Fiscal System and Practices in ASEAN: Trends, Impact and Evaluation 9789814377102

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The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is regional research centre t

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tax revemH· fl om a particular ("ategury as a proportion of total tax revenue. tax •·evcmw from a particul:u category as a proportion oJ GDP.

This cat ego•;.· con~i~h of personal itKOIJH' tax, corporate inconw tax, and tax 011 oil companies. Thi:-. categ:mHw

05:~09 I~~~~

0.6Ht)G:l7H :1.40:12HiiH

l.lfiliH12~

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O.!i:l4~742 O.liHI~:,:JH

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!'d-141.0

14.~

1,07H.4 491.4

253

ltlH.O

4:l.l 17.2

1,:19~.1

7.6

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4,719.0

4.7

5.7

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4.~

5.2

575.2

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:~.:N0.0 1

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4~.7

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~.'d.G

~1.4

17.4 SH7.0

9165

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1:12.4 !)J..'J 69.7

11.2 4.:1

l~.li

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S.9 0.4 I:l.H G.9

4.2

4.~

1.7 0.:1 11.1 5.6

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6.4 !l.l 25.9

4.0 .'J. :~ o.:l

2H.l 22.7 I tl.:~

()~.4

21.7 17.!) !Vi 4.1 O.H

!i57.0

0.:~

1~!)5

~.4

~.(~)

25~).!')

S.~J

7.0

166.~

:1.1

4.0

104.0

:1.0 15 O..'J

:Ul Ui 0.9

Othntficit as % of Fiscal Year beginning

;::,

Financing of the Deficit

;::1

l'l..

~ ;::, Total Expenditure

Domestic Revenue

Budget Deficit

Expenditure

COP

Counterpart Funds

Project Aid

Change in Balances (- = increase)

8-.

"B;

;:;· ~

l'l..

1969 1970 1971 1972 19n 1974 1975 1976 1977 197H 1979 19HO 19HI 1982 19H3 19H4 19H5 19H6 19H7

334.7 457.9 545.0 735.0 1,117.8 1,966.9 2,672.0 3,653.H 4,278.1 5,299.3 8,076.0 11,716.1 13,92H.O 14,356.0 18,311.0 19,3Hl.O 22,H24.6 2l,H24.6 26,959.0

243.70 344.60 42H.m~

5H5.1 977.1 1,759.2 2,200.H 2,H77.0 3,50H.2 4,266.1 6,696.H 10,227.0 12,213.0 12,41H.O 14,433.0 15,90.~.0

19,202.9 16,141.0 20,H03.0

91.0 113.3 117.0 149.9 140.7 207.7 471.2 776.H 769.9 1,033.2 1,379.2 I ,4H9.1 1,715.0 1,93H.O 3,H7H.O 3,476.0 3,071. 7 5,750.0 6,156.0

SOURCES: Bank Indonesia, Indonesian Financial Stati.stics. various issues.

27.2 24.7 21.5 20.4 12.6 10.6 17.6 21.3 18.0 19.5 17.1 12.7 12.3 13.5 21.2 17.9 15.6 2G.3 22.H

3.3 3.4 3.2 3.3 2.1 1.9 3.7 5.0 4.0 4.5 4.3 :~.3

3.2 3.2 0.3 4.0 4.0 6.0 5.4

65.R 7H.9 90.5 95.5 89.H 36.1 20.5 10.2 35.H 4H.2 64.H 64.1 45.1 15.1 14.9 69.0 n.a. n.a. n.a.

25.3 41.6 45.0 62.3 114.1 195.9 171.4 773.6 737.6 987.3 1,316.3 1,429.7 1,663.9 1,924.9 3,H67.!i 3,409.0 3,503.4 3,794.0 5,430.0

-0.1 7.2 -1R5 0.4 -7.0 -25.8 -20.7 -7.0 -3.5 -2.3 -1.9 -4.7 -4.0 -2.4 -4.1 -2.0 n.a. n.a.

c ;::1 B;

E)•

n.a.

*"'

-5768

-6963

6965

-1938

-3.2

1983

-4172

-294

-4466

-7443

7447

-3878

-53

1984

-4354

-879

-5233

-7690

7693

-3476

-4.0

:\"ote: (-)=deficit.

Calculated on the basis of item-by-item estimation ')f the foreign/ domestic component of re\'enues and expenditures. For fiscal years 1979 /80~ 1984/85. foreign/ domestic Wt:'ight'i except those for personnel expenditure are updated to allow for the impact of anation~wide campaign and efforts to increase the use of domestic products. For derails, see ..-\nne Booth and Peter .\1cCawle~, ''Fiscal Policy" ,in The Indonesian Economy During the Suhat1o Era, edited bv Anne Booth and Peter ~1cCawley (Kuala Lumpur: Oxford l'niwrsity Pres~. 1981). E5timated by assuming that rupiah expenditures are routine expenditure less debt sen·ice plus the rupiah~funded component of the derelopment budget. and rupiah ren•tmes equal domestic re\'enues excluding oil taxes. See Howard Dick, "Smyey of Recent Den;lopments". in Bulletin of Indonesian Eronomir Studie!> (BJ£!)1, December 1985~ for detaib. Calculated by simply subtracting dnelopment receipts from total receipts. In other formulas (those of Booth and ~1cCawley1 ), foreign aid is also excluded from the calculation.

Fiscal System and Practices in Indonesia

53

reflect the impact of the "public sector" on domestic absorption or aggregate demand. In addition, the overall budget balance is not equivalent to the domestic deficit because of the instabilities in the impact of the budget on GDP and the balance of payments. The instabilities have been due to sharp changes in the prices of oil and expenditure abroad. Abrupt changes in the price of oil have caused sharp changes in oil revenue. Thus, the two shocks during the 1970s have sharply increased the price of oil and hence, the government's oil revenue. A sharp decline in the price of oil since 1982 has also severely cut the oil revenue. Abrupt changes in overseas expenditure are mainly because of sharp changes in the quantities of imported fertilizers and foodstuffs. Other concepts of the budget deficit can be estimated from identity ( 1). Thus, the government's net position in the domestic banking system (Bb) is equal to total government expenditure (E) minus domestic revenue (R) and foreign aid and loans (Bf). The net government position in the domestic banking system is reported in the Weekly Report of Bank Indonesia as "Factors Mfecting Money Supply". As has been discussed before, it is difficult to define the components of the identity. At best, the concept gives a rough indication of the transfer of resources from the economy to the public sector. As a matter offact, for most of the fiscal years after the first oil shock in 1973-74 the monetary data have indicated a surplus, that is, Bd has been negative. The monetary surplus means that foreigners have injected economic resources into the domestic economy through the government budget. Intergovernmental Fiscal Relations The Republic oflndonesia, with a population of 147.5 million in 1980, is the fifth largest country in the world. It extends over a part of the world's largest archipelago between the Asian and Australian continents, and between the Pacific and Indian oceans, covering an areaof5, 193,250 square kilometres. The territory oflndonesia comprises six main islands and about 30 groups of smaller islands totalling approximately 13,667 (measuring 2,027,087 square kilometres) of which about 6,000 are inhabited. The problem of central-local fiscal arrangements is always a difficult one, especially for a large and diverse country like Indonesia. One of the reasons for the civil wars in the 1950s was the unsatisfactory solution of this problem. The national motto "Bhinneka Tunggal Ika" (Unity in Diversity), recognizes the diversity of ethnic groups, religions, and cultures of its people. This diversity provides a good reason for some degree of fiscal decentralization. On the other hand, the diversity requires a development policy which unifies the nation and establishes an integrated economic unit. Indonesia is a unitary state. The country is divided into 27 provinces, including Jakarta, the capital city, and two special districts. Each province consists of several kabupatens (regencies) and kotamadyas (municipalities) which are divided into kecamatans. The lowest level of the government is the desa or kalurahan (village). As of 15 September 1984, Indonesia was administratively divided into 246 regencies, 55 municipalities and 67,534 villages.

54

Anwar Nasution

In general, there are two basic issues in the central-regional fiscal arrangements. First, what is the role of own revenue in the overall pattern of revenue at the provincial and kabupaten levels? Second, how is the distribution of central aid determined? The answers to these questions in practice depend upon the functions of the various levels of government and on the degree of freedom granted by the central government to lower levels in carrying out the functions of the government.

The Role of Own Revenue The central-local fiscal arrangements are regulated by Law No. 32/1956, Balance on Inter-Governmental Fiscal Relation, and Law No. 5 I 1974, Principles of Regional Government. These laws provide for the allocation of some resources and subsidies to the regional government. Tables 2.10 and 2.11 show that the fiscal structure in Indonesia is highly centralized. The "own" revenue generated by the provinces, kabupatens and kotamadyas, and other local governments accounts for only 9.6 per cent of their combined expenditures in 1978-79 (not shown in the tables). This, in turn, is only about 25 per cent of total (central and local) government expenditures. This ratio drops to 21 per cent if expenditures of the central government, supported by foreign aid and loans, are included. In other words, only about 5 per cent of total revenue from the public are collected below the central government level. Furthermore, the 25 percent of total expenditures undertaken by the regional governments greatly overstates the degree oflower-level decisionmaking since a substantial part of the transfer from the central government remains largely under its control. The degree of fiscal centralization is considerably greater ifJakarta Special Region is excluded from the data. As shown separately in colume ( 4) of Table 2.1 O,Jakarta apparently raises slightly more than 40 per cent of its own revenue. IfJakarta is excluded, Table 2.10 shows that the regional government revenues are less than 8.6 per cent of the total revenue from the public. The general picture (excluding Jakarta) is thus one of considerable centralization of fiscal functions. Nevertheless, local revenue in the provinces is not insignificant in relation to expenditures at the lower levels. As experience in Jakarta has shown, there may be considerable scope for the development of these lower-level revenue sources, especially in the big cities. Own revenues at the regional levels play a minor role in the overall revenue picture. This role becomes almost insignificant in relation to Indonesia's GDP. inm, in \ 9'6'2.-'63 revenue 1tom own sources o£ the \)tovincial \!;Overnment was ().4 per cent o£ GD"P \1ab\e '2..\0). 1here ate two ty\)es o£ revenue at the subnational level. The first type is the assigned revenue which consists o£ taxes and royalties levied by the central government but wholly or in part assigned to the local governments. These include Ipeda, petrol tax, royalties and tax on property. The second type of revenue includes minor taxes, service charges, departmental revenues, and profits from their owned enterprises. The central government retains 10 per cent of the Ipeda to cover assessment and collection costs and returns the rest to their origins through the provincial

~

TABLE 2.10 Indonesia: Revenue Structure of Provincial Govemments, Selected Years (In million Rp.)

""'£.

(;{!

"'~ ~

1974/7!1

I. Hnwrllu' From Own

19:-i~/H.'{

.fakana s,)('(·ial Reg-ion (DKI) I'IKUH:1

Exdudi11g DKJ

Household taxes Transfer duties on motor car \'chidt\~

Tax on foreig-ners

~

IDH2/t·t)

\~174/?S

197H/7~l

II.K

12.11

5,1D6

0.2

0.2

0.2

4G,O:ki

101597

;,_1)

5.0

(i.9

H2.2:14

24,1)96

!"l7,!J:~H

2.9

4.1

:\.H

1.22K

1,22K

0

0.1

:Vi,447 627

Uill

!\19()

IH.004

44,5:11

147.4:\:l

9,44!}

:~6.7?,2

4:\4

!14,H:l2

Others

ll,HH7

n.441

Receipt-; from services

:l,2!iti

10)-~!Jii

160

:11

Net profit., of local government enterprises llllel-(;ovl'nlnu'tllal

H.I'I!f'/1/u'.\

Assigned Revenues lped,1 C!H

c lee l1o1H

'l,:l\2

()

0.4

11,51)5

19!">

0.5

Vi40

1'~~~);,

fv1-:)

2.1

'25

0.1

,669

12.(1S2

195~7

1.0

1.:!

1.5

:>7':1

11.\

0.1

0.)

.r-17:!

()7~

1,~154

7.10!)

:1.~41

:U-ih!)

0.~

0.~

0.:1

~l:UH)9

t)OKA~,o

\,!}7(),9~.:-)

S7.0H

i.lH'I.HH I

tl!"U!

GK.

0.01

Foreigner~

Taxes

Adverti~ement

Tax

Dog licences

Liquor Tax

65

131

0.05

0.01

Road Toll

905

1,261

0.2

0.1

Enterprises Registration Tax

835

1,861

0.2

0.2

2.320

3,533

0.6

0.5

26,600

62,620

7.0

6.9

St>rvirr5

5,782

12,962

1.2

1.5

IV. Rmtals

846

1,994

0.1

IU

Other Il.

&distribution on Local Snvirf's

Ill. Rueipts from Official

V

Income from Local Gm•ernmrntl'ntapri\o

Inter-Governmental Revenue a.

Assigned revenue (lpeda)

b.

Grants

Miscellaneous Revenues (including loans) TOTAL RE\ 'ENL'E Revenue from Own Sources as % of a. Central Gow-rnment Domestic Rew·nue b. GDP Total Revenue as % of a. Central Go\'ernment Domestic ReYenue b. Go\'ernment Expenditures GDP

6,023

2,659

1.4

0.4

286,009

752,149

78.9

82.2

47,164

79,948

62.9

8.7

238,845

672,201

62.9

73.5

25,435

46,838

6.9

5.1

362,123

915,727

100.0

100.0

0.3 0.07

0.2 0.05

6.8 6.8 2.8

6.4 6.4

1.6

SOURCES: Central Bureau of Statistic:., State and Loral Govfmmml Financial Statistics, Yarious issues.

58

Anwar Nasution

governments. The kabupaten and kotamadya governments receive 90 per cent of the net Ipeda collection (excluding collection cost), and the remaining 10 per cent is the share of the provincial government. As discussed earlier, starting from fiscal year 1986-87, the Ipeda has been replaced by a new property tax which includes wealth tax (Pajak Bumi dan Bangunan). Local governments also receive an allocation of tax charged on petrol sales at Rp 1 per litre sold within the province, 70 per cent of the royalties on timber extracted from their territories and revenue from cess. If the large revenue potential from the new property tax can be realized the degree of fiscal centralization can be reduced considerably. As has been discussed earlier, the amount of tax revenue from this source is a function of the following set ofvariables: (a) number of registered taxpayers; (b) assessment value of the property; (c) percentage of the assessed property which is subject to tax; and (d) improvement in the efficiency of tax collection. The collection of property tax has been entrusted to provincial and local governments as they are in a better position to identify taxpayers and determine the tax base. Greater motivation oflocal governments to increase their own revenue could result in greater efficiency in tax collections from this source. The law lists fifty taxes which could be collected by local governments. However, revenue potential from these items is negligible. They are also difficult to administer and uneconomical in relation to their collection costs. In addition, there is considerable overlap between taxes levied by different levels of government. A single building, for example, is subject to both property tax and household tax. The former is collected by the central government and the latter by the province. The overlapping increases collection costs and creates difficulties for taxpayers. The kabupaten and kotamadya governments have the right to collect automotive tax :1nd taxes on hotels, restaurants and amusements. They also levy user charges for roads and receive royalties from certain natural resources. The importance of collections from these sources varies among kabupaten and kotamadya according to the variation in tax objects in the territories. Grants. Tables 2.10 and 2.11 show that grants from the central government constitute an important source of revenue for regional governments. There are several types of grants to cover both routine and development expenditures of the sub-national governments. The Subsidi Daerah Otonom covers the salaries and responsibility allowances plus 66 per cent of the food allowances of civil servants in the regional governments. The grant for development expenditures is known as Instruksi Presiden (Presidential Instruction) or Inpres Program. The Inpres includes: (a) Provincial Development Grant (Bantuan Pembangunan Dati I), or Inpres Propinsi, for development projects undertaken by the provincial governments; (b) District Development Grant (Bantuan Pembangunan Dati II), or Inpres Kabupaten, is given to kabupatenand kotamadya govern:nents on the basis of the number of their population, with a minimum of 50 million rupiah for each jurisdiction; (c) Elementary Education Grant (Bantuan Pembangunan Sekolah Dasar), given to kabupaten and kotamadya to

Fiscal System and Practices in Indonesia

59

expand elementary education facilities; (d) grant for the operation and maintenance of elementary education (Subsidi Pembiayaan Penyelenggaraan Sekolah Dasar); (e) Public Health Grant (Bantuan Sarana Kesehatan); (f) Village Grant (Bantuan Desa) given to each village to be spent on materials to build roads, bridges and water supply projects. Labour for the village projects has to be provided communally and freely by the villagers themselves; (g) Inpres Pasar for building market places, and (h) "Inpres Reboisasi" for aforestation expenditure. The main objectives of the In pres programmes are to decentralize expenditure functions and to create more employment opportunities in the regions, especially in the rural areas. The Inpres programmes are basically for improvements and extensions of the social and economic infrastructure. A large proportion of the allocations under the Inpres Propinsi and Inpres Kabupaten has been for roads and irrigation works. The improvement in the economic base and the extension of markets and transport have substantially contributed to an increase in the quantity and range of additional employment offered by these programmes which can ease the problems created by the shift from agricultural to non-agricultural activities. The range of development projects that can be selected by each level oflocal government is quite wide. The Inpres programme is being locally administered as local governments have a better knowledge of the public services which are needed and the appropriate locations. In addition, locally-based expenditure should involve the local communities more closelywith their local governments, with better choice and perhaps surveillance standards. On the other hand, the Inpres programmes can be seen as centralized expenditure since the central government determines the range of development projects that can be selected by the local governments. From this point of view, the Inpres programmes are earmarked expenditures. Centralization of expenditures could be justified on the basis of the superior administrative capacity of the central government as well as the promotion of national unity through centrally-directed development expenditure programmes. Although the past successes with the Inpres programmes certainly justifY their continuation and extension as an important part of the government's investment programme, constraints on implementation capacity and resource availability are sufficient reasons to slow down their rate of growth. The problems that the forestry programme has faced illustrates the dangers of the failure to ensure that projects have a sound economic and technical justification. Mechanism of Intergovernmental Transfer. There are two reasons for transferring central revenue to the lowest level governments: first, to fill the gap between the fiscal needs and revenue capacities of the lower level governments; and secondly, to equalize the expenditures of the lower level governments in various jurisdictions since revenue capacities differ among them. These vertical and horizontal adjustments have to be made to apply uniform expenditure standards for all parts of the country.

