Press Release
August 9, 2018

Recto: Excerpts from the DBCC hearing in the Senate

SEN. EJERCITO. Thank you, Senator Escudero.

Next on deck will be Senator Recto. Actually, it's me but, Senator Recto, I'll give way to you. And then I'll just ask my questions later.

SEN. RECTO. Thank you, Mr. Chairman.

Just a few questions, I think most of the questions have been raised already. But the first issue is openly discussed today in public with regard to what government's response should be as far as high inflation is concerned. And that is understandable because inflation is a silent tax. Inflation is not a tax on income but a tax on wealth.

Now, having said that, I've read on the papers that there was a recommendation and there seems to be a plan to reduce duties on vegetable, fish and meat products. Is this correct?


MR. PERNIA. That is correct, Your Honor.

SEN. RECTO. Okay. And we are talking about reducing duties, right?

MR. PERNIA. Tariffs. These are tariffs, yes.

 SEN. RECTO. Tariffs, yes. And how much would be the loss to government with regard to this?

MR. PERNIA. We haven't done the computation yet.

MR. DOMINGUEZ. [Off-mike] Not large.

SEN. RECTO. Not large. If it is not large, then how will that reduce inflation?

MR. DOMINGUEZ. Actually, it's a combination of factors: (1) the tariff itself is to be looked at; (2) it's also to ease the process of bringing in food products and speed up the processing of the phytosanitary certificates and the restrictions on other meat products.

 By the way, the total amount of duty collected for chicken and fish is 1.8 or 1.9 billion.

SEN. RECTO. So you were saying that by taking away these tariffs and duties, inflation is expected to go down for these particular products.

MR. DOMINGUEZ. That's one. I said one is the tariffs and duties; and the other one is to speed up and reduce the nontariff barriers.

SEN. RECTO. And, therefore, there is also an admission that taxes create inflation.

MR. DOMINGUEZ. Of course.

SEN. RECTO. Of course, yes.

MR. DOMINGUEZ. There's no question about that.

SEN. RECTO. Thank you, yes.

MR. DOMINGUEZ. But let me just point out that in the TRAIN, the first tax reform that you passed, there were two taxes there that we had designed to increase the cost of the product because they are not helpful or they are actually taxes on products that cause ill health.

SEN. RECTO. You're talking about sugar and cigarettes.

MR. DOMINGUEZ. Sugary drinks and cigarettes, yes.

SEN. RECTO. Cigarettes, yes.

MR. DOMINGUEZ. Yes, correct.

SEN. RECTO. I understand that.


SEN. RECTO. Yes, okay. So, having said that, there's an admission that taxes create inflation. And kung minimal lang naman ang mawawalang revenues dito at 1.9 billion, then very little as far as reduction in prices would be expected.

MR. DIOKNO. [Off-mike] One point nine, yes.

MR. DOMINGUEZ. As I mentioned, the duties is one and the other one is to ease the nontariff barriers.

SEN. RECTO. Yes, the procedure, to fast-track the procedure. Yes, understood.


SEN. RECTO. Okay. So let's move on. What could be the other inflation mitigating measures that could be done to reduce the prices, inflation without even government losing revenue? Has government even thought about other possible--Well, as you mentioned, easing the process?


SEN. RECTO. That is one. Have we taken a second look also, for example, to reduce oil prices? Halimbawa, to rethink our bioethanol, biodiesel?


SEN. RECTO. And how much could we reduce this, the price of diesel and gasoline na hindi maapektuhan ang gobyerno?

MR. DOMINGUEZ. We've actually been working on that for more than a month, and Undersecretary Beltran is the gentleman who has the latest info on that.


MR. BELTRAN. Mr. Chair, actually--

SEN. RECTO. Which may also help our balance of payments position.

MR. BELTRAN. Yes. But, as of April, the data that we have which we are trying to update, if we replace the oil, diesel with biochemicals, the increase in the price would be about 45 centavos per liter. We are trying to get new data--

SEN. RECTO. If you take it out, there's a reduction in prices. That's what you are saying?

MR. BELTRAN. No. There will be an increase in the price by 45 centavos.


MR. BELTRAN. If we replace the--

SEN. RECTO. No. We're talking about reducing. My question is reducing prices.

MR. BELTRAN. Yes. It's not--


MR. DOMINGUEZ. Let me just clarify.


MR. DOMINGUEZ. The Department of Agriculture suggested that we substitute diesel and use coconut oil instead. When we did the numbers, it seemed that the price would go up.

SEN. RECTO. Will go up. Correct, okay.

