a building boom that shows no signs of stopping.
Yet at the same time, our poverty and unemployment rates remain high. Joblessness appears to be the permanent underside of growth. Our agriculture certainly could not keep up with the rate of growth of our population. Our environment shows signs of exhaustion.
The economic growth and its parallel poverty rate are obviously unsustainable. We have to start rethinking things. We have to put equal importance on community as much as growth, on repairing the social fabric as much as restoring order.
When our voters cast their votes last May, they delivered a strong message. We can no longer do business as usual. We have to start innovating, not just the technological foundations of our society but its ethical premises as well.
My specific world at the moment is public finance. Let me confine myself to this world, which is complex and challenging in its own right.
In his first State of the Nation Address, President Rodrigo Duterte gave us our marching orders. They are not easy orders.
Principal among these are orders to reform the tax system to make it fairer for the middle class. The reform should also bring down our corporate tax to competitive levels.
Tax reform is easy to imagine. It is toughest to execute.
The previous administration clung to the obsolete tax rates because it could find no substitute for them. It did not want to lose the much-vaunted credit ratings — although these were won largely by the fiscal policies of the Arroyo administration.
These led to certain distortions in our public finance policy. Government borrowed but was hesitant to spend. This produced chronic underspending and a severe shortfall in infrastructure.
There has to be a way for government to lower rates while broadening the tax base. We have examined the numbers. I am sure there is a way to keep the budget balanced while growing the middle class.
Meanwhile, the public absorbed the costs of infrastructure that was not built. We see that in the congested roads and airports. We see that in the backward ports and high cost of transport. That is an invisible cost of absent public goods.
Those that were built will eventually cost higher for the consumers because of the high front-end costs charged the bidder. I am not sure this is the best way to go about this business of recruiting the private sector support to meet our shortfall in infra.
There has to be a better way of doing this. I am asking my staff to look into more innovative ways of doing this, bearing in mind that infra are also public goods and not just commodities that enable government to earn. It is always tempting for government to think about its bottom line and forget about the public needs.
We are looking to launching hundreds of infrastructure projects over the next few years. This can be done only if we reimagine the terms of these partnerships. We cannot continue to bleed the public dry under the guise of providing for their needs.
We have to be mindful that the PPP could be a mechanism for loading up government with contingent liabilities.
PPPs are ideal for large projects of long-term duration. That makes it possible to take advantage of the strengths of partnership with private corporations. Small, short-term projects often turn out to be more expensive for government eventually because of related costs such as the hiring of consultants and multiple Cabinet-level approvals.
Our VAT system needs examination as well. At the present rate, our VAT ought to be able to collect as much as twice more than it is collecting. A very large “loophole” exists: it is called Smuggling.
The World Bank estimates that smuggling denies government billions of dollars in potential revenues. If we are able to upgrade the capacities of the Bureau of Customs, no additional VAT and no new tariffs need to be imposed.
At the BIR, the largest loophole appears to be the Large Taxpayers Unit. This unit collects from the biggest industries in the country, even if it covers less than 3000 companies. If this unit can collect more efficiently, it should be possible to raise enough revenues at least to compensate for the lower tax rates.
You will note that most of the ideas here are open-ended. That is because most of the answers are yet to be found.
Give us a little more time. In a few weeks, we should be able to find the proper rebalancing between lower tax rates and a broader tax base. Surely, towards the end of the year, we should be able to sit down with our colleagues in the legislature and craft a revenue system that is kinder to the poor and just to the rich.
That will not be the end of the innovation — only the start.
I know this new government has been extremely busy in its first three weeks in office. It has to be. Ambitious goals were set during the campaign. A 10-point agenda was set down. We are running against time.
Instead of imagining what can be done in the first 100 days of the Duterte administration, it might be more fruitful to imagine what the last 100 days ending in June 30, 2022 will look like. I have attempted that exercise and arrived at a broad outline based on the 10-point agenda.
I imagine that on June 30, 2022 the Philippines ought to have brought down our poverty incidence figure to 17% from 27%. This will be achieved by massive investments in infra, education and public health. It will have been boosted by gains in honest government and a perceptible decline in corruption. It will consolidated by proper dispersal of economic activity and improvements in our logistics system.
I imagine the Philippines leading the region in sustainable growth — perhaps at the 8% level. That growth will happen in a climate of peace and order. It will happen in the context of superior business confidence in our institutions of governance, a high degree of transparency and a committed bureaucracy.
Lastly, this will be a country equipped with the civic virtues necessary for all civilizations to thrive. Public discipline will be unlike anything we have seen before. Respect for the environment will be paramount. The nation’s resources will be there for everybody to share, as long as the needs of the future are not compromised.
I am confident we will get to some approximation of this vision by working harder and striving honestly, by rethinking the way we do things and innovating on the way we govern. We have the leader to take us there, the public support to doing the difficult things and the unyielding desire for change.
Maraming salamat po.