60

Anwar Nasution

Laws No. 32/1956 and No. 5/1975 also deal with the broad-based system of intergovernmental transfers and grants. As discussed earlier, the central government returns most of the I peda revenue, petrol tax, royal ties, and tax on property to their origins. The transfer to the provinces is usually based on the previous year's governmental payroll in the receiving provinces. However, this basic rule is adjusted in reality to prevent the perpetuation of inequalities among regions. Newly hired personnel such as teachers to serve the newly built schools and new medical staff to manage the new medical facilities are also taken into account in determining the amount of transfers. Grants are distributed on the basis of a list of factors, such as population density, number of school age children, size of the province, economic potential, and infrastructural facilities. Nevertheless, there is no specific formula on how to distribute grants among provinces and local jurisdictions.

Concluding Observations The government had three major objectives in instituting the new tax system in 1983. The first objective was to generate adequate revenue to support government expenditures. The second was to improve economic efficiency. The third was to reduce fiscal dependency of the provisional and local governments on the central government. The new tax system is simpler than the previous one and is based on the principles of self assessment and credibility. In order to generate adequate revenue and to increase tax buoyancy, the government must continue to improve the data base on taxpayers and the efficiency of the tax administration. In addition, it must also address the underdevelopment of the legal and accounting systems. The general reluctance of people to pay tax can be reduced by persuasion and campaigns, as well as by strict enforcement of the tax laws. All of these require improvements in the accounting and legal systems. These, however, cannot be expected to happen overnight or in the short run. Experience in the EEC and elsewhere has been that up to two years are needed to educate both tax authorities and taxpayers before implementation of the VAT. Legal and accounting systems are more developed in these countries than in Indonesia and with more efficient tax administrations as well as a higher degree of tax compliance. As has been discussed earlier, in Indonesia VAT was implemented within eighteen months after legislation. However, unlike the EEC countries, the Indonesian VAT when first introduced in 1985 was only up to the manufacturing level. The measures to increase tax effort are particularly important as the Indonesian economy has been suffering from unfavourable external shocks since 1982, particularly a steady drop in the price and demand for oil in the world market; declining prices of primary export commodities, and the sharp appreciation of the Japanese yen (Indonesia's main import currency) vis-a-vis the U.S. dollar (its main export currency) since the fall of 1985. On the other hand, intensification of tax collection could mean an additional burden on the taxpayers at a time of slow economic growth.

Fiscal System and Practices in Indonesia

61

To improve the real tax base, domestic economic policies on the supply side are important. In this regard, the present government's trade and industrial policies and regulations need to be reoriented to make the economy more export oriented. There is also a need to eliminate economic distortions and to improve efficiency, including in government expenditure decisions. Non-tax revenue from returns on investments in state enterprises and from the selling of public properties are also largely untapped. Returns on capital from the public enterprises are much lower than for the private firms. To increase their fiscal contributions, the philosophy, objectives, and operating environment of these enterprises should be made as far as possible similar to the private firms. If possible and appropriate, government assets must be sold to the private sector. The private sector should also be allowed a greater role in the economy. REFERENCES Bahl, R.W. A Representative Tax System Approach to Measuring Tax Affort in Developing Countries. International Monetary Fund (IMF), DM/71/38, 10 May 1971. "Alternative Methods for Tax Forecasting in Developing Countries: A Conceptual Analysis". Unpublished working paper, IMF, October 1972. Blinder, A.S., and R.M. Solow. "Does Fiscal Policy Matter?". journal of Public Economics, November 1973. Booth, A. "lpeda: Indonesia's Land Tax". Bulletin of Indonesian Economic Studies (BIES) 10, No. 1 (March 1974). Booth, A., ;md P. McCawley, eds. The Indonesian Economy During the Soeharto Era. Kuala Lumpur: Oxford University Press, 1981. Chelliah, RJ Fiscal Policy in Underdeveloped Countries. GeorgeAIIen and Unwin Ltd., 1971. Cnossen, S. The Indonesian Sales Tax. Deventer: Kluwer, 1973. Emerson, C., Ross Garnaut and A. C. Ross. "Mining Taxation in Indonesia". BIES20, no. 2 (1984). Glassburner, B. "The January 1973 Tariff Revision". BIES9, no. 3 (November 1973). ____ . "Budgets and Fiscal Policy under the Soeharto Regime in Indonesia". };conomics and Finance in Indonesia, September 1979. Gray, Clive. "CiYil Service Compensation in Indonesia". BIES 15, no. 1 (March 1979). Lerche, Dietrich. "Efficiency of Taxation in Indonesia". BIES 16, no. 1 (March 1980). ____ . "Indonesian Tax System". Mimeographed, 1978. Levin, Jonathan. "The Role of Taxation in the Export Economies". In Readings on Taxation in Developing Countries, edited by R.M. Bird and 0. Oldman. Baltimore: Johns Hopkins University Press, 1975. Morgan, D.R. "Fiscal Policy in Oil Exporting Countries". IMF Staf!Papers26, no. 1 (May 1979). Musgrave, R.A. Fiscal System. New Haven: Yale University Press, 1969. Nasution, Anwar. Financial Institutions and Policies in Indonesia. Singapore: Institute of Southeast Asian Studies, 1983. ____ . "Indonesia's Five-Year Development Plan, 1984/85-1989/90". In Korea and Indonesia in the Year 2000, edited byJ.K. Park and JusufWananda. Seoul: Kyungnam University Press, 1985. ____ . "Survey of Recent Developments". BlES21, no. 2 (August 1985). Paauw, Douglas. Financing ofEconomic Development: The Indonesian Case. New York: The Free Press of Glencoe, 1960.

62

Anwar Nasution

_ _ _ _ . "Local Finance in Indonesia". In Readings on Taxation in Developing Countries, edited by R.M. Bird and 0. Oldman. Johns Hopkins University Press, 1975. Peacock, A.T. and G.K. Shaw. "Fiscal Measures to Improve Employment in Developing Countries: A Technical Note". Public Finance, No. 3, 1971. _ _ _ _ . "Fiscal Measures to Create Employment, the Indonesian Case". Bulletin for International Fiscal Documentation 27 (November 1973). Sanders, Martin. "Regional Finance in Indonesia". BIES 6, no. 2 (July 1970). Snyder, W. "The Budget Impact on Economic Growth and Stability in Indonesia". Economics and Finance in Indonesia 33, no. 2 ( 1985). Up pal, J.S. 'The Indonesian Tax Structure". Eronomics and Finance in Indonesia 34, no. 1 (1986). Van Leeuwen. "Central Government Subsidies for Regional Development". BIES11, no. 1 (March 1975). Weinstein, F .B. IndonesianForeign Policy andDilemma ofDependencefrom Sukarno to Soeharto. Ithaca: Cornell University Press, 1976.

3

Fiscal System and Practices in Malaysia

Mukul G. Asher

Introduction The public sector in Malaysia consists of the federal government, thirteen state governments, four municipalities (namely Penang, Ipoh, Kuala Lumpur and Malacca), non-financial public enterprises (NFPEs), and public financial institutions such as the Employee Provident Fund (EPF) and the Bumiputra Investment Foundation. As of September 1988, there were 847 government companies (including government financial institutions), with paid-up capital amounting to $19,652 million, ofwhich the government contributed $13,819 million 1 (Economic Report, 1988-89, p. 96). The fiscal system of Malaysia operates under a federal structure. Under the Federal Constitution (1Oth schedule), the main revenue sources assigned to the states are receipts from land sales, revenue from lands, mines and forests, entertainment duty and Islamic religious revenue. Additional sources of revenue are assigned to the states ofSabah and Sarawak. These include import and excise duties on petroleum products and export duty on timber and other forest produce. The Constitution also provides for capitation and road grants to the states. In addition, special grants are provided to Sabah and Sarawak. During the six years ending 1988, consolidated revenue of the thirteen states (excluding grants from the federal government) amounted to about one-sixth of the total revenue of the federal government. 2 The operating expenditure of all the states combined increased steadily from 8.5 per cent of the operating expenditure of the federal government in 1983 to 22.5 per cent in 1988. The quantitative importance of development expenditure of the NFPEs has been considerable. Thus, during the six years ending 1988, development expenditure by the NFPEs was about 70 per cent of such expenditure by the federal government. In spite of the importance of the state governments and the NFPEs, this paper focuses on the fiscal system and practices ofthe federal government of Malaysia and their probable impact on resource allocation, incentives and growth, equity

64

Mukul G. Asher

and stabilization. However, to the extent that there are interconnections between the fiscal system and practices of the federal government on the one hand and state governments and NFPEs on the other, they are taken into account. Three main areas of such interconnections are net loans and grants given by the federal government to the other two entities, privatization and divestment of some of the NFPEs which in Malaysia is related mainly to their inadequate financial performance, and decentralization and rationalization of fiscal functions among the various levels of government. Because of their importance for societal welfare and implications for government expenditure, a brief discussion of the Employee Provident Fund (EPF) scheme and other social security institutions is also provided. The finances of the federal government are organized around various funds. The main funds are Consolidated Fund, Development Fund, Sinking Fund and Contingencies Fund (details may be found in the Federal Constitution, Part VII). Malaysia introduced the Programme and Performance Budgeting (PPB) in 1968. In the early 1970s, emphasis was on applying the PPB to a relatively small number of agencies. The objective was to first create operationally effective budgetary practices and only then applying them on a wider scale (Dean 1986, p. 269). However, even for the agencies selected for in-depth implementation, considerable difficulties relating to conceptual (such as measuring unit costs), political (such as resistance from the bureacracy), and resurces (such as trained manpower) have been encountered (Dean 1986, pp. 269-72). The Treasury circular of 1981 required all remaining agencies to adopt the PPB format in their budget submissions. It appears, however, that the adoption of the PPB for all agencies has not significantly affected budgetary procedures and decision-making. The above-mentioned difficulties have continued in the post-1981 period. This suggests that the tension between the input-output or objective orientation of the PPB and the accountability criteria centring around organizational structure have not been overcome. The need for enhancing efficiency in public sector management does, however, require that the above tension be reduced significantly, especially in certain critical agencies, such as those providing infrastructure and social services. The Size of the Government Sector The end period values for the three conventional measures of the size of the government sector, that is, total revenue, tax revenue, and total expenditure to GDP (gross domestic product) ratios were higher than the corresponding values during the late 1960s (Table 3.1). In spite of the increase in the above ratios, the end period value for the non-oil tax revenue to GDP ratio was lower than the corresponding value during the late 1960s (Table 3.1). This has resulted in a considerably smaller proportion of total expenditure being financed out of non-oil tax revenue in recent years. The share financed by total tax revenue has also declined but not as sharply. The non-oil tax revenue to total expenditure ratio fell from 66.8 per cent in 1974 to 34.5 per cent in 1982, but has since then increased to reach 43.9 per cent in 1988 (Table 3.1).

65

Fiscal System and Practices in Malaysia

TABLE 3.1 Malaysia: Indicators of the Size of the Federal Government Budget, 1966-88

Tax Revenue

Total Revenue

Tax Revenue

Total Expenditure"

Total Expenditure

GDP

GDP

GDP

1966

57.7

17.2

13.4

23.2

1967

59.6

18.2

14.1

23.7

1968

62.4

17.9

14.2

22.8

1969

66.8

17.9

14.5

21.7 23.6

1970

68.8

19.7

16.3

1971

59.5

18.7

15.9

26.8

1972

55.3

20.5

16.7

30.2

1973

67.8

18.2

16.2

1974

69.9

(66.8)'

20.9

18.9

(18.0)"

27.0

1975

65.2

(59.5)

22.9

20.5

(18.7)

31.4

21.9

19.5

(18.1)

29.1 32.6

23.9

1976

67.3

(62.3)

1977

67.1

(58.7)

24.0

21.9

(19.1)

1978

68.2

(60.6)

23.3

21.1

(18.8)

31.0

1979

67.0

(60.4)

22.6

20.5

(18.4)

30.6

1980

60.8

(47.7)

26.1

24.0

(18.8)

39.4

1981

50.0

(36.5)

27.4

23.3

(17.0)

46.5

1982

48.4

(34.5)

26.7

21.5

(15.4)

44.5

1983

58.6

(42.4)

26.7

23.4

(17.7)

39.9

1984

63.3

(46.2)

26.1

22.2

(16.2)

35.0

1985

66.8

(46.8)

27.2

23.1

(16.2)

34.6

1986

58.6

(42.4)

27.4

22.3

(16.1)

38.0

1987'

51.3

(42.7)

22.5

16.7

(12.9)

30.1

19881

53.2

(43.9)

24.5

17.8

(13.5)

30.7

h

d

Total revenue ~ tax revenue + non-tax revenue. Total expenditure~ operating (current) expenditure+ direct development expenditure+ net lending (that is, gross lending minus repayment) by the federal government. Figures in parentheses refer to non-oil tax revenue to total expenditure ratio. Figures in parentheses refer to non-oil tax revenue to GDP ratio. Such data for the 1966-73 period are not available, but oil revenue during that period was negligible. Estimated actual. Latest estimates.

SOURCES: Ministry of Finance, Economic Report (Kuala Lumpur), various years; and Estimates of Malaysia's Federal Revenue, various years.

66

Mukul G. Asher

It should be noted that the behaviour of the three conventional measures noted above has not been smooth over time. In general, the sharp increases in these three ratios have coincided with the introduction of the New Economic Policy (NEP) in 1971 and sharp increases in oil prices in 1973 and 1979 (Table 3.1). The reduction in government expenditure to GDP ratio since 1983 has coincided with the austerity drive designed to make the overall budget deficit level consistent with pn1dent macro-economic policy. Both total revenue and tax revenue to GDP ratios declined significantly in 1987 (Table 3.1). The size of the government sector as measured by total expenditure to GDP ratio doubled between 1966 and 1981 to reach 46.5 per cent (Table 3.1). This is substantially higher than the corresponding ratio for many developed countries. 3 Moreover, the ratio for Malaysia refers to only the federal government and not to all levels of government." vVhile this ratio has declined considerably since then (it was 30.7 per cent in 1988), the size of the government sector can still be characterized as being on the high side for Malaysia's level of per capita income of US$1,803 in 1988 (Economic Report, 1988-89, Table 1.2). An investigation of the relationship between economic growth and the size of the government sector is beyond the scope of this paper. However, a recent study does lend support to Wagner's hypothesis that economic development in Malaysia has led to an increased level of government expenditure (Zulkifli 198889, p. 64). The study relies on statistical tests and does not spell out the economic reasoning or mechanism by which such a relationship is brought about. During the 1965-87 period, GNP (gross national product) per capita in Malaysia grew at an average annual rate of 4.1 per cent (World Bank 1989, p. 165). Traditionally, the government sector (which excludes NFPEs) has been an important source of employment. In 1985, it provided 15.0 per cent of total employment (Fifth Malapia Plan, 1986-90, p. 138). By 1989, this proportion had been reduced to 13.6 per cent (Economic Report, 1988-89, Table 6.1).

The Revenue Structure Total revenue may be divided into tax and non-tax revenue. For the present purposes, the latter is defined to include licences and permits; service fees or user charges; sales of goods, including government property; rental income; fines and penalties; refunds of expenditure; receipts from other government agencies; revenue from federal territories; and interest and returns from investment. In recent years, revenue from the last item has been dominated by contributions from the national oil firm, Petronas. Thus, in 1984, Petronas accounted for about 30 per cent of non-tax revenue. This proportion increased to more than two-fifths in 1987. The importance of non-tax revenue has fluctuated considerably during the 1966-88 period (Table 3.2). A sharp decline in the contribution from non-tax revenue between 1966 and 1980 is particularly observable from the data in Table 3.2. As noted above, increases in its share during the 1980s are due mainly to contributions from Petronas. Thus, even in the case of non-tax revenue, the petroleum sector has become a major contributor.