MR. DOMINGUEZ. Yes. But there are other factors that we have to consider, other economic factors such as less pollution. So we are doing those numbers.../jbc/imjv

MR. DOMINGUEZ. ...So we are doing those numbers.

SEN. RECTO. My question is, how can we reduce oil prices without affecting the revenues of government? Is there a way?

MR. DOMINGUEZ. [Off-mike] That's one way.

SEN. RECTO. No, specifically. For example, today there is a mix already, right? What is the mix in diesel? What do we mix diesel with?

MR. BELTRAN. CME, Coconut Methyl Ester.

SEN. RECTO. Isn't it that we import all of that?

MR. BELTRAN. No, we are producing locally.

SEN. RECTO. We are producing it locally?


SEN. RECTO. What do we import?

MR. BELTRAN. Maybe just the equipment.

SEN. RECTO. No, I mean the--let's say, bioethanol? Are we importing or are we producing it domestically?

MR. BELTRAN. We are producing it domestically. But the production is so small.

SEN. RECTO. For all the products?


SEN. RECTO. Did this raise the price of gasoline and diesel?

MR. BELTRAN. Yes, it will increase the price of--

SEN. RECTO. No, today as we speak.


SEN. RECTO. The price today of diesel and gasoline. I am saying that there are many mandates of government--let's start with petroleum--that if you take away certain mandates--these are coercive powers of the State. We pass a law saying that, "Let's include this in gasoline, let's include this in diesel." The effect of which tumaas ang presyo, right? Okay. Now, if you take this out, bababa ba ang presyo?

MR. BELTRAN. We are trying to update our data and we will give you information on whether it will lower the price.

SEN. RECTO. So I'm recommending to study that issue because we can reduce inflation, the price of gasoline in diesel if we rethink some of these mandates that we've imposed in the industry. At walang talo ang gobyerno diyan. Okay, that's one.

Number two, electricity. With regard to electricity, that's one of the highest increase in inflation also, hindi ba? Utilities, okay. And I know that government is planning to file increases in power rates all over again--PSALM, so on and so forth, right? Tataas na naman ang presyo ng kuryente. Now, what other mitigating measures can be done as far as reducing prices of electricity is concerned? Or at least not increasing it? What is the cost per kilowatt-hour of feed-in tariffs, example? Would anyone know? May piso ba iyan?

MR. DOMINGUEZ. [Off-mike] I'm not sure.

SEN. RECTO. Palagay ko mahigit pa. And then there are plans of increasing prices, hindi ba?

 MR. DOMINGUEZ. [Off-mike] Yes.

SEN. RECTO. Okay. So the suggestion is--and that is one of the reasons why we are asking this is maybe we can really look at these two issues as far as electricity. We are the second highest in Asia, is that correct?

MR. DIOKNO. [Off-mike] Yes.

SEN. RECTO. Okay. And as far as petroleum, it has a multiplier effect on inflation. And that's why there are certain mandates that maybe we can take away so that prices go down, na ang nakikinabang lang with those certain mandates, a few people lang. Ang makikinabang dito, lahat ng consumer.

So could you get back to us on that?

MR. DIOKNO. [Off-mike] Yes.

SEN. RECTO. Yes, thank you very much. Okay.

Second point with regard to the budget. There is an increase in the revenues for next year of roughly 13 percent. Okay. I think I should congratulate also the BOC for doing a good job. You can see the increases in revenue generation and collection.

But having said that, as far as the budget is concerned next year, there is a 13 percent increase. All of these increases are already paid for? Meaning to say, we don't need to pass any tax law to fund the budget next year. Or do we need to pass TRAIN 2 to fund part of the budget next year?

MR. DIOKNO. As far as I know, TRAIN 2 is revenue-neutral.


MR. DIOKNO. That's how we deal with the budget.

SEN. RECTO. So there is no pressure on Congress to pass any tax measure this year to fund the budget next year, is that correct? None, okay. So thank you for the clarification.

MR. DIOKNO. But we want our corporations to be competitive with the rest of Asia.

SEN. RECTO. Yes, I understand and I support. Incidentally, I support the reduction in corporate income taxes and rationalization of fiscal incentives. The philosophy in general, I support.

MR. DOMINGUEZ. Yes, but by the way, we also are requesting Congress to pass the tax amnesty...


MR. DOMINGUEZ. ...and the law that allows us to look into bank accounts in case--

SEN. RECTO. Yes, it's part of the draft already. There is a draft. MR. DOMINGUEZ. Yes. I just want to remind the Senate that that was promised also last March. During the bicam, it was promised that...

SEN. RECTO. We are working on it.

