Press Release
September 7, 2010

2011 interest payments inflated by P7-B

The amount for interest payments proposed in the 2011 national budget may have been overstated by as much as P7.7 billion, but such excess cannot be rechanneled to social services following the Budget department's unprecedented move to shield debt service from congressional review, Sen. Ralph Recto said. One of the effects of the new policy to take out automatic appropriations items from the national budget that Congress will approve is that automatic appropriations "are presumed to be 100- percent correct and thus cannot be changed," Recto said.

"Automatic appropriations are now clothed with the cloak of infallibility. The new dictum it seems is that automatic appropriations are automatically correct that they are beyond scrutiny and possibly correction by Congress," Recto said.

To bolster his view, Recto illustrated how the policy to declare off-limits to congressional scrutiny 47 percent of the P1.645 trillion budget will impact on next year's interest payments on the government's foreign debt.

Recto said government has set aside P357 million for interest payments, of which P120.8 billion will be used to service foreign obligations.

The P120.8 billion, however, was premised on a P47:$1 exchange rate, "a high assumption, in the light of emerging consensus among banks that the peso could strengthen to at least 43 to a dollar next year."

According to the senator, Standard Chartered forecast the peso to reach P43 against the US dollar by end of 2011 while HSBC and Goldman Sachs are more bullish, predicting the peso to surge to 42.50 and 42, respectively.

Recto said adopting a P45: $1 exchange rate would reduce interest payment allocation from P120.8 billion to P115.7 billion, or a difference of P5.1 billion, and a P44:$1 benchmark would further whittle it to P113.2, which would free up P7.7 billion for "productive expenditures."

Recto said the amount of between P5 billion to P7 billion can be used to augment the budget for the improvement of public hospitals "or can be added to the P15 billion seed fund for Public-Private Partnership in infrastructure."

These two critical services need augmentation, Recto said, "especially infrastructure whose 2011 level of P147 billion is P17.5 billion lower than this year's P164 billion program."

Recto theorized that interest payments for next year was "deliberately bloated to create a buffer in the event tax collection falls."

On the other hand, the decision not to submit debt service for congressional approval was spurred by worries that lawmakers will reduce the amount and convert the "savings" into pork, Recto said. "If the worry of executive branch is that interest payments will be carved up into small pork slabs, then my suggestion is that not a single centavo of funds transferred from interest payments will end up in legislators' allocations," he said.

To ensure the above, Recto proposed that the executive branch "will have the sole monopoly in doing the realignment."

The changes, he said, can be effected by a simple message of the President to Congress "stating that the amount for next year's interest payment as indicated in the proposed budget has been reduced by, say, P7 billion, and this, in turn has been added to the sector of his choice."

Recto described his proposal as reasonable and one that "has empirical basis."

Departing from the 23-year-old practice of including "automatic appropriations" items in the national budget for congressional approval, the Aquino administration submitted only P933.5 billion worth of expenditures, out of the 2011 ceiling of P1.64 trillion, to Congress, arguing that it does not need congressional authorization to spend the balance of P711 billion in automatic appropriations items.

In addition to debt service, among the expenditures deemed automatically appropriated by the Palace are the Internal Revenue Allotment of P287 billion; Retirement and Life Insurance Premiums (RLIP) of government employees (P22.4 billion); and Customs duties paid by the government (P15 billion).

Recto said he cannot accept "a presumption of correctness in the P22.4 billion in the proposed RLIP considering the fact that there is no reliable database on the names and number of government employees."

Recto said the bigger reduction in debt service will be triggered by a lowered interest rate as the average annual servicing cost of the P5.2 trillion NG debt is 6.8%, thus a reduction of 0.8% to 6% will lead to savings of P45 billion in interest payments.

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