67

Fiscal System and Practices in Malaysia

TABLE 3.2 Malaysia: Importance of Non-Tax Revenue, 1966-88"

Period 1966-70 1971-75 1976-80 1981-85 1986-88 ·•

Non-Tax Revenue

Non-Tax Revenue

Total Revenue

GDP

20.24 13.04 9.34 15.42 24.00

3.68 2.60 2.18 4.12 5.87

The ratios are derived by taking a simple average for the period.

SOURCES: Ministry of Finance, Economic Report (Kuala Lumpur), various years; and Estimates of 1Walaysia 's Fedpra/ Revenue, various vears.

The contribution ofNFPEs to non-tax revenue has so far been inadequate. As the Finance Minister remarked during the 1989 Budget Speech, ... the performance of a number of large NFPEs has been a matter of concern to the Government in view of the losses they are making and the need for Government to periodically inject fresh funds for operational purposes .... Indeed, the NFPEs are the biggest problem in our efforts to improve public sector finances.

As oil is a depleting asset, the revenue contribution of the petroleum sector is bound to decline in the longer term. Thus, the future importance of non-tax revenue is likely to be significantly influenced by the financial performance of the NFPEs. The extent to which reliance is placed on user charges to cover the costs of such major services as education and health will be another important determinant. A detailed discussion of the relevant issues involved is, however, beyond the scope of this paper. The Tax Structure and the Tax Mix Table 3.3 provides a breakdown of tax revenue by broad categories. Changes in the tax mix in Malaysia during the 1966-88 period may be summarized as follows: 1. There has been a sharp shift from reliance on indirect taxes at the

beginning of the period to direct taxes." In the 1960s, direct taxes accounted for a little less than one-third of total tax revenue, but in the 1980s, their share increased to about 50 per cent. Thus, towards the end of the period, the contribution of both direct and indirect taxes to total tax revenue is nearly equal. As noted below, the government would like to shift the present tax mix in favour of indirect taxes.

TABLE 3.3 Malaysia: Tax Revenue of the Federal Government, by Broad Categories, 1966-88 I'axes Yt'aJ

Income and Profits"'

11

Trade

11

()thers

:111.1

4.~

196~)

29.6 ~:l.~

4.3 5.4

~~.4

:,.~

31.:\

5.2 4.5

29.7

27.5

1'177 197H

29.4 43.H :l7.H 41.11 41.11

1979

~\I.H

I!IHII I!IHI 19H2 1\IH:l 19H4 19H5 JqH() I!IH7 1\IHH

4~~-(i

1976

Taxes 011 lntl'l nation;ll

I

1966 1967 196H 1970 1971 1'172 1!17:l 1974 197!)

'LIXt'SOil

Co()(ls .7)

2S.:~

(:\2.!1)

4.~

~:l.H

(:;.li)

2!).4

(:l:\.4)

45

24.0

10.9 5.0

I.!""> 0.7 0.6

:t9

!""J.:~

1.6

7.1

2.H

7.1

05 0.5

(S5)' (!.H) (:l.tl)

2.2

(~.6)

7.~

2.2

7.:\

~.H

(25) (:l.l) (:l.l) (:\.:\) (3.9) (:l.ii) (:l.ti) (3.7) (S.9) (:l.:l) (:l.:l)

H.6

(7.:1)'

2.4

7.7 (i.4 6.4 ti.O :d)

(!>.6)

~.4

(4.~)

~.H

(4:1)

~.X

(4.(1)

:!.()

(:15)

2:.6

4.5

(:\.11)

4.11 4.:\

(~5)

4.:1 :!.5

(2.9)

2.5

0.4 11.7 0.6 1.0

o.:l

0.5 0.5

05 0,()

O.li 0.6 O.ti 0.6 0.6

0.6 0.9 0.4 0.4

Noll's:

I 11

=

Ratio with n .. :-.pcct to total tax Rc1tio with respect to GDP.

rt'\Cil\lt'.

lndudes individual and l"ompany income tax, petrokum income tax, and royahie~ on petroleum. Indudes sales, excise, S('I'Vi< e. ;md road taxes. Include~ export and import dutin. " This category i~ treated as a residual. lt indudc~ ... tamp dutin, ('state dutit·~. !Tal property gaim tax, share tr 100,000 > 100,000

*

1'.:)

Income Bracket

Rate

$ 6% 9% 12% 15% 20% 25% 30% 35% 40% 45% 50% 55% +5% EPT*

I- 2,500 2,501- 5,000

5%" 8%"

5,001- 10,000

12%

10,001- 20,000

15%

20,001- 35,000 35,001 - 50,000 50,001 - 70,000 70,001- 100,000 > 100,000 > 300,000

20% 25% 30% 35% 40% +5% EPT

EPT = Excess Profit Tax From year of assessment 1985 onwards, a tax rebate of $60 for the taxpayer and $30 for the wife is confined to those having chargeable incomes not exceeding $10,000.

~

;.,-

~

0

~

"'

;::,-

SOURCE: The 1985 Budget Speech, Table I.

~

73

Fiscal Systfm and Practices in Mala_ysia

TABLE 3.6 Malaysia: Structure of Personal Relief for Resident Taxpayersa (Year of Assessment 1989)

Category

Amount($)

Self

5,000

Wife

2,000

Child Relief' lst Child 2nd Child 3rd Child 4th Child 5th Child Alimony to former wife Life insurance premiums and Provident Fund contributions

"

650 750 800 800 800 2,000 3,500

:\!on-residents are not entitled to any personal reliefs. The relief is granted in respect of children not exceeding 16 years of age or children m·er 16 years of age who are undergoing full time education in a local institution of higher learning. If the child is over 16 years of age and receiving higher education at a university or college overseas (other than in Singapore) the relief is increased to the sums expended but not exceeding four times the normal child relief. Increased deduction is also extended to children of East Malaysians under 16 years of age who are being educated in West :\falavsia or Singapore. A relief of $400 is given for each phvsicallv or mentallv disabled child who is abOYe 16 years of age.

SOURCE: Price Waterhouse, The 1989 J'vfalaysian Pockrt Tax Book (Malaysia, 1989),p.l.

projected to be $4,900 in 1989 (Economic Report 1988-89, p. 7). Vv'hile the distribution of wages is not available, from the above it appears that the level of personal reliefs is neither too generous, nor too low to create undue hardships. The second observation concerns child relief which is provided for the first five children. The amount of this relief increases with each successive child rather than decline as is the normal pattern. The present structure of child relief was introduced in 1985 to support the government's then recently announced policy of achieving a target population of 70 million. Because of doubts about the effectiveness of the present structure for increasing population and its regressive impact, a tax reform group of the Malaysian Institute of

74

A1ukul G. Asher

Economic Research (MIER) has suggested reverting to the pre-1985 structure ( 1988, p. 17). The same group has also suggested the abolition of additional reliefs for children studying abroad because of its regressive impact, erosion of the income tax base, and adverse impact on balance of payments and on local higher education (1988, p. 18). At present, there is a rebate for zakatby individuals but not by companies. In 1985, the rebate amounted to only $3 million on zakatcollections of$18 million (MIER Tax Reform Group 1988, p. 31). Thus, the income tax base and revenue erosion from zakat is negligible at present. In 1985, individual taxpayers constituted 12.4 per cent of the labour forceY If only workers in the organized sector are considered, the proportion can be expected to be much higher, however. In recent years, the tax authorities have been attempting to increase the number of taxpayers by such techniques as matching provident fund contribution data with income tax returns. The government is also reviewing individuals and bodies enjoying tax exempt status. One possibility is to provide exemption by activities rather than by bodies. Thus, even if a museum is a non-taxable body, gift shops in the museum could be taxed if exemption is based on activities. Employees contribute about three-fifths of the individual income tax, and constitute about two-thirds of the taxpayers. Assessed income to GDP ratio for resident individuals and companies in 1985 was 16.6 and 11.3 per cent respectively. The major part (about two-thirds) of the income tax collected in 1985 was contributed by about one-tenth of the taxpayers whose assessed income was $30,000 or more (Table 3. 7). At the other end, those having an income of $15,000 or less constituted almost two-thirds of the taxpayers in 1985, but contributed only 11.4 per cent of the tax revenue (Table 3. 7). The progression shown in Table 3.7 is somewhat overstated because dividend reliefs and the items excluded such as capital gains from shares, are concentrated at the upper end of the income scale. Company Income Tax The importance of this tax to revenue ranged from 17 to 22 per cent during the 1974-88 period (Table 3.4). From 1966 to 1988, the nominal company income tax rate remained unchanged at 40 per cent. In addition, development tax of 5 per cent was also levied. However, this tax will be abolished gradually commencing with a reduction of 1 per cent from the year of assessment 1990. Between 1975 and 1986, companies were also subject to excess profits tax. Until 1986, a tax on tin and timber profits was also levied. The 1989 Budget reduced the nominal company income tax rate to 35 per cent. As a result, there is now a divergence (of 5 per cent) between the maximum rate on individual and company tax rates. Other major changes in company income tax rate in recent years have revolved around the liberalization of depreciation allowances, the extension of reinvestment allowances, and overhaul of fiscal incentives. In the 1981 Budget, the depreciation schedule was changed from a reducing balance to the straight-

~

TABLE 3.7 Malaysia: Distribution of Resident Individual Taxpayers, Assessed Income and Tax Assessed (Year of Assessment 1985)"

"' §_ ·~ ~

~

.,.,"' ;:::

Assessed Income Group

Taxpayers

Income Assessed

(%)

(%)

Average Income Assessed

Tax Assessed

100.0 ($1, 162 million)

(%)

Average Tax Assessed

~

Average Tax Assessed Average Income Assessed

;:;·

9.0

:::;

~

~

All Groups

I - 7,500 7,50I- 10,000 I 0,00 I - I5,00l 15,00 I - 20,000 20,00 I - 30,000 30,00I- 50,()00 50,00 I - I 00,000 I 00,00 I - 200,000 200,00 I -over

IOO.O (73I,74I)

100.0 ($12,852 million)

$I7,564

10.8 20.4 32.2 I5.I Il.2 6.7 2.8 0.6 0.2

4.0 IO.I 22.9 14.8 15.4 14.5 10.6 4.4 3.2

6,448 8,700 12,496 17,188 24,164 37,870 67,863 129,108 359,221

0.5 2.3 8.6 8.7 13.8 18.8 20.9 13.3 13.0

$I ,588

73 I80 425 917 1,937 4,439 11,815 34,763 131,986

~

l.l 2.I 3.4 5.3 8.0 Il.7 17.4 26.9 36.7

§"' ~ ;:;·

-Notes: not applicable. Year of Assessment 19H!i rcters to income earned in 19H4. Data refer to assessment made up to 31 March l'lH!i. The tax assessed up to that date amounted to slightly more than two-thirds of the individual income tax collected ($1,749 million) in 19H!i. It is assumed that those with zero tax liability are excluded fi·om this figure. Tax assessed is not tax pavable. This is because of various rebates, primarily f(H· tax on dividends deducted at the company leveL Since such rebates arc likely to benefit upper-income groups disproportionately, distribution of tax payable would reduce the average tax paid as well as their share. SOLJR(:E: (:alcnlated from Malaysia,Jahatan llasil Dalam Negcri, Aomwl Report, l'lH!i.

"

U
0

24.87 30.04 30.18 28.60 29.78 :\1.51 29.25 :\4.89 4152 40.16 :l:\.88 28.96 25.19 25.81 16.')2 20.55

Net Lending

Direct Expenditure

Total

Current Expencli tu re

11 6.61 6.11 5.78 5.16 .~.86

8.26 8.60 5.94 8.11 9.48 8.31 9.70 9.76 8.94 1:\.77 I!!..'\:\ 17.88 13.54 10.15 8.71 9.81 5.10 6.30

I

11

24.16 21.61 20.62 19.91 19.65 21.74 18.67 16.91 17.97 18.04 19.42 19.12 20.43 19.75 25.10 :l:-1.0.') 25.41 20.84 15.35 14.30 16.27 13.15 14.69

5.61 5.13 4.70 4.:)2 4.65 5.82 5.63 4.04 4.85 5.67 5.64 6.2:\ 6.:\:l 6.64 9.90 lf>.39 11.31 8.33 5.38 4.9:1 6.18 3.% 4.51

I

4.33 4.12 4.74 3.83 5.11 9.11 9.83 7.96 12.07 12.14 9.18 10.67 11.08 9.50 9.79 8.47 14.75 13.04 13.61 10.89 95[">

3.77 :).86

11 1.00 0.98 !.08 0.83 1.21 2.44 2.97 1.90 3.26 3.81 2.67 :\.47 :\.43 2.90 3.86 :\.94

657 5.21 4.77 :\.76 3.G:l 1.14 1.80

Notes: ~

11

~

As a proportion of Total Expenditure As a proportion of (;Dr.

SOURCE: Calculated ti·om Ministry of Finance, Fumomic Nrjiorl (Kuala Lumpur), various years: and lc'stima/es of !Ylalaysia 's foi•rlnal NnJPIIIlP, various years.

86

Mukul G. A.shn

occurred during the 1980s. Unlike current expenditure, direct development expenditure at the end of the period was lower than in the 1960s. The main burden of the drastic reduction in government expenditure during the 1980s from 46.5 per cent in 1981 to 30.7 per cent in 1988 (Table 3.1 0), has been borne by direct development expenditure and net lending. 3. Net lending as a proportion of total expenditure has ranged from 3.83 per cent in 1969 to 14.75 per cent in 1982. As a percentage of GDP it has ranged from 0.83 to 6.57 per cent. Since these figures are much lower than the corresponding figures for direct development expenditure, it suggests that the government has preferred to undertake most of the development expenditure itself rather than rely on NFPEs and other entities. Since 1982, there has been a drastic reduction in net lending (from 6.57 per cent of GDP in 1982 to 1.80 per cent in 1988). This is a reflection of attempts to bring the financial affairs of the NFPEs under greater control. A striking feature of the functional breakdown of federal government expenditure (Table 3.11) is the sharp rise in expenditure on debt services. Between 1966 and 1988, the share of this category in total expenditure increased by nearly four times, and as a proportion of GDP it increased by five times. To make the debt servicing more manageable, the government has prepaid more expensive external loans and has reduced its reliance on foreign borrowings (Economic Report 1988-89, p. 85). Nevertheless, expenditure for debt serTicing is unlikely to decline by much from the present high levels for the next several years. The share of total expenditure going to security has declined, from about a quarter of the total in the ! 960s to a little less than one-sixth. As a proportion ofGDP, the peak expenditure (8.21 per cent) occurred in 1982. However, by 1988, this was almost halved ( 4.4 7 per cent). Much of the decline has come from the development or capital component rather than current expenditure. The future behaviour of this category will crucially depend on weapons acquisition policies. The share of social services in total expenditure has remained remarkably stable during the period, ranging between 25 and 30 per cent. The variation as a share ofGDP has been greater, however. The share almost doubled between 1966 (6.46 per cent) and 1982 (12.23 per cent), but has declined since then. However, by 1988 the share was still higher (at 8.57 per cent) than in 1966. The share of economic services in total expenditure has ranged from 21.39 per cent in 1988 to 30.27 per cent in 1981. As a percentage ofGDP, expenditure on economic services in 1988 was less than half of the 14.09 per cent attained in 1981. Thus, the reduction in expenditure on economic services has been much greater than in social sen·ices. However, as has been the case with social services and security expenditure, it is the development or capital component which has been almost exclusively affected by the decline.

Ye;u

:J1

TABLE 3.11 Malaysia: A Functional Breakdown of Federal Government Expenditure,

"'~

1966-88

\~

Social .'-!e1Vi< cs

Senuity

"'(;;"

E< ononli< Services

~ ;:,

Debt Services

Administration

;:l

11

11

11

ll

11

(~()

(lfi.(i!))

S.70

(:I.H6)

2/.H:l

(22.:1'1)

6.46

(.iJ.20)

'2'2.70

(7'JI)

;,_27

1 1.H:l)

7.24

(11.11:1)

I.IIH

( 1. 0>4)

:l. ~1'2

137

/9()7

21.7~

( lii.IO>)

:i.Ui

(:l.H:l)

27.114

(2:l.IJ2)

().56

(5.47)

:z:U!l

(7.H7)

0.49

(l.H7)

~J.20

(H.66)

2.18

(2.()(1)

li ..'l:l

1.50

~·

196~

'20.07

( 1.'J.96)

45H

(:l.IA)

2'!.09

(2:1.44)

6.ti:~

(!).:)4)

2.'\.2.'~

(7.115)

.>.:10

(1.74)

H.HI

IH.14)

2.01

( 1.\12)

7.19

1.64

'20.()()

(16.5'2)

4.49

C15H)

2H.:I:l

(2~.H2)

ti.l:J

(!"L17)

2'2.HO

(7.'14)

4.%

( 1.72)

H.:n

(7.">c>)

!.HI

(1.114)

7.6:)

1.6()

;:;·

1969

:.n.2.'1

(7 ..:->.))

