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Reforming Public Expenditure Management in the Philippines

May 2012

Abad, F. 2012. Reforming Public Expenditure Management in the Philippines. GREAT Insights, Volume 1, Issue 3. May 2012. Maastricht: ECDPM

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Over the last year, the Philippines appeared to be flush with good news, having made headway in various global economic and governance indices. In 2011 alone, this Southeast Asian country managed to climb up ten whole places in the World Economic Forum’s Global Competitiveness Index—one of the highest jumps tracked in the 2011 index—as well as five places in Transparency International’s Corruption Perception Index. 

Efficient public expenditure management is at the heart of this drive for change. After all, the way government manages public funds has an immediate impact on its ability to deliver critical goods and services to its constituents. For the longest time, the national budget and its attendant processes were at the mercy of too many competing interests, underpinned by a systemic culture of patronage. This enabled an exclusive group of oligarchs, clans and cronies to exert their influence over public resource management, allowing them to effectively retain control over the distribution of wealth and economic opportunity in the country.

This, of course, yields devastating results. A firmly established system of patronage will ultimately give way to unjust relations of inequity and dependence, where the privileged stand to gain more and the disadvantaged remain shackled to poverty. In this light, fund management reforms in the Philippines should focus on restoring the government’s role as a fair mediator of competing interests and an effective and impartial redistributor of wealth.

Generally speaking, the role of the Department of Budget and Management sounds simple enough: to ensure that each and every peso counts in improving socio-economic conditions for all Filipinos, particularly the poor. But fund management is naturally more complex than that, and its effectiveness should be measured against how it achieves three imperatives, the first one being aggregate fiscal discipline—utilizing resources in a strategic way so that government is able to spend within its means. 

Secondly, fund management effectiveness should be measured against allocative efficiency, or how the allocation of scarce public funds can be aligned with a strategic socio-economic development plan. It’s a no-brainer: government must spend on the right priorities. Thirdly, operational effectiveness is key. Public goods and services must be provided at the most reasonable cost and lead to maximum benefit so that value-for-money is ensured. 

Aggregate fiscal discipline 

Success in achieving aggregate fiscal discipline could be the easiest to track. The trajectory in deficit-spending governments like ours should point towards attaining a sustainable level of deficit and debt. At the moment, we intend to reduce the fiscal deficit to 2% of GDP in the medium-term, as well as reduce the debt stock to around 40% of GDP, at par with our neighbors. 

We are doing this through a combination of increased revenue efficiency and a smart borrowing strategy, coupled by prudent spending according to a Medium-Term Expenditure Framework. Already, these initiatives are beginning to bear fruit; more than ever, the Philippines is closer to attaining investment grade status from global credit watchers, with investors eyeing local shores with renewed interest and enthusiasm. 

But what is prudent spending? Is it just about reducing government expenditures at all costs? And while we want to make our creditors happy, how about government’s role in stimulating economic growth? Most importantly, how can we establish social justice in such an environment?

Allocative efficiency

The question of securing social justice leads to our efforts to measure allocative efficiency. This involves the politically charged question of how to measure and benchmark priorities at the macro level, within sectors, and even within an activity. Combating poverty has always been distinguished as a priority in previous administrations, with social services being the premier budgetary sector. 

But how is our social services budget—amounting to more than P560 billion or around USD13-14 billion—being distributed to education, health, social protection, and asset reform, among others? 

Within education, for example, how is the budget optimally shared between the public basic education system and state universities and colleges? And within basic education, again, how will the pie be divided among classroom construction, teacher recruitment, learning materials, and other competing concerns? 

In our first salvo of Zero-Base Budgeting, we discovered how P2 billion or $46 million had been wasted per year on the School Feeding Program under previous administrations. The program was doomed to fail, not only because it was not a core function of the Education Department, but also because the program did not concentrate on in-campus feeding. Instead, bags of uncooked rice were distributed to the children. Rice distribution continued even during summer vacation, when students were presumably not attending classes!

Operational effectiveness

This leads to the objective that is trickiest to measure: operational effectiveness. Rather than mulling over the best way to benchmark procurement costs with prevailing market prices, we put a larger emphasis on institutional outputs versus their budget, as well as those institutional outputs versus desired social outcomes. 

Too often, however, the link between spending and outcomes is poorly established. This is what we are trying to cure by establishing an Organizational Performance Indicator Framework, through which each and every agency has a logical frame that links societal goals with outcomes, down to organizational outputs and specific programs and project targets.

Budgetary reform and its challenges

The initiatives above are just some of the many budgetary reforms pushed for by the Aquino administration. Ever since President Benigno S. Aquino III assumed leadership of the country, we instituted Zero-Base and participatory budgeting to improve transparency and accountability in expenditure management. These reforms also widen spaces for citizen participation in budget preparations, so that the government may address on-the-ground needs as efficiently and effectively as possible.

In preparing the budget for 2013, we also piloted the concept of “bottom-up budgeting.” So far, we have engaged 300 of the Philippines’ poorest municipalities to craft local poverty reduction and empowerment plans, in partnership with communities and grassroots groups in their jurisdictions. These will then be considered in the consolidation of the budget for submission to Congress. 

We are also pursuing the broad digitization of government processes to streamline operations and improve the flow of information between agencies. To this end, we initiated the development of a Government Integrated Financial Management Information System (GIFMIS). Some of its components—which we will launch this year—are the National Payroll System, the Cashless Purchase Card system, and an Electronic Procurement System.

Our drive for reform has generated mixed reactions both inside and beyond the bureaucracy. Some sceptics have voiced their doubts at our ability to succeed, citing previous reform efforts that failed or backfired. Parties and individuals who once benefited from the political tradition of patronage are even more resistant to the changes we are making. Nonetheless, many groups and individuals have expressed excitement over this administration’s reform thrust, having recognized that we are moving into a public management regime that values competence over connections.

While we know that corruption continues to lurk in government, we have to approach the bureaucracy not as an enemy but as a stakeholder and ally in reform. Many of its members, especially in middle management, have been silenced by the status quo and left at the sidelines. We are hoping that in the end, the very reforms we are fighting for will create a positive impact on the welfare of public servants and, ultimately, translate to direct, immediate, and sustainable benefits for all Filipinos across the country. 

Florencio Barsana Abad is the current Philippine Secretary of Budget and Management

This article was published in GREAT Insights Volume 1, Issue 3 (May 2012)

Economic Transformation and TradeBusiness and DevelopmentDevelopment Finance and TaxationDomestic resource mobilisationPublic expenditureAsiaPhilippines

External authors

Florencio Abad