MR. DOMINGUEZ. would have been passed last March.

SEN. RECTO. And maybe in a week or two, it's a very sensitive matter as Secretary knows. There is already a draft and I'm sure that the secretary have seen the draft.

MR. DOMINGUEZ. Yes, thank you.

SEN. RECTO. And it's a workable draft.

So the next point now will be--I'm not sure if someone asked this question already but the Supreme Court has decided with regard to the local government, right?

MR. DOMINGUEZ. [Off-mike] Mandanas case--Mandanas, Garcia case.

SEN. RECTO. Yes. And what is the cost of that if we were to implement that this year?

MR. DOMINGUEZ. [Off-mike] Hundred ninety-five billion.

SEN. RECTO. The increase?

MR. DOMINGUEZ. [Off-mike] The transfer.

SEN. RECTO. This year it's a hundred ninety-five billion?

MR. DOMINGUEZ. [Off-mike] No, no.

 SEN. DRILON. Use the microphone, please.

MR. DOMINGUEZ. It is a P195 billion as we understand the law.

SEN. RECTO. No, ulitin ko lang. My question is simple. For 2018, assuming we had to implement it for 2018, not 2019, assuming the Supreme Court decision says it's automatically appropriated, implement it now for 2018 because the decision came out in 2018, how much is the cost?


MR. DOMINGUEZ. It's around 190.

SEN. RECTO. Hundred ninety billion for 2018?

MR. DOMINGUEZ. But we are seeking clarification--we are filing an


MR. DOMINGUEZ. We are seeking clarification, among others, when is the base-date to determine this? Is it three years ago or is it now?

SEN. RECTO. My understanding is it's prospective, right?

MR. DOMINGUEZ. Yes. So what is the--

SEN. RECTO. But is that your understanding of prospective?

MR. DOMINGUEZ. My understanding is prospective. But this is prospective when?


MR. DOMINGUEZ. When is the first year of the prospectivity?

SEN. RECTO. Yes, I understand.

MR. DOMINGUEZ. Is it 2016, is it 2015 or is it 2018?

SEN. RECTO. I supposed kung prospective, it is 2018 or 2019.

MR. DOMINGUEZ. Correct. So the taxes we collect now will be shared three years from now?

SEN. RECTO. Correct.

MR. DOMINGUEZ. Yes. Okay. So if that's the case we are seeking a clarification in the MR then we don't have any impact on the GAA next year.

SEN. RECTO. Okay. No, I'm talking about 2018. Okay. If the decision is prospective and they say you must implement it, okay, it is collections in 2016 for the 2018 budget, is that correct?

MR. DOMINGUEZ. That is one interpretation.


MR. DOMINGUEZ. But the other interpretation could mean--

SEN. RECTO. And what is your wish? What is the position of the Executive?

MR. DOMINGUEZ. Our wish is to be clarified in this and a number of other issues.

SEN. RECTO. Okay. So uulitin ko. So, in effect, the Executive is saying that kung prospective, the decision is 2018, collections starting 2018--

MR. DOMINGUEZ. [Off-mike] Will be shared in--

SEN. RECTO. 2021 na?

MR. DOMINGUEZ. Yes--no, that's another interpretation.

SEN. RECTO. Yes, yes. So that interpretation--

MR. DOMINGUEZ. It could also be 2019 collection.

SEN. RECTO. Yes, yes.

SEN. DRILON. 2016?

SEN. RECTO. No, 2019 collections will be given in 2022. That's what they are saying.

SEN. DRILON. That is an interpretation--that is the interpretation that they wish is the correct interpretation.

SEN. RECTO. Correct.

SEN. DRILON. Because the other interpretation is since this is an interpretation of the Constitution and the Local Government Code has been there since 1992, the collection of 2016 should be--of the national taxes including particularly those collected by the Customs should be the basis.../rjo/alcc

SEN. DRILON. ...should be the basis of the IRA computation effectively shared. That could be another computation.

MR. DOMINGUEZ. Yes, of course.


SEN. RECTO. Okay. Assuming the Supreme Court decides, because that position is favorable to the national government at the moment.

SEN. DRILON. [Off-mike] Which position?

SEN. RECTO. No, their position is favorable to the national government at the moment. Because later on, you know, it depends on how the Supreme Court decides. If the Supreme Court says, "No, it should have been 2016." The future government will have tremendous debts. That is the downside. Ubos na iyong future government. Posible.

SEN. ESCUDERO. [Off-mike] They can securitize.