!)_50

(l.7H)

!1.14

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(.1.·1, edited by P.B. Rana and F.A. Alburo, pp. 79-103. Singapore: Institute of Southeast Asian Studies, 1987. Spinager, Dean. Industrialization PoliriPs and Regional Eronomir Dnl('lopmPJlt in lHalaysia. Singapore: Oxford University Press, 1986. Tan, Loong-Hoe. The State andEronmnic Distribution in iHalaysia. Singapore: Institute of Southeast Asian Studies, 1982. Tan, S.E., and Lai, Y.vV. "Emplovment Impact ofTariffProtection: A Case Study of\\' est Nlalaysian Manufacturing Indw;tries". In The Fow1h Afalaysia Plan, edited by K.S. Jomo and RJ.G. Wells, pp. 121-43. KualaLumpur: Malaysian Economic Association, 1983. Toh, Kin Woon. "Privatization in Malaysia: Restructuring or Efficiency?" In ASA'AJ\' Economic Bulletin 5, no. 3 (March 1989): 242-58. Tvabji, Amina. "Resource Mobilization through the Budget: The Experience of Malavsia, the Philippines and Singapore". Ph.D. thesis submitted to the National Universitv of Singapore, 1983. \\'orld Bank. World Development RPjJort. Washington, D.C., 1988. _ _ _ _ . World Development Repmt. Washington, D.C., 1989. Zulkifli Ibrahim. "Government Expenditure and Economic Growth in Malaysia, Korea, and Taiwan". Honours Year Academic Exercise, Department of Economics and Statistics, National Llniversity of Singapore, 1988.

4

Fiscal System and Practices in the Philippines Mukul G. Asher Agustin Kintanar, Jr.

Introduction The Philippines is just beginning to emerge from the economic and political crisis experienced during the last few years of the Marcos administration. 1 During the last two years of the Marc os administration, real GNP (gross national product) growth was negative, at -7.1 per cent in 1984 and -4.2 per cent in 1985 (Tan 1988, p. 218). With the advent of the Aquino administration in February 1986, there has been a modest economic recovery, particularly when the growth rate of real GDP (gross domestic product) or GNP is used as an indicator. ~ According to the same source, GNP grew at a rate of 1.5 per cent in 1986 and 5.1 per cent in 1987. The real GDP is estimated to have grown at a rate of6.8 per cent in 1988 (Business Times [Singapore], l 0 February 1989). V'.'hile some doubts persist, there appears to be a consensus, particularly among the business oriented publications, that the Philippines will be able to sustain a moderate rate of growth over the next few years. According to a recent study, real GDP of the Philippines is expected to grow at a rate of between 4.3 and 4.6 per cent per year during the 1988-93 period (Hodgkinson 1988, pp. 110-11). This paper attempts an analysis of the fiscal system and practices in the Philippines, focusing on the period since 1975. Several factors hampering such an analysis should, however, be noted at the outset. First, the fiscal structures and procedures in the Philippines are among the most complex (Cheetham and Hawkins 1976, p. 390). This has been compounded by the frequent changes. Secondly, there are unusually wide divergences between the over elaborate formal fiscal structures and practices and their actual implementation. Thirdly, the fiscal data exhibit wide unexplained divergences even when official publications are used.:l As a result, the extent of their reliability is not always clear. Fourthly, the lags in the availability of data are unusually long. 1 Historically, the Philippines has had a centralized government and therefore, there has been little delegation of powers to the provinces and the local governments (Cheetham and Hawkins 1976, p. 390). The centralized

104

Mukul G. Asha and Agustin Kintanar, Jr.

government has also meant a centralized fiscal system. One indication of this is that the local source revenue of all the local governments combined was about three-fifths of the total revenue during the 1980-85 period, or about 6.0 to 8.0 per cent of the revenue of the national government (World Bank 1987, pp. 101 ancl109). In spite of the centralized structure, the public sector in the Philippines did not begin to play a prominent and active role until the imposition of martial law in 1972.-, The national government became much more activist during the remainder of the Marcos regime. 6 The number of government owned or con trolled corporations increased from 70 in 1973 to 245 in 1985 (Manasan 1988, p. 120). The services sector accounted for 26 per cent of all public enterprises in 1985 while the corresponding share of financial enterprises, transport, communication and agricultural enterprises was 16, 10 and 8 per cent respectively (Manasan 1988, pp. 144-45). These figures suggest an extremely wide range over which there is an active participation of public enterprises. Although the Aquino administration has started a privatization programme, which will be discussed later, the fiscal system as a whole continues to remain centralized. As with the other aspects of the fiscal system and practices, the budgetary system and practices in the Philippines also suffer from over formalization and complexity and there is wide divergence between the formal structure and actual practices. Thus, in discussing the planning and control of public expenditures Manasan makes the following observations (1988, pp. 84-87). First, while the Presidential Decree (PD) 11 77 of 1977 established "total resource budgeting", it was rarely implemented. Indeed, prior to 1983 there were no aggregate public sector accounts. Secondly, while formal institutional linkages existed between planning, programming and budgeting, their effectiveness was undermined by the duplication of functions among the coordinating agencies, by inadequate coverage of projects reviewed by the Investment Coordinating Committee, and by broad powers given to the President to transfer funds across various programmes and ministeries. The 1986 constitution has curtailed the presidential powers in the fiscal arena. Thirdly, the formal budgetary structures were unable to prevent recourse to across-theboard reductions in government expenditure when the need arose. Such a practice suggests the absence of a well-considered set of priorities, an essential task of any good budgeting system. The Revenue Structure The size of the general government sector (which excludes public enterprises and statutory boards) in the Philippines is not large when measured according to the aggregative indicators (Table 4.1). Moreover, both the revenue and the expenditure indicators exhibited a downward trend during the last decade of the Marcos administration, though the decline was much greater for the revenue indicators (Table 4.1). Since the advent of the Aquino administration in 1986, the downward trend has been reversed, though tax collections remain below targetted levels (Business Times [Singapore], 2 February 1989). During

105

Fiscal System and Practices in the Philippines

TABLE 4.1 Philippines: Aggregate Indicators of the Size of the National Govemment Budget, 1975-87 Year'

1975 1976 1977 1978 1979 19130 1981 19132 1983 1984 1985 1986 19137

Total Revenue

Tax Revenueh

Total Expenditure

GDP

GDP

GDP

15.7 14.0 13.0 14.2 14.6 14.2 13.0 12.5 12.9 1l.fl 11.13 13.3 15.13

13.0 12.2 12.0 12.7 13.2 12.7 11.5 11.2 11.3 10.5 10.6 11.2 13.3

16.6 15.4 14.6 14.7 13.5 14.2 15.7 15.4 13.8 12.4 13.1 17.5 16.8

In the Philippines, the fiscal year coincides with the calendar year. Includes revenue from various tax amnesties as well as social securitv contributions, immigration, travel and overseas communication taxes. SOURCES: Revenue data supplied by the 1\ational Tax Research Centre, Manila. The revenue ltevel from this source is higher by about 10.0 per cent compared to the other sources, for example, those from which expenditure data have been taken. Expenditure data from IMF, Government Financial Statistics Yearbook, various years; and IMF, IntPmational Financial Statistics, various issues.

the 1975-87 period, on the average, about one-eighth of the total revenue was derived from non-tax revenue, with taxes accounting for the rest (calculated from Table 4.1). In the Philippines, non-tax revenue consists offees and user charges, property income, grants, repayment of advances and extraordinary income such as the share of proceeds from the privatization of governmentowned enterprises. 7 Manasan ( 1988, p. 44) has suggested that one of the reasons for the relatively small contribution of non-tax revenue is long delays in adjusting user charges for changes in the cost of delivering public services. Lax cash-flow management practices and generally low productivity and profitability of government enterprises have also contributed to the low level of property income of the government sector. The estimated values for buoyancy and income elasticity" of total tax revenue for the 1975-85 period were found to be quite low, 0.88 and 0.25 respectively (Manasan 1988, Table 2.4, p. 66). Not a single tax exhibits elasticity value above one, while buoyancy values above one are exhibited only by corporate income tax and excise taxes (Manasan 1988, Table 2.4, p. 66). The buoyancy value of 0.88 suggests that even if all the discretionary changes in the tax rates and bases are taken into account, on the average for every one per cent change in GDP,

106

Mukul G. Asher and Agustin Kintanar, .fr.

tax revenues changed by 0.88 per cent. In estimating income elasticity, such discretionary changes are not taken into account. This results in a corresponding change in tax revenue of only 0.25 per cent. A value moderately above one, for both the buoyancy and income elasticity, is considered desirable in a country such as the Philippines where resource mobilization has a high priority. A major reason for the low revenue productivity of the Philippine tax system is inadequate and inefficient administration and compliance. This is indicated by the fact that the use of tax amnesties has been a recurrent feature of the Philippine tax system. Between 1972 and 1981, there were ten tax amnesty decrees (Yoingco 1987, p. 173). There has already been three such executive orders under the Aquino administration, emanating from the 1986 tax reform programme. vVhile the Aquino administration has indicated that tax amnesties offered by it are the first and the last of such amnesties, given the past record, caution concerning the success of the latest amnesties in terms of revenue raised, and in securing greater enforcement and compliance is amply warranted. The data concerning the revenue importance of various categories of taxes are provided in Tables 4.2 and 4.3. During the 1975-87 period, the revenue importance of taxes on income and profits and on domestic goods and services has increased, while that of taxes on international trade and others has declined (Table 4.2). vVhether the sharp increase in the revenue importance oftaxes on international trade (import duties, as export duties are now of negligible importance) represents a trend or an aberration remains to be seen. It is probable that the sharp increase is because of the abnormally low levels of imports during the several years preceding 1987. The revenue from import duties in 1987 may also have benefited from improvements in customs administration. There still appears to be considerable scope for improvement in this area, however (Business Times [Singapore], 2 February 1989). Because of the above reasons, and as lower and more selective tariffs are implemented as part of the import liberalization programme, the revenue importance of import duties can be expected to decline in the future. A breakdown of selected broad categories of tax revenue suggests the following (Table 4.3). First, until 1980, revenue from personal income tax exceeded revenue from corporate income tax, but since then the position has been reversed. Personal income tax at present generates revenue equal to about one per cent of GDP. In view of this and the low buoyancy (0.66) and elasticity (0.45) values for the 1975-85 period, it could be argued that the present complex structure of personal income tax has limited impact. Secondly, until 1983, the differences in the revenue importance of sales and excise taxes were small. However, since then, the differences have widened considerably. Thus, by 1987, excise taxes were generating slightly more than three times as much revenue as the sales taxes. In 1987, about half of the total excise tax revenue was from petroleum products, with tobacco and alcohol products providing 30 and 16 per cent respectively. Whether the introduction of the value added tax (VAT) in January 1988 will result in narrowing the differences by increasing revenue from the general sales tax remains to be seen. Thirdly, the revenue importance of export taxes is now negligible.

TABLE 4.2 Philippines: Tax Revenue of the National Govemment, by Broad Categories, 1975-87 Taxes on Income and Profits" Year·'

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

2L7 22.8 24.3 22.9 20.8 19.9 22.8 22.4 20.5 24.2 27.2 27.4 23.0

Taxes on Domestic Goods and Services'

Others'

Taxes on International Trade"

11

l

Il

I

11

I

11

2.83 2.79 2.91 2.91 2.75 2.51 2.63 2.50 2.31 2.54 2.88

28.1 31,0 31,5 36,() 37JJ 36.8 35.1 35.0 33.4 32.9 34.7 39.4 36.5

3.67 3.78 3.76 456 4.90 4.66 4.05 3.91 3.76 3.45 3.68 4.40 4.87

36.3 29.5 26.0 25.7 24.5 23.8 21.7 23.0 28.5 27.7 22.4 19.3 27.3

4.74 3.61 3.11 3.27 3.25 3.02 2.50 2.58 3.21 2.91 2.37 2.15 3.66

13.9 16.7 1R.2 15.4 17.7 19.5 20.4 19.6 !7.6 15.2 15.7 13.9 13.2

1.76 2.02 2.22 1.96 2.30 2.51 2.32 2.21 2.02 1.60 1.67 1.59 1.70

:1.06

3JJ7

Notes: 1

=

11

=

as a proportion of total tax revenue as a proportion of GDP

In the Philippines, the fiscal year coincides with the calendar year. Includes personal and company income tax, tax on stock transactions, on interest on bank deposits, and revenue from various tax amnesties. Includes sales and excise taxes and fixed and fi·anchisc taxes. Includes import and export duties. Regarded as residual. Includes social security contributions, immigration, travel and overseas communication taxes, motor vt>hidc kes. and other Jniscf'llancous taxes. Source: Based on tht> data supplied by the National Tax Research Centre, Manila.

TABLE 4.3 National Govemment of the Philippines: A Breakdown of Selected Broad Categories of Tax Revenue, 1975-87 Taxes on Income and Profits·' Personal Income Tax

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 I986 1987

8.0 9.6 14.5 12.3 11.8 10.4 10.2 10.2

8.9 7.9 8.6

8.5 7.7

Corporate Income Tax

General Sales Tax

Excise Taxes

11

I

11

I

11

I

11

].()4 1.17 1.73 1.56 1.56 1.32

12.6 13.1

1.64 1.60 1.17 1.35 1.56 1.20 1.29 1.32 1.25 1.52 1.38 1.37 1.72

10.5 10.0 10.7 14.6 16.7 16.6 15.4 15.0 13.8 10.6 9.2 10.6

1.36 1.22 1.28 1.89 2.22 2.10

13.1 l.'J.6 16.6 17.1 14.6 13.7 14.7 15.4 15.2 17.8 20.7 23.5 24.I

1. 71 1.91

1.18 1.14 1.0 I 0.83 0.91 0.95 1.03

9.8 10.6 9.0 9.5 11.2 11.8 11.1 14.5 13.0 12.2 I2.9

Taxes on International Trade

Taxes on Domestic Goods and Services''

7.8

1.78 1.67 1.55 1.11 0.97 1.18 1.04

1.98 2.17 1.94 1.74 1.70 1.72 1.71

1.87 2.I9 2.63 3.21

Import Taxes

26.6 26.1 22.8 2:~.9

22.2 22.4 21.0 22.5 27.9 25.0 20.8 18.4 '27.3

11

I

ll

3.47 3.18 2.72 3.03 2.94 2.84 2.42 2.51 3.15 2.63 '2.20 '2.06 3.GG

9.7 3.5 3.2 1.9 2.3 1.4 0.7 0.6 0.6

1.26 0.42 0.38 0.24 0.31 0.18 0.08 0.07 0.07 0.28 0.16 0.09

Notes: negligible As a proportion of total tax rcven ue. 11 = As a proportion of GDP. In the l'hilippint>s, tht> fiscal year coincides with the calendar year. Anuwsty tax and other taxes on income and profits art' nut included " The total dot's not correspond to figures in Table 4.2 as "other percentage" taxes and taxt's on the use of goods arc not included. SOURCE: Bast>d on data supplied hv the National Tax Rcst>arch Ct>ntrt', Manila.

