PHILIPPINE ECONOMY: The devil and the deep blue sea

By: Mario G. Zavalla

Brought to you by the FUTURIST |? September 7, 2024

?There's another brewing controversy involving the Department of Finance (DoF) and the group questioning the transfer of funds of PhilHealth?and PDIC to the government treasury amounting to more than P120 billion of which P60 billion had been released so far "to finance crucial government projects like health, education, social services, and infrastructure." The decision was supported by six former secretaries of the Department of Finance (DoF), namely,?93-year old Cesar E. A. Virata, Roberto F. De Ocampo, Jose T. Pardo, Alberto G. Romulo, Jose Isidro N. Camacho, and Margarito B. Teves who claimed, "delaying crucial projects is a burden our people cannot afford — diminished public services, slower growth, more debt, and higher deficits. No responsible DOF Secretary would allow such an outcome.”

They continued, “Recall that in the 2024 national budget, the government was authorized to get surplus money from GOCCs and use that money to finance items in so-called “unprogrammed appropriations” (infrastructure projects, social programs, etc.).The Department of Finance then issued a memo instructing GOCCs to make such transfers. In the case of PhilHealth, they were instructed to hand over almost P90 billion of their funds. In May, P20 billion of that was already remitted to the Treasury; another P10 billion was transferred recently. Meanwhile, the Philippine Deposit Insurance Corporation or PDIC, another GOCC, remitted at least P30 billion to the Treasury in May, also at the behest of Recto."

The former finance chiefs also said, “In our view, it is in the public’s best interest for a portion of excess GOCC funds to be mobilized efficiently, rather than imposing additional taxes or increasing public debt that would burden future generations” adding “The taxpayers are effectively paying interest on these idle, unused funds that are benefiting no one” adding that GOCCs are harboring “dormant” funds that can be used elsewhere and more productively. “Responsible public financing requires considering opportunity costs. If unused funds are left dormant, the potential benefits are lost. Every unused peso represents development denied for Filipinos. They continued, “PhilHealth’s? funds have a huge opportunity cost in the form of government projects (like roads or bridges) that could be helping Filipinos in the meantime.”???

They also said, “If you don’t know yet, opportunity cost is a basic concept in economics, one that’s taught on Day 1 of any introductory course. It simply refers to the value of the next best alternative that you give up when making a choice. If you watch a new online series, for example, the opportunity cost of that could be the hourly wage you could be earning instead. "

The group opposed to the transfer reasoned that, “If the problem is the government not earning nearly enough money for all its projects, the solution is for the finance department to do its job better. Tapping GOCCs’ 'dormant' funds is a lazy and irresponsible shortcut.?

?Economic technocrats are supposed to be experts appointed to key positions and expected to steer the economy toward solid growth, stable prices, and job creation.

But technocrats are not infallible. And when technocrats get it wrong, people tend to trust them less. Technocrats’ policies and pronouncements become less credible over time. Take for example what had happened to Secretary Arsenio Balisacan of the National Economic and Development Authority (NEDA). Before becoming a technocrat at NEDA, he was a longtime professor and researcher, a highly-regarded scholar on poverty issues. For a time, the name Balisacan was synonymous to poverty studies.

However, in the past weeks, he and NEDA have been thoroughly criticized because of their unrealistic food poverty line (P21 per meal per person per day).”

They also said, "It’s not only imprudent but also violative of laws that earmark government revenues for PhilHealth and the broader goal of providing universal care.?

First, even supposing that PhilHealth is not maximizing its so-called surpluses, that doesn’t remove the fact that laws are in place to make sure that PhilHealth’s funds cannot be taken away by the national government on a whim.?

Second, the obvious next step of government should be to prod PhilHealth’s board and management to make efficient use of its funds — not just take away PhilHealth’s money and supposedly make better use of it.

On the surface that makes sense. But if you think for a minute, there’s a very good reason why certain pools of money — like PhilHealth funds, the funds of the PDIC, the capital of state-owned banks, or the international reserves of the Bangko Sentral ng Pilipinas — can’t and shouldn’t be touched by anyone capriciously.

In the case of PhilHealth, such funds are meant to benefit their members who directly contribute to the fund. In the case of PDIC, that GOCC needs the money in the event of a banking sector crisis. In the case of state-owned banks like the Land Bank of the Philippines and the Development Bank of the Philippines, they need enough capital to ensure they can lend to farmers and cooperatives (recall that their funds were also tapped for the Maharlika Investment Fund, again using the assumption of idle funds). In the case of the Bangko Sentral’s reserves, they need that money to make sure we have enough dollar reserves to pay for our foreign obligations as a nation, and in the event of future economic shocks or crises.

In short, there are huge pools of money across our economy whose value derives largely from having them for use in the future, even if they’re not currently being used. In economics, this is also called “option value.”The former finance chiefs should be the first to know about the prudence of not touching these large sums of money — even if in theory such funds can be tapped to fund government projects. Insisting that such funds can be touched now is the very opposite of “responsible public financing.”

Besides, there’s no evidence that funds remitted by PhilHealth and PDIC have already been used. Guess what: they’re also lying dormant in the public coffers. The same goes for the P125 billion seed fund of the Maharlika Investment Corporation, which has not been used for any real investments yet, and is only earning marginal interest from government securities.?

It’s also doubtful that giving the government more money means that that’s the best use of funds. In this country with weak rule of law, the opportunities and temptations for corruption multiply as the government gets its hands on larger and larger funds.

Finally, the ex-finance chiefs seem to be banking on the “astute leadership” of Secretary Recto, who (when you think of it) is more of a politician than a technocrat with real expertise in economics or finance.” Sure, Recto did push for the VAT reforms in the mid-2000s that helped to avert a fiscal crisis. But now that he’s called to be a technocrat once more, he should be ready to make equally difficult decisions — making sure, though, that they’re also the right ones.”?

Here’s what I think.?

Secretary Recto, et al, sit in a very hot seat. The country cannot borrow today, nor next year or the next, without increasing national debt way above the 60% ratio of national debt to gross domestic product (GDP), the threshold accepted by international lenders as a gauge of a nation’s economic health and ability to pay its debt. This ratio was not arrived at arbitrarily but is the result of previous studies showing that debt has a promoting effect on a country’s growth but becomes a drag upon reaching 58% of GDP. An economy will enter into recession? upon experiencing two consecutive quarters of decline which may last for 17 months based on historical data or worse, a depression which is more severe and may last for as long as 10 years like the 2029-2039 Great Depression in the U.S.

Such are the options as of today still open to the Marcos administration, a choice as they say, between the devil and the deep blue sea …..a choice between maintaining or reducing the present level of debt which could result in a slower pace of growth or risk an economic slowdown by continuing to pursue aggressively economic growth using less costly mixture of funds which will lead, nonetheless, to additional debt. I believe that this is the issue that must be settled first before determining whether or not fund transfers can be justified on the basis of fund optimization or whether it is whimsical or not on the part of the government.

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