SEN. RECTO. Yes. Okay. Now, having said that, you know, securitization will not work also because you will have to give money to the Land Bank or to the DBP. It is not as simple as that. Now, having said that, if the decision is 2016, 63 years preceding, meaning to say, if the intention of the Supreme Court decision is implement it in 2018, how much should be the increase, 190 billion?

MR. DOMINGUEZ. Probably.

SEN. RECTO. Okay. So that will carry forward. And in 2019, what would be the increase?

SEN. DRILON. 2017.

MR. DOMINGUEZ. Yes. Whatever collection in 2017.

SEN. RECTO. Yes. Iyon nga. I just like to put that on record.

MR. DOMINGUEZ. Yes. But there are other things that we have to clarify, our special taxes included, like taxes on the PEZA.

SEN. RECTO. I understand. I understand all of that. But these are minute, very little details. I understand. Okay. So how much would it be in 2019? Maliliit na kasi iyong mga PEZA-PEZA and all of that.


SEN. RECTO. Two hundred ten billion. Okay. And then, of course, may generic increase pa iyan moving forward. So all of that will pile up if the Supreme Court says applicable iyan 2016. And if you don't budget for it, it becomes a contingent liability, is that correct?


SEN. RECTO. Yes. Yes, it does. Kasi clearly nanalo na sila. In effect, we are appealing, the national government is appealing.

Now, let me move on. Wouldn't it be better, since there was already a few discussion, I will zero-in on that on Charter change. Because that is another issue that everyone is discussing today on federalism. Would it be just better to implement the decision of the Supreme Court and provide these funds to local governments instead of changing the form of government and moving to federal, as suggested in the joint draft.

MR. DOMINGUEZ. That is certainly a possibility.

SEN. RECTO. That is certainly much better, is that correct?

MR. DOMINGUEZ. I don't know much better. It depends on the final discussions and resolutions on the issues on federalism. It depends.

SEN. RECTO. But based on the draft, your understanding or the economic managers' understanding.

MR. DOMINGUEZ. As we mentioned earlier, we are very confused by the draft.

SEN. DRILON. [Off-mike] ...for the draft today?

SEN. RECTO. Now, having said that, what is your interpretation of the draft today? Meaning to say, how many percent of national taxes will be given to the region?

MR. DOMINGUEZ. I explained that earlier, Mr. Senator. I did meet with former Senate President Pimentel and met some members of the commission. And I asked them, "Who is going to pay for the national debt? Who is going to pay for the military, foreign affairs?"

SEN. RECTO. Correct. And why is that your concern? Why is that your concern? Isn't it because they are saying that 50 percent of the revenues of the current collection will be given to the region, right?


SEN. RECTO. Now, if we apply that to the 2019 budget?

MR. DOMINGUEZ. It won't work.

SEN. RECTO. What are we talking about?

MR. DOMINGUEZ. A very large deficit.

SEN. RECTO. Right?


SEN. RECTO. And what would happen to our credit rating?

MR. DOMINGUEZ. Oh, it will go to hell. [Laughter]

SEN. RECTO. And when the credit rating goes to hell, what happens to the Philippines?

MR. DOMINGUEZ. Everybody pays higher interest rate.

SEN. RECTO. Everyone goes to hell too?

MR. DOMINGUEZ. Yes. Not naman hell. Just pay higher interest rates.

SEN. RECTO. And what could that interest rate look like?

MR. DOMINGUEZ. Oh, tremendous.

SEN. RECTO. Give me an example.

MR. DOMINGUEZ. Six hundred basis points. So maybe--

SEN. RECTO. Six percent increase?


SEN. RECTO. Okay. What would be the exchange rate look like?

MR. DOMINGUEZ. No, we don't know.

SEN. RECTO. But could it be a hundred to one?

MR. DOMINGUEZ. I don't know.

SEN. RECTO. Seventy-five to one?

MR. DOMINGUEZ. We had to ask our dear friends of the BSP.

SEN. RECTO. Okay. Next point. What happens to your Build, Build, Build?

MR. DOMINGUEZ. Well, I guess it will be--No, it will be maybe, it is not build three. It is build minus three. Derailed.

SEN. RECTO. Derailed. Okay.

MR. DOMINGUEZ. No. But let me continue.

SEN. RECTO. Secretary, one more point. Then I will allow you to continue.