Export Taxes

'2.7 1.6 0.8

Fiscal System and Practices in the Philippines

109

The Tax Structure As structural features have important implications for the probable economic effects of a tax, an analysis of such features is essential. Personal Income Tax. This tax was introduced in the Philippines as early as 1913 as a part of the Income Tax Law of the United States (Yoingco 1985, p. 29). Because of its origin, the personal tax in the Philippines has been heavily influenced by the concepts, philosophy and practices of this law in the United States. Developments concerning personal income tax in the Philippines since 1920 may be divided into three periods: the pre-1982 period, 1982 to 1986, and the post-1986 period. In the pre-1982 period, personal income tax was levied on a global basis, that is, income from all sources was combined together and a common rate structure was applied to it. The tax rates ranged from 3 to 70 per cent, with 37 brackets. The number of brackets then existing must have been among the highest in the world. Following the United States' practice, option was given to apply a standard deduction, or itemize the deductions. The withholding provisions have existed since 1977. The tax unit was the family, and the taxable base for resident citizens was world-wide income. Non-resident citizens were taxed at the above rates on their income from the Philippines. For other income of the non-residents, the rates ranged from 1 to 3 per cent, with three brackets, while the base was the adjusted gross income. No separate data are available on the income tax collected from non-resident citizens, but given the severe problems with tax administration and compliance, it can be assumed that such revenue collected must have been a small fraction of the potential base. The practice of taxing non-resident citizens has continued in the post-1986 period. The difficulties of administering a complex income tax structure and the need to generate greater tax revenue led to implementation of a new income tax law (Batas Pambansa 135) in 1982. Under this law, instead of the previous global approach, a schedular approach was adopted. Incomes were grouped under three categories according to the source. The first was compensation income, or wages and salaries. This income was taxed on a modified gross basis. From the gross compensation income, only personal and other such allowances can be deducted, thus eliminating previously existing standard and itemized deductions. The new tax also reduced the discretionary powers of the tax administration, a desirable development in the context of the Philippines where such discretion was widely regarded as a source of corruption (Yoingco 1985, pp. 173-74). The tax rates on the modified gross income ranged from 1 per cent to 35 per cent, with nine brackets. While this suggests considerable reduction in the nominal rates compared to the previous rates, it appears that the nominal tax rates did increase considerably for those who were previously itemizing their deductions (Yoingco 1985, pp. 158-59). The second source of income was the business income. In this case, the net income concept was retained. However, an option was provided for a standard

110

Mukul G. Asher and Agustin Kintanar, Jr.

deduction at the rate of 10 per cent of gross income instead of itemizing the deductions. The tax rates ranged from 5 to 60 per cent with only five brackets, with the highest rate applicable for net taxable income of more than P 500,000. The third source of income consisted of passive income such as interest and dividends. These were taxed at a rate of 15 per cent of gross receipts. Capital gains from properties and shares were also subject to tax at varying rates. For compensation and passive income, extensive withholding provisions were applied. Between 1982 and 1986, the personal income tax revenue to GDP ratio declined from 1.14 per cent to 0.95 per cent (Table 4.3). While the cyclical factors did play a part, it appears that the revenue generation objective of moving to a schedular income tax structure did not meet with success. It also appears that the unsatisfactory revenue performance was largely due to a significant drop in the revenue from business income (Yoingco 1986, p. 118). This suggests a widened differential in the taxing oflabour and capital income, and between salaried and capital income, and self-employed taxpayers. The Aquino administration wasted little time in formulating and implementing a tax reform programme (Philippine RevenueJournal, August 1986, pp. 10-13 and 24-28). Executive Order (EO) 37 (31 July 1986) effected major reforms in income taxation. The post-1986 period is characterized by four major departures from the previous system of personal income taxation. First, there is a substantial shift away from the schedular income taxation, though the modified gross basis is retained for compensation income. At present, both business and compensation income are taxed at rates ranging from 1 to 35 per cent with nine brackets. As business income was previously taxed at the maximum rate of 60 per cent, this represents a substantial reduction in taxation of such income. The passive income, however, is still taxed at separate rates at source. Secondly, in 1986, there was a move away from the family to the individual as the unit of taxation. The Philippines thus joins a growing list of countries such as Hong Kong and to some extent Malaysia which have recently moved towards the individual as the unit of taxation. Thirdly, the double taxation of dividends is to be removed ( Guevara 1988, p. 2). Fourthly, there is an attempt to limit some of the business expenses, such as for travel and charitable contributions, by prescribing ceilings. EO 37 has also raised personal exemptions, which are expected to be adjusted periodically to take inflation into account. The practice of taxing non-resident citizens on their foreign income, and the world-wide basis for personal income taxation are to continue. According to official sources, in 1987, 2.2 million of the 21.0 million employed filed tax returns, and only 1.6 million (or 7.6 per cent of the employed) actually paid income taxes. The potential number of taxpayers is estimated by these sources to be at least 5.0 million, or three times the number who actually paid taxes in 1987 (Straits Times [Singapore], 15 April1989). Corporate Income Tax. Prior to the 1986 tax reforms, corporate income tax had a two-step rate structure. The rate was 25 per cent on net income ofP100,000 or less, and 35 per cent on income above that level. The two-step rate structure

Fiscal System and Practices in the Philippines

Ill

was regarded as providing a mechanism for tax shelter, particularly for the small and medium-sized corporations. The tax base for the three major types of corporate taxpayers was determined as follows. A domestic corporation, regardless of the ownership pattern was subject to income tax on its world-wide income. However, a foreign tax credit was available for taxes paid on income from foreign sources. The tax credit could be computed on a "per country" basis or on the basis of "overall limitations" which allows the combining of income from all foreign countries. A foreign corporation doing business in the Philippines was subject to tax on the net income from the Philippines, compared to the tax on the gross income for non-resident corporations. Under the 1986 tax reform plan, two major changes in the corporate income tax were the abolition of the tax on inter-corporate dividends and the introduction of a single rate of35 per cent for all the three types of corporations noted above. In the Philippines, an income taxpayer can select any reasonable method of depreciation so long as the sum of the total depreciation and the salvage value does not exceed the cost of acquisition of the asset.

Fiscallncentives. The Philippines has made extensive use of fiscal incentives since the early 1960s. As in other areas, there have been frequent and not always consistent changes in this area as well. Thus, the major incentives laws were combined in ] 98] to form the Omnibus Im·estment Code. This Code in turn was replaced by the Investment Incentives Policy Act of1983. Subsequently, two presidential decrees were implemented to withdraw some of the fiscal incentives granted to government entitites (PD 1931 issued on 11 June 1984), and those granted to private entities (PD 1955 issued on 15 October 1984). Yoingco and Sy Dante report that around 1985 there were about 300 legislations granting fiscal incentives to government and private entities (1988, p. 31). The social-political-economic environment existing during the last decade of the Marcos administration has been dubbed "crony capitalism" (Villegas 1987, p. 163). Canlas et al. argue that" ... the main characteristics distinguishing the Marcos years from other periods in our economic history has been the trend towards the concentration of power in the hand of the government, and the use of governmental functions to dispense economic privileges to some small factions in the private sector" ( 1984, p. 19). Given the above, and the PD as the primary instrument for modifYing tax and incentive policies, it is not surprising to find Yoingco and Sy Dante concluding that, "through time and in practice, ... tax and duty exemption privileges have become convenient outlets for tax manipulation or avoidance, unwarranted fiscal revenue loss, promotion of undeserving entities, market distortions, among others" (1988, p. 31). The 1986 tax reform programme recognized the above deficiencies of the fiscal incentive regime in the Philippines (Yoingco and Sy Dante 1988, p. 33). However, Executive Order No. 93 (which became effective on 10 March 1987) does not make a fundamental break with the past. It affirms continued use of fiscal incentives, but envisages altering the form of incentives in a limited

112

Mukul G. Asher and Agustin Kintanar, Jr.

number of cases (direct subsidies instead oftax deductions and exemptions), and it expands the role of the Fiscal Incentives Review Board (FIRB). Most of the earlier incentives, for example, those enjoyed by entities registered with the Board oflnvestments, the Export Processing Zone Authority, and the Phividec Industrial Authority, and those incentives provided under the National Internal Revenue Code, the Tariff and Customs Code, the Local Tax Code, and the Real Property Tax Code have been left largely untouched. Thus, Executive Order 93 has had only limited impact.

The Sales and Excise Taxes10 The Philippine sales tax is one of the oldest in the world. It was first imposed in 1904 in the form of turnover tax at all levels of production and distribution. The tax rate was one-third of one per cent. The rate was raised to one per cent in 1915 and to 1.5 per cent in 1923. The turnover tax at this rate was continued for a number of years. However, because of its unpopularity with business firms, it was converted in the early 1950s into a single-stage tax at the manufacturer's level with a complex rate structure. While various modifications were made in its nature and structure, many essential features remained unchanged until 1985. The sales tax reform introduced in October 1985 (under PD 1991) did subject the second sale of certain articles to 3.0 per cent tax. These articles included those subject to excise tax, Miller's Tax and those subject to sales tax on the original sale. This was later changed to a rate of 1.5 per cent on every subsequent sale of articles. Thus, for a brief period, the manufacturer-importer level sales tax was once again transformed into a turnover tax. Pursuant to Executive Order No. 273 promulgated on 25 July 1987, a consumption type VAT covering all levels of production and distribution was introduced in the Philippines on !January 1988. Under the same order, the rate structure of various excises, notably excises on tobacco, liquor, petroleum products and automobiles has also been revised. The Philippines, thus, joins nearly sixty other countries which have some form of VAT as part of the tax system. The VAT replaces privilege taxes, sales tax on original and subsequent sales, and percentage taxes on various services. Moreover, unlike in the case of the old system, tax credit is not limited to the first sale and to the sales, excise, and Miller's taxes on the purchase of raw materials. Under the VAT, tax credit can be claimed by all sales tax payers, not only on raw materials but also on supplies, capital equipment, and services. Thus, multiple taxation and cascading features of the old system have been eliminated, at least in principle. For domestic goods and services, the base for the VAT is the gross selling price or gross value in money, of goods or services sold, bartered, or exchanged. For imports, the base is the total value used by the Bureau of Customs in determining tariffs and customs duties, plus customs duties, excise taxes and other charges. In the cases where customs duties are determined on the basis of the quantity or volume of the goods, the tax base is the landed cost plus excise taxes. Thus, the mark-up on the landed cost, which used to be applied under the old sales tax, is no longer applicable.

Fiscal System and Practices in the Philippines

ll3

Those firms with annual sales ofP200,000 and those which are not registered for the VAT are levied a tax at the rate of2 per cent on gross quarterly receipts. This is in addition to the input taxes which these persons cannot recoup as there is no output tax for the exempted firms. Zero-rating, which allows input tax to be refunded, is applied to export sales and related services or activities and to the cases covered by international agreements of which the Philippines is a signatory. Whether the latter would cover projects financed by foreign aid is not clear from the Executive Order. The rate structures for the old and new sales tax are shown in Table 4.4. It is clear that the VAT has simplified the rate structure considerably. With the introduction of the VAT, certain goods which had previously been covered by the sales tax are now shifted to the excise or selective sales tax category. Excises are levied on both domestic production and on imports. These include indigenous petroleum, automobiles and non-essential goods such as jewellery, perfumes and yachts. Excise taxes on these products are in addition to the VAT. Excises on traditional items, such as alcoholic beverages, tobacco and petroleum products, and saccharine have been retained. Executive Order No. 273 also revised the rate structure of excises. Under the previous system, many items such as cigars and cigarettes, fermented liquor, gasoline, and fuel oil attracted excises at both the specific and ad valorem rates. Now, the excises are either specific or ad valorem. In addition, goods subject to the excises are also subject to the VAT. Thus, fermented liquor now attracts an ad valorem excise duty of 37 per cent of the brewer's wholesale price, excluding the VAT and the excise duty, compared to a combination of specific and ad valorem rates previously. The rate structure for cigarettes has also been simplified. Previously, the specific rates varied according to the retail price, the number of cigarettes in a package, and whether the cigarettes were domestically manufactured or imported. Moreover, in addition to the specific tax, an ad valorem tax at a rate of2 per cent of the gross selling price, net of excise duty, was also levied. Under the new structure, since only ad valorem rates are applied, rates do not vary according to the retail price. The other criteria such as the number of cigarettes in packages, and whether the cigarettes are imported or not are retained. Since the rate on imported cigarettes (at 65 per cent) is higher than for domestic cigarettes (ranging from 15 to 50 per cent) protection to the domestic industry is being provided. This was also the case under the previous system. The lead-in time for the introduction of the VAT in the Philippines was one and a half years, considerably shorter than the generally recommended time of two years, especially given the low levels of efficiency of tax administration and compliance. Moreover, it appears that the educational campaigns during the lead-in time and preparations for computerization were inadequate. As a result, public acceptance of the VAT has been low and there have been considerable initial problems with it (Yoingco 1988, pp. 102-3). Because of the above, it was anticipated that the planned revenue targets for 1988 from the VAT will not be met (Yoingco 1988, p. 105). An indication that this has been the case is the resignation of the head of the Bureau of Internal Revenue, an agency

TABLE 4.4 Philippines: Sales Tax Rate Structure, pre-VAT and the VAT Periods" Prc-\'AT ( :lassilication of Products Luxury or non-csscutial

Scmi-essnJtial

lklorc I'D 1'1'11

VAT

I'll 1'191

I'D 2006'

Rate of .Sale~ Tax

Additional Excises

:10

00

:10

10

20"

10-2!\

:lo

:w

10

Nil

10

10

10

Nil

0

10

Nil

1 '

(depending- on selling price)

0

Ess('Jitial

Agrirt1ltural Ordinary

10

20

20

lO

Nil

Indigenous Petroleum

22

'2i.S

275

10

n

10

1!\-100 (depending 011 engine

Automobiles (dc>tnC'>tir)

I [J-'15

:l0-!\0

same as undc1 PD

ID~ I

(depending on engine di ...,placcmcnl and type ol l"ucluscd) Autlllhil'·~

Revenue Productivity Two measures of revenue productivity are buoyancy and income elasticity. While the buoyancy measure incorporates revenue effects ofboth discretionary and non-discretionary changes in taxes, income elasticity involves estimating the relationship between tax revenue and income while abstracting from the effects of discretionary tax changes.:n Low [ 1985] has estimated both the measures of revenue productivity for the years 1965 to 1979-HO. She uses the dummy variable method for estimating income elasticity for stamp duties, property tax, and "other import duties". For all other taxes, the constant rate structure method is used. Since she makes acljustments for only the changes in tax rates, upward bias in her elasticity estimates is likely to arise in cases where expansion ofthe tax base occurred. The main results of Low's study may be summarized as follows: 1. All taxes, with the exception of excise and import duties on petroleum, tobacco, and liquor products, and "other import duties", exhibited buoyancy and elasticity values above one. Company income tax, with buoyancy and elasticity values of 1.66 and 1.64, is found to be the most revenue productive. Total collected income tax exhibited a buoyancy value of 1.51 and elasticity of 1.56. 2. Total expenditure was found to have buoyancy (and elasticity) value of 1.12. Current expenditure had a lower buoyancy value ( 1.03) compared to development expenditure (1.31). 3. The buoyancy value for total tax revenue was found to be 1.27. Since expenditure buoyancy is only 1.12, revenue growth far exceeded expenditure growth during the period. The tax revenue elasticity at 1.13 was almost identical to expenditure elasticity of 1.12.

164

Mukul G. Asher

TABLE 5.9 Singapore: Buoyancy Estimates" for Revenue and Expenditure Categories Category Aggregate Revenue Aggregate Expenditure Current Expenditure Net Development Expenditure Non-Tax Revenue Total Tax Revenue Income Tax (collected) Taxes on Real Estate All Taxes on Property Payroll Tax All Taxes on Payrolls Import Duties Excise Taxes Taxes on Motor Vehicles Other Taxes on Goods and Services All Taxes on Goods and Services

Buoyancy Value 1.21

1.16 1.06 1.34 1.29

1.15 1.39

1.07 1.05 1.15 1.57 0.59 0.84 1.25 1.29

1.12

" The estimates are for the 1966 to 1985-86 period. Double log equation is used to estimate buoyancy. The estimates did not change significantly when corrected for autocorrelation. All estimates are significant at the 5 per cent level.

Table 5. 9 provides buoyancy estimates for revenue and expenditure categories. The estimates are for the 1966 to 1985-86 period. It is evident that the income tax continues to exhibit the highest buoyancy. However, the difference in buoyancy values between aggregate revenue and aggregate expenditure has narrowed considerably compared to Low's study. The buoyancy value for total taxes is now slightly lower than that of aggregate expenditure. This reflects the increasing importance of non-tax revenue. In general, expenditure buoyancies shown in Table 5.9 are higher than those found by Low, and tax buoyancies lower. Various changes in taxes since 1985-86 noted earlier, and somewhat lower growth rates in the future are likely to reduce the buoyancy values for various tax categories even further. As noted below, the budget continues to exhibit an overall surplus. Thus, the reduced buoyancy of taxes, which in any case are contributing a smaller and smaller proportion of aggregate revenue, does not merit serious concern.

Fisml System and Pmctims in Singajmm

165

The Expenditure Structure As shown in Table 5.1 0, the main or current expenditure to GDP ratio has increased remarkably little since 1966. In contrast, netdevelopmentexpenditure to GDP ratio has increased substantially since 1966. This ratio has also shown larger year to year fluctuations, especially since 1983-84. Development expenditure is undertaken through direct expenditure by ministeries, capital grants, and loans. More than half of the gross development expenditure is undertaken through the provision of loans. Functional and economic classifications of government expenditure, while available from the national sources suffer from many limitations. The main limitations are use of expenditure totals from which no tall inter-fund transactions have been eliminated; use of highly aggregative functional and economic categories; and non-availability of a functional breakdown for repayment of loans. These limitations have been largely overcome for the functional classification in the data available in the IMF's Government rznanre Statistics Yearbook. Even in this source, the economic classification is available only for direct government expenditure, excluding net lending. Moreover, the data in the IMF's Yearbook are available after a long lag. Thus, in late 1988, only the relevant data for 1985-86 were available. Table 5.11 provides the available data concerning selected functional categories for the period 1975-85. Since 1975-76 there has been a threefold increase in the relative share of interest expenditure on public debt. As the budget has been in surplus during these years (see Table 5.12), the increase can only be explained by the need to provide debt instruments for meeting statutory requirements concerning asset holdings by the CPF Board, commercial banks, and others. 34 Another noteworthy feature of the data in Table 5.11 is the negligible share of expenditure on social services and welfare. This reflects not only the government's ideological aversion to the welfare state, but also the tight labour market, and the demographic structure. The dependency ratio and the proportion of the aged are, however, expected to increase. 3" If these changes in the demographic structure, along with increasing experience as an affluent society do reduce the ideological aversion to the welfare state, then government expenditure on social services and welfare and on health may well increase in the future. The extent to which the CPF scheme meets the challenge of financing the aged, and the overall employment situation would also affect the level of government expenditure on these two categories. Defence and education expenditure each constitute about 5 per cent of GDP. While the share going to defence has remained relatively constant, the share going to education has shown an increase. Education expenditure in the future would largely depend on whether the supply of publicly provided education, especially tertiary education, is increased to accommodate, at least partially, unmet demand. Till now the supply of education, especially at the tertiary level, has been determined primarily by manpower planning projections. The financing mechanism adopted will also affect future educational

166

Mukul G. Asher

TABLE 5.10 Singapore: Main, Net Development and Total Expenditure, 1966 to 1987-88 Fiscal Year beginning

1966 1967 1968 1969 1970 1971 1972 1973 1974 1~l75

1976 1977 1978 1979 1980 1981 1982 1983 1984·' 1985 1986" 1987'

Main Exp.

Net Dev.Exp.

Main Exp.

Net Dev. Exp.

Total Exp.

Total Exp.

Total Exp.

GDP

GDP

GDP

70.2 74.8 73.9 76.6 73.9 71.4 66.0 59.5 64.7 60.0 64.9 67.5 66.4 66.1 60.5 57.1 56.1 55.3 68.5 65.9 53.0 52.2

29.8 25.2 26.1 23.4 26.1 28.6 34.0 40.5 35.3 40.0 35.1 325 33.6 33.9 39.5 42.9 43.9 44.7 31.5 34.1 47.0 47.8

14.4 14.4 13.6 14.6 16.0 15.8 14.3 13.8 13.3 14.4 15.1 16.2 15.6 15.5 15.4 15.2 16.0 17.3 16.7 18.2 17.5 n.a.

6.1 4.9 4.8 4.5 5.6 6.3 7.4 9.4 7.2 9.6 8.2 7.8 7.9 8.0 10.1 11.4 12.6 13.9 7.7 9.4 15.4 n.a.

20.5 19.3 18.4 19.1 21.6 22.1 21.7 23.2 20.5 24.0 23.3 24.0 23.5 23.5 25.5 26.6 28.6 31.2 24.4 27.6 32.9 n.a.

Notes: n.a. not available. The decline in net development and total expenditure to GDP ratios is due to the unusually large repayment of loan principal by statutory boards. Based on revised estimates. Based on budget estimates. SOURCES: Calculated from, Republic of Singapore, Yearbook ofStatistics, various years; Republic of Singapore, J?inancial Statements, various years; Report of the Auditor General, various years; and government Budget documents. IMF data are from Government Finance Statistics Yearbook (Washington D.C., 1987), Vol. X.

TABLE 5.11 Singapore: Total Government Expenditure, by Selected Functional Categories, 1975-76 to 1985-86

?

(In per cent)

~

":2.. "'~

~

Fiscal Year beginning

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Total Expenditure including Net Lending

"'

;:l

Defence

Health

Education

Social Service and Welfare

Housing

Economic Services

Interest on Public Debt

;::_

"1::

;:l

~-

"/) A

B

A

B

A

B

A

B

A

B

A

B

A

B

A

B

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

24.5 23.8 24.0 23.3 23.3 25.3 29.7 28.5 31.3 25.1 35.8

20.3 22.7 25.4 22.8 20.9 20.6 17.5 17.8 13.8 20.9 17.0

5.0 5.0 6.1 5.3 4.9 5.2 5.2 5.1 4.3 5.3 6.1

14.9 15.5 12.5 12.3 12.8 12.0 15.4 14.9 16.1 21.0 16.4

3.6 3.7 3.0 2.9 3.0 3.0 4.6 4.3 5.0 5.3 5.9

6.2 6.4 6.3 7.2 6.0 5.7 5.8 5.0 4.8 6.5 4.9

1.5 1.5 1.5 1.7 1.4 1.4 1.7 1.4 1.5 1.6 1.8

1.3 1.2 1.1 1.1 1.3 1.1 1.1

0.3 0.3 0.3 0.2 0.3 0.3 0.3 0.3 0.2 0.2 0.4

15.0 13.5 8.9 6.0 8.7 8.5 10.7 19.3 26.5 -1.3" 32.6

3.7 3.2 2.1 1.4 2.0 2.2 3.2 5.5 8.3 -0.3" 11.7

20.3 18.1 15.4 15.0 12.8 15.0 13.7 12.6 10.4 14.7 10.0

5.0 4.3 3.7 3.5 3.0 3.8 4.1 3.6 3.2 3.7 3.6

6.7 9.2 11.5 13.8 14.5 13.0 9.6 11.1 14.5 18.8 n.a.

1.6 2.2 2.8 3.2 3.4 3.3 2.9 3.2 4.5 4.7 n.a.

1.1

0.8 1.0 1.2

;:;·

~

~:::i

~

":;;

Notes: n.a. = not available A =As a proportion of total expenditure including net lending. B =As a proportion of GDP. The amount is negative due to large net repayments of loans to the government. Gross expenditure on housing in l984-H5 was $3154.5 million. SOURCE: Calculated from IMF, Covnmnrnl Finanrial Statislits Ymrhook, l9H5 and 1987.

O'l -J

Muhul G. Ashrr

expenditure. Thus, increasing privatization of primary and secondary education, along with a reduction in subsidies for undergraduate and especially graduate level education may allow an increase in the number of students without substantially increasing the government budget on education. Care, however, would have to be taken to expand student loans and other such programmes so that the financial constraint does not unduly preclude able students from pursuing higher education. Expenditure on economic services has shown a tendency to decline in relative terms. It appears that by 1990, much of the infrastructure and housing programme would be completed. While the increased stock ofinfrastructural facilities and housing may require additional maintenance expenditure, unless new capital projects are undertaken, expenditure for economic services and housing may be expected to decline. Much of the increased maintenance expenditure, for example, on housing, is likely to be recouped from user charges, thus minimizing the effect on government expenditure. The reduced need for expenditure on infrastructure and housing could provide an opportunity to bring about a lower government expenditure to GDP ratio. In that event, revenue policy, especially tax policy, would have to be adjusted to lower financing needs. On the other hand, the reduced need for expenditure on infrastructure and housing could allow greater expenditure on such relatively neglected areas as social services and welfare and to a lesser extent, health.

Budget Balance and Its Financing Two basic measures of the budget balance are the balance on the current account and the overall balance. The former measures the difference between aggregate revenue and current expenditure. It is, however, inappropriate to regard the budget balance on current account as a saving in the national income accounting sense. This is because unlike the system of national accounts, government finances are on a cash basis. Moreover, in government accounts depreciation is not considered an expense. (For elaboration, see IMF 1986, pp. 250-52). The overall balance is the difference between the aggregate revenue and total expenditure. Two basic measures of the budget balance for Singapore are shown in Table 5.12. The data show that the government has had a surplus in its budget since 1968. The largest overall budget surplus was in the recession year of 1985-86. The government borrowing noted earlier is therefore not for financing expenditure but for other purposes, such as allowing various public and private institutions to meet their statutory obligations. The existence of an overall budget surplus also suggests that since 1968 there has been no need to use the CPF funds to finance government expenditure, including loans given for housing. Thus, the importance of the CPF scheme as it relates to housing does not lie in the use ofCPFfunds for housing construction. There are, however, two significant ways in which the CPF scheme and housing are connected. The first is that the forced saving nature of the CPF scheme transfers control over the CPF funds to the government. Since property ownership is a major social and political objective of the government, the CPF

Fiscal System and Prartices in Singapore

169

funds have been allowed to be used for housing from the demand side. Secondly, the mandatory nature of the CPF scheme has made possible a drastic reduction in the delay and default on housing payments. This in turn has reduced housing costs. TABLE 5.12 Singapore: Measures of Budget Balance, 1966 to 1986-87 (InS$ million)

Fiscal Year beginning

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986'

a

h

'

Current Account Balance"

Overall Budget Balance,

Amount$

%GDP

Amount$

%GDP

131.2 141.2 266.4 365.5 450.5 579.1 641.4 1,002.5 1,156.9 1,505.4 1,336.8 1,452.7 1,518.8 2,011.8 2,888.5 4,120.5 5,395.1 5,920.7 5,629.3 6,577.4 6,230.1

3.94 3.77 6.17 7.28 7.76 8.49 7.86 9.82 9.22 11.26 9.17 9.10 8.56 9.84 11.89 14.36 16.97 16.74 14.06 17.07 17.69

-72.0 -40.5 59.0 141.4 122.7 146.8 39.6 40.9 248.2 226.0 143.0 203.6 115.3 383.7 443.6 846.2 1,404.0 994.5 2,565.3 2,952.3 387.5

-2.16 -1.08 1.37 2.82 2.11 2.15 0.49 0.40 1.98 1.69 0.98 1.27 0.65 1.88 1.83 2.95 4.42 2.81 6.41 7.66 1.11

Defined as the difference between current receipts and current expenditure. However, all receipts are regarded as "current" in estimating this measure. Defined as the difference between aggregate receipt or revenue and aggregate expenditure. The expenditure is on a net basis. Based on revised estimates.

SOURCE: Author's estimates.

170

Mukul G. Asher

Another implication of the data in Table 5.12 concerns the structure of saving in Singapore. If the current surplus of the major statutory boards is added to the current surplus of the general government sector, the result approximates public sector saving. According to Krause eta!. (1987, p. 84), the share of public sector saving in Gross National Saving (GNS) and Gross Domestic Saving (GDS) was 45.6 and 42.4 per cent respectively for the 1974-85 period. Moreover, these shares have been increasing, reaching 69.3 and 70.1 per cent respectively in 1985. A substantial proportion of private saving, that is, GNS minus public sector saving, was in the form ofCPF saving. For the 197485 period, 45.8 per cent of total private saving was in the form of CPF. This proportion has also been increasing, reaching 84.8 per cent in 1985 (Krause et al. 1987, p. 84). Since such a large proportion of the saving in Singapore is in the form of public sector and compulsory saving, the scope for voluntary saving is limited. This suggests that taxes are unlikely to have significant effects on the level of saving in Singapore. A high level of public sector saving, especially as they far exceed public investment,:11 ; raises two questions which policy-makers will need to address. The first is, should pricing policies of statutory boards, user charges, and tax levels be adjusted to bring the level of public sector saving more in line with public sector investment? Subjecting statutory boards to income taxation will not reduce public sector saving in the absence of compensatory changes in the total receipts or expenditure of the public sector. The second question is whether such overwhelming control over the nation's savings is consistent with the desire to reduce the role of the state, and with the aim of developing local entrepreneurship.

Probable Economic Effects These effects may be divided into three areas. The first concerns resource allocation, incentives and growth. The other two areas concern equity and stabilization. Before analysing these effects, the main characteristics of the Singapore economy should be noted. ~ 7 Among the relevant characteristics are the predominance of foreign investment, especially in manufacturing; 3H the relatively small domestic market requiring business operations to be internationally competitive; and the ability to provide the social and political environment as well as infrastructure necessary for efficient operations. Compared to the other newly industrializing countries (NIEs), Singapore's economy is much more dominated by foreign companies and large public enterprises. Singapore has also stressed the need to attract and retain professional manpower. Resource Allocation, Incentives and Growth Elements of the fiscal system which are needed to promote efficiency in resource allocation, provide incentives and encourage growth flow from the characteristics of the Singapore economy noted above. The first is that weaknesses in the formulation and execution of fiscal policy are likely to affect the economy fairly quickly. Therefore, a high degree of accountability, control

Fiscal System and Practices in Singapore

171

and efficiency with regards to budgetary tasks, whether they are on the revenue or on the expenditure side are required. At the same time, given Singapore's exposure to global developments, a high degree of flexibility is also necessary. During the period under consideration, the Singapore Government has exhibited very high standards of public administration. In recent years, the government has also been attempting to institutionalize efliciency norms; and has moved towards greater public accountability of statutory boards. Recent revisions of the budget format, providing greater information on the financial policies of the government, and on inputs and outputs for various government programmes should be regarded in this light. However, as noted, the adoption of the cash and opportunity cost basis for budgetary allocations and the block vote allocation system, if not appropriately handled could reduce parliamentary control and public accountability. The government has not allowed the monopoly position of various statutory boards, such as the port authority and the utilities, to impede technological upgrading and international competitiveness. The pricing policies have taken these requirements into account as well. Indeed, as the Report of the Economic Committee (1986) noted, there is a need to be constantly vigilant to ensure that the monopoly power of the statutory boards is not used to generate revenue without adequate consideration for the overall cost of doing business in Singapore. ~Whenever the need has arisen, for example, during the 1985 recession, the government has also not hesitated to be quite flexible in its fiscal policies. Thus, a reduction in the CPF rate in 1985 represented a reversal of a long-standing policy. Generally satisfactory performance concerning the formulation and execution of fiscal policy has meant that the overall credibility of the fiscal system and administration has remained high. This has allowed the government to take various necessary measures to promote efficient allocation of resources and economic growth. Moreover, a high degree of credibility on economic issues, combined with budgetary surpluses, has encouraged foreign investment, contributing to economic growth. The second essential element consists of providing enough incentives for the local and foreign work-force, especially the professional categories, not only to continue working in Singapore but also to improve the quality oftheir work. As far as fiscal aspects are concerned, as described earlier, the tax system has been structured such that marginal tax rates are low, and the system is not an obstacle to the accumulation of wealth. On the expenditure side, considerable attention has been given to human resource development. Both formal institutional instruction, and training for those currently employed have been emphasized. However, some concern has been expressed whether access to education, especially at the tertiary level, needs to be increased (Singapore Parliament, SecondReportoftheEstimates Committee, Part I ofl988, p. 4). The Report noted that only one out of two applicants to the National University of Singapore was admitted in 1987. The admission rates are governed by projected manpower requirements rather than by demand for tertiary education.

172

Mukul G Asher

The manpower pn~jection oriented education policy has helped in avoiding the problem of educated unemployed. However, this policy has also contributed to the situation where the proportion of the work-force with tertiary education is lower in Singapore than in its major competitors and trading partners.:\\) The increased expectations and demand for higher education by Singaporeans, however, do require a response from the government. The manner in which issues relating to access and financing ofhigher education and training are tackled by the government could be expected to affect incentives of the workers to improve productivity and continue working in Singapore. While no official data are available, emigration from Singapore appears to be increasing (Business Times [Singapore], 8 December 1988). While tax aspects are not believed to be important in explaining this trend, the availability of social insurance schemes in countries of emigration could be a factor, especially for the above 45 age group. The third essential element concerns the need to provide a fiscal environment which promotes high levels of saving and investment. In addition to various measures noted above, additional measures have also been used. The government has used its budgetary resources to provide excellent infrastructure, such as in transportation and utilities. The government has also not hesitated, as in the case of the financial sector, to use fiscal incentives to make certain activities internationally competitive. As noted earlier, fiscal incentives appear to be well targetted, designed, and administered. Their continued use reflects the government's confidence in selecting activities vital for Singapore's future growth. Fiscal incentives appear to have been utilized primarily by foreign firms. The local, especially small and medium enterprises, because of their inability to meet stipulated criteria, have not been able to fully utilize these incentives. If less reliance on foreign firms is considered necessary for the quality of future economic growth, incentive packages specifically tailored for local small and medium firms may have to be designed. The fiscal environment has also been conducive to a high level of saving. This has been made possible not only through large public sector surpluses, but also through compulsory saving, such as the CPF scheme; and by providing tax incentives for specific forms of saving, such as saving deposits in the Post Office Savings Bank. Equity Effects Along with efficiency, equity and perceptions about equity remain the main preoccupation of the public finance economists. However, what constitutes equity is subject to a wide variety of interpretations. One of the reasons for this may lie in differing cultural characteristics; while the traditional analysis of equity issue is undertaken assuming an individualistic mode, in Singapore any conflict between individual and group welfare is usually settled in favour ofthe latter. Since primacy of group welfare is widely accepted, what may be regarded as inequitable under an individualistic mode need not be so regarded in the case of Singapore.