If the Bangsamoro, which I debated here for the longest time, and I was able to put in many, as much as I could, safeguards in the BBL, now, if that were the model of your federalism and we are saying that 5 percent goes to BBL, 5 percent of the BIR and BOC collections and if you have 18 regions, magkano ang matitira sa national government? Halos ubos na, 10 percent, not even enough to pay the debt. Not to mention that is just a simple straightforward 5 percent. Maraming mag-aaway diyan. Lugi iyong ibang regions because the ARMM is only point six (.6) percent GDP of the economy. And they are getting 5 percent minimum, right? So magulo iyan. It is hard naman to give the other regions less than that. Parang ano iyan, magiging MRT 7. Iyong isang bagon may aircon, maganda iyong upuan, leather seat, lahat. Iyong iba standing room lang, hindi ba?

MR. DOMINGUEZ. [Off-mike] ...ibang bagon.

SEN. RECTO. Hindi ba? Right. That is right. Labingwalo iyong bagon, hindi ba? Okay. So that is the point. Now, so this federalism --are there concerns when the credit rating agencies come and see you?


SEN. RECTO. Did they discuss this issue with you?


SEN. RECTO. Is it in their mind and in their discussions with you, tinkering with the Constitution and going to a federal system, total revision of our structure of government. Would that be a political risk as far as they are concerned?

MR. DOMINGUEZ. Well, certainly uncertainty which is a political risk. Yes.

SEN. RECTO. Yes. And because of that political risk and uncertainty, there is uncertainty in their minds as well. And that may affect--even just this discussion and the seriousness of the bush and depending on that equation that doon pa lang baka tumaas na kaagad iyong--bumaba iyong credit rating natin, is that correct?

MR. DOMINGUEZ. Yes, that is possible.

SEN. RECTO. That is possible, right?

MR. DOMINGUEZ. That is possible.

SEN. RECTO. Now, if these were not on that table, would that be a concern with the credit rating agencies? Everything will be a little more positive, is that correct?

MR. DOMINGUEZ. Yes, because it will be less uncertain.

SEN. RECTO. Correct. So there is nothing to gain, so to speak?

MR. DOMINGUEZ. Well, from that point of view, yes.

SEN. RECTO. Yes. So we agree with the economic managers?

MR. DOMINGUEZ. It seems I am the one agreeing with you. [Laughter]

SEN. RECTO. Now, let me move on and I will try to be as quick as possible.

I understand as well that the BOL, the cost of the BOL, and you know, we have been many computations and we have debated this for many, many hours and days in the Senate, and based on our office computation working with the DOF and the DBM, it's roughly gonna cost iyong maliwanag na mga 110 billion more or less.

Yes, you have the 35, the 25--

SEN. DRILON. The figure, Senator Ralph, that they mentioned is about 73 billion more or less?

SEN. RECTO. Yes, the new money.../smv/trs

SEN. RECTO. ...the new money is 105 kasi mayroon nang 35 ngayon.

SEN. DRILON. Mayroon ngayong 32.

SEN. RECTO. I am rounding it off--yes. Okay. Now, so kulang ang naka-budget for next year. In fact, for the next 10 years, our computation, gross, is about 1.9 trillion.

Now, having said that, in 2019, how much is the budget, 32? For the ARMM region, 32?

SEN. DRILON. Thirty-two point two (32.2).

SEN. RECTO. Thirty-two billion, okay. So medyo kukulangin. Iyong 5 percent magkano na, nasa 65 siguro.


SEN. RECTO. Oo, thereabouts. SEN. DRILON. Sixty.

SEN. RECTO. Oo, more or less. And then, you have the special development fund, five billion pa, hindi ba? Okay? And all the others.

SEN. DRILON. Retirement pay.

SEN. RECTO. Iyan, hindi ko nga binilang iyan. Hindi pa nagawa iyan.

MR. DIOKNO. It's 7.2 billion accordingly.

SEN. RECTO. Yes, something like that. Okay.

So now that the President signed it, we probably will have to amend part of the budget to include the Bangsamoro mandates. Is that correct?

MR. DIOKNO. That is right.

SEN. RECTO. Yes, okay. Okay, so we will do that. Now, the budget as presented is roughly 3.7 trillion. What was the budget in 2018? Roughly about 3.7 trillion, right?

MR. DIOKNO. No. But the cash equivalent of that is 7.3.

SEN. RECTO. Okay. I understand. Yes. I am talking about the authority that government allows you to spend, okay?

MR. DIOKNO. Uh-huh.

SEN. RECTO. Last year, the budget that we passed is 3.7.

MR. DIOKNO. Correct, obligation budget.

SEN. RECTO. Yes. Today, its' also 3.7. It's a flat budget.

MR. DIOKNO. Cash-based budget.

SEN. RECTO. Yes. In effect, it's a flat budget.

MR. DIOKNO. No. It's comparing apples and oranges.

SEN. RECTO. Yes. That is fine. Yes, I understand. I am saying authority to spend. That is what the budget is. Okay.