Fisral System and Pmctires in Singajmre

173

With regard to taxes, two aspects ofequityare emphasized in the conventional literature. These are vertical equity, that is, treatment of those who are unequal for tax purposes; and horizontal equity, that is, tax treatment of equals. Traditional incidence studies address the vertical equity aspects. The concepts of vertical and horizontal equity, although not much emphasized, are also relevant for analysing government expenditure incidence. The definition of equals and unequals is, however, much more complex as many other factors besides income need to be considered. As is well known, empirical studies of fiscal incidence suffer from many conceptual, methodological, and data related problems. For Singapore, no attempt has been made to analyse incidence of government expenditure. Two attempts, however, have been made to analyse tax incidence. Booth ( 1980) used the 1972-73 household expenditure survey to analyse tax incidence. She found the incidence of the tax system to be almost uniformly progressive over all income ranges. The overall tax burden of the three lowest expenditure groups was found to be less than half of the highest expenditure group. Tobacco excises were found to be the most regressive single tax. Booth's results were not subjected to a sensitivity analysis. Long (1987-88) has attempted to up-date Booth's study by using data from the 1982-83 household expenditure survey. Long has also subjected her results to sensitivity analysis. Long used three sets of incidence assumptions. Her assumptions under the first set coincide with those made by Booth. Long, however, found a U-shaped pattern of incidence in contrast to almost uniform progressivityfound by Booth. Long attributes this difference in findings to the increasing proportion oflow income individuals being subjected to income tax, and the introduction of the Skills Development Fund levy (Long 1987-88, p. 37). Long also demonstrates that the incidence results, though not the overall finding of a U-shaped pattern, are quite sensitive to the incidence assumptions, especially for company tax and property tax. While in set 1, both these taxes are assumed to be borne by owners of capital, in set 2, a certain proportion of these taxes is assumed to be shifted to the consumer in the case of company tax. For property tax, the portion paid by the Housing and Development Board (HDB) is assumed to be shifted to the flat dwellers; and the portion falling on commercial property is assumed to be shifted forward to output prices. In set 2, different incidence assumptions are also made concerning the personal income tax, payroll taxes, and stamp duties. The only change in assumptions made in set 3 is in the allocation of company income tax. All of this tax paid by resident companies is assumed to be shifted to domestic consumers. The main effect of the sensitivity analysis is to narrow the differences between the lowest and the highest expenditure group substantially. Thus, under set 1 assumption, the tax burden on the lowest expenditure group is 18.1 per cent, and on the highest 33.7. Under set 2 and set 3 assumptions the corresponding burdens are 21.4 and 34.8, and 26.2 and 33.9. In all cases, the U-shaped pattern prevails.

174

Mukul G. Asher

Long also argues that various changes in taxes since 1982-83 are likely to have made the tax system less progressive ( 1987-88, pp. 65-69). Exclusion of certain types of income, such as capital gains from the definition of income used by both Long and Booth is also expected to have a similar effect. Indeed, the lack of an appropriate measure of individual income is the most important data constraint in Singapore. Horizontal equity requires tax units that have the same ability to pay equal taxes. As noted, the use of tax expenditures has been increasing in Singapore. As a result effective individual and company income tax rates differ substantially for identical taxpaying units. If the family is taken as a unit of taxation, then income splitting allowed under the income tax provisions, also violates horizontal equity. While not all violations of horizontal equity are indefensible, there may be some, such as enhanced child relief for qualified women, which are difficult to justifY on equity grounds. While the incidence analysis usually focuses on the tax aspects, it is the net incidence, that is, net effects of expenditure benefits and tax burden, which may be of greater interest. While no detailed studies exist, there appears to be less overall inequality in the provision ofbasic amenities such as housing, education, transportation and sanita1y services. As a result, expenditure incidence is expected to be regressive, that is, pro-poor. As concern shifts from absolute to relative poverty, equity perceptions concerning expenditure on ed1 1cation, health, and old age income maintenance can also be expected to undergo a change. These changing perceptions would have to be taken into account in future expenditure policies. Stabilizati on The main focus of stabilization policies has been on keeping Singapore's products internationally competitive, holding both domestic and imported inflation down, and sustaining investor confidence through budgetary surpluses, accumulation oflarge reserves, and strong currency. This focus has necessitated the use of monetary, exchange rate, and wage policies in addition to traditional fiscal policy tools. 40 In pursuing fiscal policies the effects on both aggregate demand and on the cost aspects need to be considered. 41 As noted (see footnote 2), macro-economic performance of the Singapore economy for the 1966-88 period as a whole can be considered quite satisfactory. However, there have been instances when fiscal policy aspects could have been handled better. During the years 1975 and 1976, the government had successfully used expenditure on construction as an anti-cyclical measure (Krause 1987, p. 148). However, beginning with 1980, public sector construction began to expand rapidly. This expansion occurred at a time when growth in private sector construction activity, unlike during 1975 and 1976, was also strong. After five years of strong growth, the government suddenly reduced expenditure on construction substantially. This is reflected in the aggregate expenditure to GDP ratio falling from 31.2 in 1983-84 to 24.4 in 1984-85 (see Table 5.1). In retrospect, while high growth in public construction expenditure did help maintain growth rates between 1980 and 1984, over-reliance on this sector also

Fiscal System and Practices in Singaj)()Te

175

brought about sectoral imbalances and made the 19H5 recession perhaps more sudden and severe. It also appears that during the 19H0-84 period, not only was there a sharp increase in construction expenditure by the government, but the government also contributed to increases in the cost of doing business in Singapore through raising charges by statutory boards, higher taxes such as the SDFlevywhich largely fell on relatively less competitive sectors, and by increasing compulsory contributions to the CPF. Thus, not enough attention was paid to cost competitiveness and to ensuring co-ordination among various policies. However, swift actions taken to reverse the loss of international competitiveness, 1 ~ along with favourable ext~rnal bctors such as the sharp appreciation of the yen, have meant that the recession of 1985 was short-lived. At the macro-economic level, the CPF scheme has acted as a contractionary force from the aggregate demand side. However, it is probable that allowing withdrawals for residential properties may have contributed to inflation in the construction sector in general and in residential properties in particular. There is a particular need to ensure that such inflation does not occur in the health care sector due to the Medisave scheme. This is because in the event such sectoral inflation does occur, the government's objective of making individuals responsible for their health care, especially in old age will be adversely affected. Severe sectoral inf1ation in health care will also increase demands for the introduction of some form of social health insurance.

Concluding Observations The analysis in this paper suggests that Singapore's fiscal system may be characterized as interventionist, financially extremely conservative, and f1exible. The interventionist tendencies are indicated by the use oftlscal policy instruments to achieve a wide variety of objectives, ranging from int1uencing the level and composition of saving and investment, provision of social security and health care, and pursuing selective pro-natal policies. As a result, neutrality and traditional equity concerns have not been the major objectives of the fiscal policy. The important economic role of public enterprises, and the distinct possibility that the current privatization policies will not alter significantly the public-private mix in the economy, together with the continued and even increasing use of fiscal policy instruments to achieve a wide variety of objectives suggest that little change in the interventionist nature of the fiscal system can be expected. An extreme degree of financial conservatism is indicated not only by the system of government budgeting being used, but also by the persistent and often quite large budgetary surpluses. The flexibility of the fiscal system is indicated by the willingness to undertake swift measures to tackle the l9H5 recession. Some of the fiscal measures, such as lowering the CPF contribution rate, represented a reversal oflong-standing policies. An important aspect of Singapore's fiscal system has been the manner of providing for social security and health care, that is, the CPF scheme. While the scheme does involve upside-down subsidy due to the tax-exempt nature of the

176

Mukul G. Asher

contributions to the scheme, there has so far been an absence of the principle of social insurance. Whether the CPF scheme will continue to be regarded as providing an adequate level of social security and health care for all individuals or whether supplementary fiscal measures would come to be regarded as necessary will be a mH

46.59

6.09

41.32

!i.40

1970

12.H9

l.(i2

!i0.47

6.:H

36.64

4.60

1971

13.94

1.69

!i3.44

6.46

32.(i2

3.94

1972

12.43

l.!i6

!i!i.02

6.:n

31."i!i

3.65

1973

13.36

l.!i I

!i4.13

6.11

32.!il

3.67

1974

13.46

!.HO

49.67

6.64

36.79

4.92

I4.20

6.HO

2H.6:1

3.60

197H

19.60

2.!i2

!i2.HO

6.7H

27.60

3.!i4

1979

19.16

2.!i4

.~3.27

7.0!i

27.!i7

3.6:'>

l'JHO

19.0H

2.46

!i!i.lO

7.12

2!i.H2

3.33

19Hl

23.03

2.H6

!13.23

6.H3

24.49

3.14

19H2

23.H2

2.97

!i!'i.:B

6.90

20.H!'i

2.60

19H3

23.59

3.02

!i4.67

7.63

23.74

3.31

19H4

2:1.3:'>

3.21

53.49

7.%

23.16

3.1H

19H!'i

24.31

3.33

!13.74

7.6H

21.9!1

3.14

19H6

22.!i.~

3.16

.~6.76

7.96

20.69

2.90

19H7

19.H3

3.01

.~7.93

H.79

22.24

3.3H

SOURCES: Calculated fi·om Bank of Thailand, Annualf,'nmomir Rl'jHJrl, various years; and Bank of Thailand, (luarterly ,,·mnomir llulll'lin, various issues.

194

Piboon l~irnjJmjml and Pongjmnu Svelarundm

In recent years, Thailand has obtained between 20 and 25 per cent of its tax revenue from income taxes. Its shat·e started from a low base of about 10 per cent but expanded very rapidly throughout the 1970s to surpass the share of international trade taxes in 19H4. However, by 19H7, the share of income tax once again became less than that of trade taxes. A breakdown of income tax indicates that corporate income tax rose sharply during the 1970s. This t·eflected the relative ease of administration of this tax and the rapid growth in industrial activity between 1973 and 1981. But in recent years the relative importance of corporate income tax has slowed substantially while personal income tax has become more important (see Table 6.4). Taxes on domestic consumption, which consist of business and excise taxes, are the most important source of tax revenue in Thailand, accounting for more than half of the total tax revenue. Business tax, which is a broad-based general sales tax at the manufacturing-importer level, has in recent years become somewhat less important compared to excise taxes. This is the reverse of the situation existing till 1978, in spite of the fact that at present, excise taxes are collected on a limited base of only nine commodities. These include petroleum products, tobacco, liquor, beer, soft drinks, and cement. If the present plans to expand the number ofcommodities subject to excise taxes materialize, revenue from this source will become even more important. While import duties have accounted for between 19 and 22 percent of total tax revenue, export duties have played only a secondary role, having produced less than 5 per centoftax revenue in the period 1980-85. The share contributed by international trade taxes has, however, been declining in recent years (see Table 6.4). This is due to the gradual removal of export duties to promote exports and duty exemptions and reductions granted to imports of industrial machinery and raw materials for investment promotion. In 1987, however, revenue from import duties as a proportion ofGDP increased substantially, to the level prevailing in the early 1970s.

Revenue Productivity Two measures of revenue productivity are income elasticity and buoyancy. The income elasticity of a tax measures the automatic response of the tax to changes in income. This requires removing the revenue effects of discretionary changes in the tax rates and base from the historical revenue series. The proportional adjustment method has been used to estimate the income elasticity. (See Chapter 1 in this volume for an explanation of this method.) No adjustment to time series concerning the revenue is made when estimating buoyancy. The discussion here focuses largely on income elasticity estimates. As shown in Table 6.5, the elasticity ofthe overall revenue system is only about 0.98, which implies that revenue has grown slower than economic activity as measured by the GDP. The government, therefore, has had to introduce many revenue raising measures in order to increase the revenue to GDP ratio. Despite these attempts, as noted, this ratio is still below the target for the fifth plan. As may be noted from Table 6.5, personal income tax seems to be the only tax that has an elasticity significantly above unity. Other taxes with high

195

Fisml Systern and Prru:tims in Thailand

TABLE 6.4 Central Govemment of Thailand: A Breakdown of Selected Broad Categories of Taxes, 1966-87

Income Taxes Calendar Year

Personal Income Tax

% of Income Taxes

As% of GDP

---------

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

54.29 56.56 55.78 58.17 59.00 59.73 60.80 53.92 42.85 42.85 45.00 44.61 45.32 44.34 43.60 40.19 48.45 52.64 54.05 56.34 55.28 52.13

0.62 0.75 0.80 0.88 0.90 0.95 0.93 0.81 0.79 0.93 0.91 0.95 1.12 1.14 1.10 1.16 1.40 1.60 1.72 1.88 1.75 1.57

Corporate Income Tax

% oflncorne Taxes

As% of GDP

------

45.71 43.44 44.22 41.83 41.00 40.27 39.20 46.08 57.15 57.15 55.00 55.39 54.68 55.60 56.94 59.81 51.55 47.36 45.95 43.66 44.72 47.87

0.66 0.63 0.70 0.70 0_72 0.74 0.63 0.70 1.01 1.21

l.lO 1.21 1.40 1.40 1.36 1.70 1.53 1.42 1.49 1.46 1.41 1.44

196

Piboort l>imfJrrtjml flnd Pon,L,rjmnu Swlrmmdm

TABLE 6.4 (continued) -- -

--

-

--

--

Domestic Consumption Taxes (DCT) Business Tax

Excise Taxes

Others·'

As 'i{, (as % of DCT) of CDP

As% (as% ofDCT) ofGDP

As% (as% of DCT) of GDP

Calendar Year

--

---

---

-

--

-

-

-

1966

43.99

2.47

30.63

1.72

25.3H

1.43

1967

45.09

2.69

32.12

1.92

1.36

196H

44.:~H

2.70

1.9H

1969

4353 42.9:1

2.65

32.56 34.35

22.79 23.()()

2.09

22.12

1.35

2.72

35.40

2.24

21.!17

1.37

1970

1.40

1971

42.HO

2.76

36.2H

2.34

20.92

1.35

1972

41.40

2.64

37.09

2.36

21.46

1.37

1973

42.3H

2.5H

37.00

2.26

20.fi2

1.26

1974

41.50

2.70

37.37

2.4H

21.0H

1.40

1970

42.90

36.4

2.49

17.46

1.09

1976

43.16

2.70 2.76

40.2H

2.0H

16.56

1.06 1.26

1977

42.99

2.93

3HS~

2.62

IH.4H

197H

42.H2 3H.73

2.H9

37.H6

256

19.32

1.31

41.47 43.71

2.92 3.11

19.HO

1.40

46.11

3.10

IH.62 13.H2

0.95 0.90

1979 19HO 19HI

37.69

2.73 2.6H

40.07

2.74

19H2

3H57

2.66

4H.45

3.34

12.9H

19H3

36.42

2.7H

44.76

3.40

IH.H2

1.44

19H4

41.42

3.04

46.94

3.40

11.64

O.H5

1.32

19H0

37.H5

2.79

4H.36

357

13.79

19H6

32.111

2.56

02.94

4.21

14.90

1.02 1.19

19H7

32.2H

2.H4

03.13

4.67

14.59

1.2H

Fisml Systnn and Pml'lirl's in Thailand

197

TABLE 6.4 (continued)

International Trade Taxes (!TT) Calendar Year

Import Duties

(as % of !TT)

1966 1967 196H 1969 1970 1971 1972 197:1 1974 1975 197() 1977 197H 1979 19HO 19Hl 19H2 19H3 19H4 19H5 19H6 19H7

71.9H 76.46 71).0:1 7H.:I2 H6.44 92.74 9:1.25 H6.97 62.!JH H5.60 H7.47 HH.09 HH.31 H5.13 H5.!J I HH.t)2 9l.H4 91.45 94.1 () 96.60 97.47 96.H5

Export Duties

As% of GDP

(as% of !TT)

:1.45 :1.95 4.26 4.2:1 :1.9H 3.66 3.41 3.19 :I.OH 2.H7 2.Hl 3.17 3.12 :1.11 2.H4 2.79 2.:19 :1.0:1 2.99 2.91 2.H3 :1.27

2H.02 2:1.54 2:1.97 21.6H I :1.56 7.26 6.75 13.03 37.42 14.40 12.5:1 11.91 !!HI 14.H7 14.49 l1.3H H.lfi H.!J5 5. 90 :1.40 253 3.15

As% of GDP

1.:14 1.22 1.:14 1.17 0.62 0.2H 0.24 0.4H l.H4 0.4H 0.40 0.43 0.42 0 ..">4 0.49 0.35 0.21 0.2H 0.19 0. I 0 0.07 0. I I

Notes: ·' Consists of liscal monopolies, royalties, licences and fees, and other minor taxes.

SOURCES:

Calculated from Bank of Thailand, Annual/~'nmornir HPjmrl, various years; and Bank of Thailand, q_uarterly 1\nmomir Uulll'lin, various issues.

19R

PiliOon Jjmftmjml and Pon,1.,rjmnu Svl!lttrunrlm

TABLE 6.5 Central Govemment of Thailand: Elasticity Estimate for Various Taxes Elasticity" Personal Income Tax

1.86Sl

Corporate Income Tax

0.8676

Business Tax

0.8730

Excise Taxes Petroleum Tobacco Liquor Beer Soft Drinks

1.4078 0.6048 0.9917 1.2801 1.2835

Import Duties

0.8032

Export Duties

0.8032

Overall Tax System

0.9805

Represents average elasticity for the 1974-83 period. For techniques used, see the text. SOURCE: Fiscal Policy Office, Ministry of Finance, 19H4.

elasticity include certain excise taxes such as on petroleum, beer and soft drinks. However, these taxes together constitute less than 25 per cent of total tax revenue and, therefore, cannot overcome the low elasticities of most other taxes. By decomposing tax elasticity into an elasticity with respect to its tax base and base to GDP, it may be possible to analyse whether low elasticities are due to low tax to base or base to GDP elasticities or both. From Table 6.6, taxes with low elasticities with respect to their corresponding bases are identified as corporate income tax, business tax, non-oil import duties, tobacco and liquor excise taxes. These figures imply some weaknesses in the revenue structure. Some taxes, such as certain excise taxes, are still collected on a specific basis and are not responsive to prices changes. Taxation has frequently been used as a policy tool to meet numerous specific policy objectives, for example, investment promotion, development of capital markets, and so forth. As a result, the tax system is full of loopholes which have contributed to low tax to base elasticity.