Now, don't mistake me, Secretary, that I am against the cash-based. I am in favor, I understand where you are coming from, from 108 the point of view of the DBM, too. And the reason why I am saying this is to--in your favor, that I support.

One is, you are implementing the current year's budget, at the same time implementing the previous year's budget--continuing appropriations--and preparing for the next year's budget. Is that correct? Okay. So what you want basically in a cash-based budget, as far as management and public administration is concerned, is ma-minimize itong continuing appropriations. Is that correct?

Yes. And I support that.

Second, you want the departments to be more effective and efficient in their planning and programming. That is the purpose, right? Okay. Now, I don't expect lang na mase-zero mo iyong continuing appropriations. The idea is to minimize it but I don't think it will be possible na zero iyong continuing appropriations. Because there could be projects, because of the weather, mag spill-over talaga. May accounts payable ka pa rin, delayed iyong implementation pa rin. But the idea is, you want obligation rate to be high and disbursements to be higher than what you have today.

MR. DIOKNO. There will be a transition period, Your Honor.

SEN. RECTO. Yes, yes. Right, okay?

So at least, in principle, we agree on those issues. Okay.

Second, and one of the reasons why I agree with the cash-based budget, is we have to be careful with taxpayer's money. And that is the most important thing here, to be careful with taxpayer's money. And doing a cash-based budget is being a little more careful than being too careless. Right, okay? And with that, I do support. And finally, based on--I am just getting back to that issue, Secretary Dominguez, on the IRA. So we have no plans of increasing the allotments to LGUs between now until, by and large, 2022.

MR. DOMINGUEZ. We didn't say that. We just said we're seeking clarification.

SEN. RECTO. Yes. With the Supreme Court, yes.


SEN. RECTO. But it would appear that the position of the government is that they decide in a manner that delayed iyong implementation.

MR. DOMINGUEZ. Well, as we explained earlier.

SEN. RECTO. Yes, yes.

MR. DOMINGUEZ. We have actually the option.


MR. DOMINGUEZ. Ben, why don't you explain? You were the one who--


MR. DIOKNO. Yes. The Local Government Code allows the President to reduce the IRA up to 30 percent in the event of an unmanageable public sector deficit.

SEN. RECTO. Yes. When I hear these issues kasi of that issue, it is like--and that is the problem naman why there are those who want federalism. Because we don't want to give what is due to the local government--as far as my perspective is concerned, from where I sit, from what I am seeing. Okay. And, of course, it's an issue on federalism and local autonomy, decentralization.

I understand where you are coming from. You want more resources for "Build, Build, Build." Okay, I understand that. But then, at the same time, matagal nang ipinaglaban ng local government units ito, tension between national and local government. I mean, look at it today, if you have tensions in the three branches of government--legislative, executive, judiciary. You also have a tension between the national and the local government. God forbid, we go federalism and there is tension between national and regional, regional and local, regional among regional. God forbid.

Now, having said that--

MR. DOMINGUEZ. Within the region.

SEN. RECTO. And within the region, right? Region and local, like I said.

So going back to the issue of the local government, why not just implement the decision of the Supreme Court?

MR. DOMINGUEZ. [Off-mike] What, iyong Mandanas?


MR. DOMINGUEZ. [Off-mike] And then call it federalism?

SEN. RECTO. I am not even talking about federalism, decentralization, local autonomy.

MR. DIOKNO. No. But when you implement the--

SEN. RECTO. Incidentally, huwag na rin natin tawagin na "TRABAHO" iyong TRAIN 2. Pangit pakinggan iyong trabaho. Kasi I could put two words together, it would be trabaho--train, baho--trabaho.

MR. DOMINGUEZ. But when you implement the Mandanas ruling, the risks that there will unmanageable public sector deficit, it will increase our deficit to at least 4 percent, okay. And that has the impact of--maybe our credit rating will go down, et cetera, et cetera, okay.

SEN. RECTO. No, I think manageable iyong--190 ba, the cost?

MR. DIOKNO. Close to 200.

SEN. RECTO. Close to 200.

MR. DOMINGUEZ. One hundred ninety for the first year.

SEN. RECTO. Yes, yes. Correct, correct. But that is much, much, much more manageable than giving 1.5 trillion to the regions. That is a lot more manageable. And you know, I can see so many items in the budget that you can still cut to protect taxpayer's money.

Let us take a look at the MOOE, financial assistance and subsidy is already at one trillion. Kaunti lang naman ang nakakaintindi ng budget. Financial assistance and subsidies--

MR. DIOKNO. No. But that will involve irrigation and that will involve health, okay.

SEN. RECTO. I understand, I understand the details of this.


SEN. RECTO. But there is a lot more here. Okay. Now, the budget is 3.7 trillion so it's more or less flat, and we already had a discussion on that. Now, I am also surprised that in the unprogrammed, there is another roughly 200 billion.

MR. DIOKNO. That is because we anticipate many ODA and loans that are coming which did not meet the cutoff.


MR. DIOKNO. So if we do not meet the cutoff, then it's place in the unprogrammed.

SEN. RECTO. Yes. Okay. So this unprogrammed is roughly 200 billion, this is on top of the 3.7?

MR. DIOKNO. That is correct. If the loan proceeds come in, then we can program them.

SEN. RECTO. Okay, okay.

So we're only talking about loan proceeds but in the past kasi nagagamit rin iyong program kahit ...

MR. DIOKNO. If there is an excess in revenues, yes.

SEN. RECTO. Yes. But when we say excess in revenue, it could be one revenue type, right? Not total revenues.

MR. DIOKNO. That is the interpretation before.



SEN. RECTO. What is the interpretation today?...mjp/mva

SEN. RECTO. ... What is the interpretation today?

MR. DIOKNO. Now, I would be inclined to just interpret the total.

SEN. RECTO. Total. So, we could write that language in the budget based on that--

MR. DIOKNO. The Treasurer is looking at me.

SEN. RECTO. You should write that language.

MR. DIOKNO. They like the flexibility where you exceed--for example, Bureau of Customs.


MR. DIOKNO. So, should they exceed the collection, then we can program.

SEN. RECTO. Yes. But in the past kasi, it's too loose. One revenue item that exceeds even if the deficit is bigger--kahit hindi pa nga nakolekta ng Customs at BIR, pwede pa rin, hindi ba? That's not being careful and judicious with public funds as far as I'm concerned. Parang hindi na cash-based budget na rin iyan. That's all I'm saying, so that we are consistent with our positions because that's roughly 200 billion here already, enough to implement the IRA for local governments. And like I said, iyong financial assistance ng Saudi that's about a trillion already. There are so many items here that--and operating expenses that could also be cut to implement the decision of the Supreme Court. My fear is that later on, you have an adverse ruling in the Supreme Court and ubos na iyong future administration. Kawawa naman kung sakaling naging presidente si Sara Duterte, ubos na iyong pera. [Laughter] So, that's the point.

So, in closing, I'd like to thank the economic managers. I think, by and large, you have done your job. My only issue is with regard to the very high inflation numbers. And I suppose that should be the job of the BSP, the primary responsibility, not total, but that is the job of the BSP. Maybe a final question on that. We already expect several rate increases in the US in the coming months and in the coming years. More or less, that's a given. There's a consensus. What is the plan--yes. What is the plan as far as the Philippines is concerned?

MR. GUINIGUNDO. Well, Mr. Chairman, before I go into that, let me just clarify that inflation is not really completely driven by taxes, et cetera...

SEN. RECTO. I understand. I understand.

MR. GUINIGUNDO. ...but more by the increase, phenomenal increase in global oil prices. In fact, from last year to today, there was about $25 per barrel increase in terms of global oil prices.

SEN. RECTO. Yes. I'm familiar with that. And that's why I was saying earlier what could be done to reduce prices of oil that may

not even impact the revenue of government. Anong kaya nating gawin? There are many mandates ...

MR. GUINIGUNDO. Well, there are many mitigants, Mr. Chairman.

SEN. RECTO. Yes. Yes. Okay.

MR. GUINIGUNDO. Yes. Well, from the perspective of the BSP--

SEN. RECTO. So, my question is, what is the plan? Hindi na iyong paliwanag. Alam ko na iyong paliwanag. Moving forward, what are we looking at?

MR. GUINIGUNDO. Well, from the perspective of the BSP, our policy is really to adjust monetary policy rate, that's one; and of course, manage domestic liquidity based on our inflation target that which is also consistent with our target on economic growth.

SEN. RECTO. That's correct. Okay. And that means--?

MR. GUINIGUNDO. Well, that means--

SEN. RECTO. How many basis points increase?

MR. GUINIGUNDO. That is something that the Monetary Board will discuss on Thursday--tomorrow, Mr. Chairman.

SEN. RECTO. On Thursday. Okay. Now, you know, part of it is consistency and the predictability, right?

MR. GUINIGUNDO. That's right, Mr. Chairman.

SEN. RECTO. Okay. And, more or less, we know in the US, there seems to be some consensus in the market and the Fed has already telegraphed to a certain degree. What do we expect?

MR. GUINIGUNDO. Well, the BSP has also provided some kind of a forward guidance that we need to do some tightening on monetary policy.


MR. GUINIGUNDO. But I think we also have to recognize that unlike other countries in the region, we still have high reserve requirement. And that's a form of tightening, Mr. Chairman.

SEN. RECTO. Yes. Yes.

MR. GUINIGUNDO. We also have in place a lot of macroprudential measures which are the effect of tightening liquidity in the market. So, it's not just a question of adjusting the policy rate.

SEN. RECTO. I understand.

MR. GUINIGUNDO. But it has to be complemented by other similar measures.

SEN. RECTO. Correct. Correct. No. Because my issue also is that, if I got that right, there was a reduction in reserve requirements and increase in policy rate.

MR. GUINIGUNDO. That's correct, Mr. Chairman. But the reduction in the reserve requirement is also targeted precisely to improve financial intermediation in the Philippines. Because of the high reserve requirement, there is also a corresponding increase in the financial intermediation cost of the banks.

SEN. RECTO. Yes, understood.

MR. GUINIGUNDO. And that could also impinge on their lending operations.

SEN. RECTO. Yes, I understand. And when we talk about money supply, the bigger the money supply, the bigger the growth, is also inflationary.

MR. GUINIGUNDO. Not necessarily, Mr. Chairman. Because the economy is a growing economy and, therefore, it has to be supported by corresponding adjustment, up for the adjustment in domestic liquidity.

SEN. RECTO. Understood.

MR. GUINIGUNDO. And so far, money supply based on M3 has slowed down to about 11 or 12 percent, which is, for us, consistent with an expanding economy.

SEN. RECTO. Okay. But the point is, you know, the effect of all of these today, and if we are behind the curve, there are repercussions.

MR. GUINIGUNDO. Well, we beg to disagree, Mr. Chairman. We are not behind the curve. Our policy changed only in May and June because from January to April, there was no strong evidence of second run effects--that's one; two, the momentum of inflation has started actually to slow down based on month-on-month inflation from January to May.

SEN. RECTO. Understood.

MR. GUINIGUNDO. So, there's no point at that instance for the BSP to consider tightening monetary policy.

SEN. RECTO. Yes. Deputy Governor, I understand all of that. What is the primary mandate of the BSP?

MR. GUINIGUNDO. Well, the primary mandate of the BSP, Mr. Chairman, is price stability.

SEN. RECTO. Which means--?

MR. GUINIGUNDO. Which means, we need to make sure that from the demand side, prices are stable.

SEN. RECTO. And when we talk about price stability, hindi masyadong mataas ang inflation?

MR. GUINIGUNDO. That's right. But inflation, Mr. Chairman, is not only driven by monetary policy but by other non-monetary factors.

SEN. RECTO. Understood. I agree. Taxes and monetary policy--fiscal and monetary.

MR. GUINIGUNDO. Including the weather, Mr. Chairman.

SEN. RECTO. Correct, including the weather. Agreed.

Now, the point being is that, there is an inflation problem.

MR. GUINIGUNDO. We don't expect inflation to be a recurring one, Mr. Chairman, because by next year, we expect global oil prices to be, more or less, stable at these levels. And that means that for 2019, we expect inflation to go back to the 2 to 4 percent target inflation range.

SEN. RECTO. Okay. So, again, we will take a look at the amendments to the BSP law at the appropriate time because--In the meantime, considering that you have a high inflation rate, and if the BSP's primary role is inflation, and then the BSP will ask for additional capital, para naman--we will have to take a second look. That is my concern. I think that the BSP should play a better role as far as inflation is targeting and is concerned.

MR. GUINIGUNDO. We're not sure, Mr. Chairman, whether monetary policy can bear upon the weather, the increase in global oil prices and even in terms of the decision of many universities and colleges to increase their tuition fee, which is the main reason for the June inflation rate of 5.2 percent.

SEN. RECTO. Let me ask a question, Secretary Diokno. Considering that we have already higher spending on education, why is it that there's a portion in the inflation basket na tumaas ang education?

MR. PERNIA. It went--


MR. PERNIA. Inflation rate in June, the free tuition had not been implemented yet. Just a few of them got the free education--free tuition. And then, in the--what really mattered is July because that's when school opening in many colleges and universities happened. And you can see that in the inflation for education .../jlf/peg

MR. PERNIA. ...the inflation for education in July is negative. Negative--minus 11. Minus 11. So it has--

SEN. RECTO. Thank you for that clarification.

So, Mr. Chairman, I'm done with my questions.

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