199

Fisml SysLem and Practices in Thailand

TABLE 6.6 Central Govemment of Thailand: Decomposition of Tax Elasticities" Tax to Base

Base to GDP

1.5107 2.7901

1.0514 1.1262

0.7746

1.1201

Value of imports Value of exports Consumption

0.7279 0.5816 0.8358

1.0879 1.0907 1.1063

Oil imports Non-oil imports

0.5254 0.6245

1.8630 1.0112

Rubber exports Rice exports

1.0769 0.9917

0.7054 0.9325

Energy consumption Tobacco consumption Alcoholic consumption Alcoholic consumption Soft drinks consumption

0.8271 0.8062 0.8739 1.1283 1.3335

0.4967 0.7500 1.1349 1.1349 0.9626

Base Personal Income Tax Non-interest Interest

Compensation to employees Time deposits

Cor·porate Income Tax Corporate profits

Business Tax Imports Exports Domestic

Import Duties Oil Non-Oil

Export Duties Rubber Rice

Excise Taxes Petroleum Tobacco Liquor Beer Soft drinks

" See footnote a, Table 6.5. SOURCE: Fiscal Policy Office, Ministry of Finance, 1984.

200

Pihoon Umjnafml and Pongjmnu Svelnrundm

For corporate income tax, the low elasticity with respect to its tax base may he due to inefficiency in the administration and the audit system. A significant portion of the tax base is also eroded through exemption from income tax given to a large number· of state enterprises and tax incentives f(Jr investment promotion. For non-oil import duties, the low elasticity arises from the h1ct that various kinds of tax exemptions are granted to imported capital goods as well as to raw materials. In addition, large-scale tax evasion and smuggling have been contributory factors. It is, therefore, not surprising that government revenue cannot keep pace with economic expansion, resulting in a budget deficit in most years. The government has had to implement a combination of politically unpopular tax increases and expenditure restraint in recent years to preserve its fiscal position. Similar studies have confirmed the low and declining tax elasticity for the Thai tax system. Chomplern Chandruangpen (1984) has found that for the period 1961-79 the Thai tax system had an overall houyancyofahout 1.04. When the revenue series was cleaned of the etlects of government discretionary actions by a dummy variable method, the elasticity was also found to he essentially the same at 1.03. The fact that this figure is slightly higher than that of the Ministry of Finance's tax model may be attributed to diflerent time periods and methods used to adjust for the discretionary changes. Since Chomplern 's study covers an earlier and longer period of time, it could he that the tax elasticity is on the decline.

The Expenditure Structure Table 6. 7 provides a functional classification of government expenditures. Bef()re 1972, government expenditure on economic services was the most important item, its share in the total budgetary expenditure during 1966-72 being 28.83 per cent. From 1972 onwards, the expenditure on economic services was second to expenditure on social services; and after 1982, if unallocable items are ignored, it was third after both the expenditures on social services and defence. The growth rate of expenditure on economic services during the fifth national plan period was very low, at about 6 per cent per annum in nominal terms. If this trend continues, the expenditures on economic services and on general administration would be similar in size in the very near future. The declining role of expenditure on economic services is also indicated by the following. As shown in Table 6.8, the proportion of expenditure on economic services to GDP has been declining from 4.94 per cent during the second national plan period to only 3.17 during the fifth national plan period. It is, thus, quite clear that the government expenditure for direct promotion and strengthening of the economy, such as for infrastructure, has had a declining role. In promoting economic growth, the fiscal policy in the past was mainly designed to promote a high level of private investment. Therefore, most of the fiscal measures adopted to boost the economy were incentive schemes for

TABLE 6.7 Central Government of Thailand: Actual Expenditure by Functional Categories, 1966-87 (In million baht)

.......

...: ~

"'--,

::..

~

"'

~

':l

Economic Services

Social Services

Central Administration

Defence

Unallocable Items

;:,

Total

--."

Calendar Year

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 19Rl 1982 1983 1984 1985 1986 1987

;::

;:::.. .......

Amount

%of Total

4,155 5,528 5,157 6,129 7,324 7,265 7,048 6,660 6,750 11,413 15,289 15,169 17,012 17,093 22,804 26,218 27,902 28.194 28,573 30,015 29,928 :11,357

29.8 31.9 26.5 28.2 29.1 26.7 24.6 20.3 19.2 25.3 26.5 23.0 21.9 19.1 18.9 19.6 17.8 16.9 15.7 15.0 14.7 14.8

Amount 3,766 3,766 4,635 5,601 6,622 7,477 8,026 9,173 10,535 13,142 17,895 20,808 23,8:~1

27,703 35,474 37,586 47,940 48,620 !)5,419 !)8,724 60,156 63,421

%of Total 27.0 25.7 23.R 25.8 26.3 27.5 28.0 28.0 29.9 29.1 31.0 31.5 30.7 31.0 29.3 28.2 30.5 29.1 30.4 29.4 29.4 29.9

Amount 2,225 2,694 2,998 3,733 4,403 5,416 5,386 6,318 7,254 8,093 10,482 12,999 15,:~10

17,3% 24,398 25,917 31,35{) :{ 1,513 36,034 42,080 41,125 41,48!)

%of Total 15.9 15.5 15.4 17.2 175 19.9 18.8 19.3 20.6 17.9 18.2 19.7 19.8 19.4 20.2 19.4 20.0 18.9 19.8 21.3 20.1 19.6

Amount

%of Total

Amount

%of Total

2,694 2,752 3,028 3,149 3,554 3,838 4,200 4,459 5,437 6,662 7,432 7,693 9,526 12,429 17,705 19,424 18,134 25,622 24,304 26,360 2!l,761 26,9!6

19.3 15.9 15.5 14.5 14.1 14.1 14.7 13.6 15.4 14.7 12.9 I 1.6 12.3 13.9 14.6 14.6 11.5 15.3 13.3 1:{.2 12.6 12.7

l,l1R 1,909 3,666 :1,091 3,232 3,231 3,982 6,118 5,263 5,868 6,551 9,399 11,830 14,895 20/>92 24,299 31,691 33,139 :n,898 42,:H8 47509 48,730

R.O 11.0 18.8 14.2 12.9 11.9 13.9 18.7 14.9 13.0 11.4 14.2 15.?> 16.7 17.0 18.2 20.2 19.8 20.8 21.2 23.2 23.0

SOURCES: Calculated from Bank of Thailand, Annual Fronomir Rrporl, various w·ars; and Bank of Thailand, Quartrrlv

f~'mnomir

~

Amount 13,958 17,329 19,484 21,703 25,135 27,227 28,642 32,728 35,2:{9 45,178 57,649 66,068 77,509 89,456 120,973 133,444 157,017 167,088 182,228 200,027 204,279 211,988

Bullttin, various issues.

,.,~~

5

'"-'

;:::-' ;:,

-. ;:, ;::

;:::..

r-,:; 0

~

t,;

TABLE 6.8 Central Government of Thailand: Average Expenditure Under Various Plans, Selected Functional Categories (In million baht) Economic Services

Social Services

(Plan)

Average Amount

1967-71 (Second Plan)

% ofGDP

Average Amount

6,281

4.94

1972-76 (Third Plan)

9,432

3.64

1977-81 (Fourth Plan)

19,659

1982-85 (Fifth Plan)

28,672

Administration

Defence

Period

--

% ofGDP

Average Amount

% ofGDP

Average Amount

% ofGDP

5,756

4.50

3,849

2.99

3,264

2.57

11,754

4.54

7,506

2.94

5,638

2.21

::P

""'§c ......

..,.~3.44

29,080

5.06

19,192

3.31

13,355

2.25

..,.il i2.

§ 3.12

52,676

5.74

35,369

3.84

23,605

2.56

"'"t:

§

"a""'

§

"'

~

SOURCES: Calculated from Bank of Thailand, Annual ll'conomic Report, various years; and Bank ofThailand, QuartPTly h'r:onomir· Bulletin, various issues.

~

~;:l

"'-

il

Fiscal System and Pmrtires in Thailand

20~

increasing the revenue. However, this does not mean that government expenditure did not play any role in stimulating economic growth in the past. In fact, government expenditure played a significant role in the economic development of Thailand during the 1960s and 1970s. This is indicated by the m~jor proportion of government expenditure on economic services during the period, which went to the transportation and communications sector mainly for providing basic infrastructure. In addition to expenditure, the government also utilized external loans in financing its development eflorts. A major proportion of the external loans went to the energy and transportation and communication sectors. In the last decade the government spent a large proportion, about 40 per cent, of its economic budget for agricultural development, nearly 60 per cent of which went to improve the irrigation systems. It is the hope of the government that the improvement of the irrigation system can inn·ease the productivity of the agricultural sector. In brief, even though expenditure on economic services has been on a declining trend, the government still seems to be committed to a policy of promoting economic growth and the role of the private sector. This can be seen from the tax incentive schemes which are designed to promote the growth of the private sector. As mentioned earlier, government expenditure on social services has become the largest item since 1971, with a rate of growth of 16.14 per cent per annum during 1972-85. This was much higher than the growth rate of the expenditure on economic services during the same period. The government's concern for an improvement in the provision of basic needs, especially for the people who live in the rural areas, is especially evident in the fourth and fifth national economic and social development plans (see Table 6.8). The major items in the expenditure on social services are for education, the development of basic public health and the improvement of public utilities in the rural areas. Government expenditure on national defence in the past decade has received the most criticism from Thai academicians. This is due to the fact that both the growth rate of expenditure on defence and its proportion to total government expenditure have been increasing at a faster rate than other expenditures. The size of the expenditure was only slightly below half of the expenditure on economic services in 1967 (the first year of the second plan period), but since 1979, defence has accounted for a larger share than economic services (see Table 6.7). The criticism of excessive expenditure on defence revolves around the issue of it being unproductive, and as a m~jor contributor to the deficit in the balance of payments and to the external debt. As far as economic classification is concerned, only the distinction between current and capital expenditure is available. The growth rate of the former for the 1967-85 period has been 32.79 per cent per annum, while that of the latter has been only 12.21 per cent per annum. Considering the ratios of these two expenditures to GDP, they do not give a different picture from that obtained by just looking at their magnitudes and

204

Piboon Jjmjnnf!at and Pongtmnu Svelmunrlm

growth rate. The government's current expenditure to GDP ratio rose from 10.64 per cent in 1967 to 16.07 per cent in 19fl5 (but then declined to 14.79 per cent in 19fl7) while the capital expenditure to GDP ratio sank from 5.35 percent in 1967 to only 2.54 in 1987 (see Table 6.2). The growth of expenditure on wages, salaries and other compensations in the public sector and payment on public debt in the past were the major contributors to the growth of current expenditures. In limiting the excessive rate of growth ofwages and salaries in the public sector, the government has been setting a maximum rate of expansion of manpower in the public sector at 2 per cent annually since the fifth plan was implemented. 11owever, the measures used to limit the excessive growth rate of the public debt payment is still a grey area since the growth rate of government revenue lags behind the growth rate of government expenditure. Concerning capital expenditures, three observations may be made from the pattern observed in Table 6.2. First, the year-to-year fluctuations in the capital expenditures have been remarkably high, ranging from a high positive growth rate of 59 per cent in 1975, to a low negative growth rate at -13.7 and -1 H.H per cent in 1968 and 1974, respectively. Secondly, the capital expenditure to GDP ratio has been declining since l9HO, and this is likely to continue for the next two or three years. Thirdly, if the pattern of decline of capital expenditure continues, the economy must in future rely more on capital accumulation in the private sector. This implies that saving and investment undertaken by the private sector will have to increase substantially. Budgetary Balance and its Financing In this section, various measures ofbudget balance and the pattern oftinancing it are discussed. CurrentAr:count Balance. The current account balance is defined as the difference between the amount of total government revenue and current expenditure, usually called the saving of the general government sector. Table 6.9 shows the current account balance to GDP ratio for the period 1967 to 1985. This ratio, while positive, has decreased during each successive plan period. Since the economy's saving to GDP ratio has been increasing over time, it follows that the share ofgovernmentsector saving has also declined over time. In 1984 and 1985 the current account balance was negative. This was due to a combination of revenue shortfall and the inability to keep the current expenditure under control. The current account balance (while not shown) was also negative in 1986 and 1987, though by a smaller degree than was the case in 1985. CapitalAr:count Balance. The capital account balance is defined as the difference between the amount of government saving and its capital expenditure. This balance may be regarded as a saving-investment gap of the government sector and is equivalent to the overall budgetary balance. The capital account deficit to GDP ratio decreased on the average from 3.4 7 per cent during the second national plan period to 2.89 and 2.81 per cent respectively during the third and fourth national plan periods (see Table 6.1 0).

205

Fisml SysLPm and PmclicPs in Thailand

However, it increased again to 3.34 per cent during the fifth plan period. Different factors influenced the above ratio during various plan periods. A high growth rate of GDP and a lower rate of growth of tax revenue were the m~jor contributors to the relatively high capital account balance to GDP ratio during the second plan period. For the fifth national plan period, the major influence was the relatively high growth rate of current expenditure. However, for the third and fourth national plan periods, a significantly high growth rate of government revenue contributed to the relatively low ratio of the capital account balance to GDP. Because of the strong revenue growth in 1987 and 1988, the budgetary position has improved considerably.

TABLE 6.9 Central Govemment of Thailand: Current Account Balance FY 1967 to 1985 Fiscal Year

CAB (million)

%

1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

3,245 2,405 3,057 1,589 505 677 2,039 10,063 4,542 1,282 4,997 6,690 8,506 1,187 6,584 9,924 7,430 -6,238 -7,687

-25.9 27.1 -48.1 -68.2 34.1 201.2 393.5 -54.9 -71.8 289.8 33.9 27.1 289.8 454.7 50.7 -25.1 -183.9 -23.2

CAB/GDP Average ofCAB/GDP 2.97 2.06 2.38 1.17 0.31 0.41 0.94 3.71 1.53 0.38 1.27 1.42 1.53 1.27 0.84 1.17 0.81 -0.63 -0.73

for the period 1967-71 1.78

for the period 1972-76 1.39

for the period 1977-81 1.05

for the period 1982-85 0.16

Note: CAB= Current Account Balance SOURCES: Calculated from Bank ofThailand, A nnualEconomic Report, various years; and Bank of Thailand, Quarterly Economic Bulletin, various issues.

206

Piboon UmjJmjmt and Pongjmnu Svetnrundm

TABLE 6.10 Central Government of Thailand: Capital Account Balance, FY 1967 to 1985

Fiscal Year

CPAB (million)

%

1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

-2,552 -2,595 -3,407 -6,342 -7,872 -7,107 -5,778 -3,719 -5,607 -14,128 -12,004 -12,301 -10,784 -25,416 -21,601 -41,037 -23,652 -21,510 -39,375

1.7 3.1 86.1 24.1 -9.7 -18.7 -35.6 50.8 151.9 -15.0 2.5 12.3 135.7 -15.0 89.9 -42.4 9.07 83.05

CPAB/GDP

2.36 2.22 2.65 4.66 5.44 4.32 2.67 1.37 1.89 4.19 3.05 2.62 1.94 3.71 2.75 4.85 2.56 2.17 3.76

Average ofCPAB/GDP

for the period 1967-71 3.47

for the period 1972-76 2.89

for the period 1977-81 2.81 for the period 1982-85 3.34

Note: CPAB =Capital Account Balance SOURCES: Calculated from Bank ofThailand, A nnualEconomic Report, various years; and Bank of Thailand, Quarterly Economic Bulletin, various issues.

Overall Cash Deficit. This is defined as the sum of the budgetary balance and the non-budgetary balance. Because data for the non-budgetary balance based on the calendar year are not available, the analysis uses the fiscal year data. Table 6.11 shows that for the 1979-84 period, the size of the budgetary deficit was smaller than that of the cash deficit since there was also a deficit in the nonbudgetary account. It should be noted that in some years, such as 1979, 1981, 1982 and 1983 there was a relatively small surplus in the non-budgetary accounts.

~

TABLE 6.11 Central Government of Thailand: Overall Cash Deficit, FY 1979 to 1985 (In million baht)

~

~ \~

~

§

;::::_

Fiscal Year

Overall Budgetary Deficit (-)

Non-budgetary Deficit (-)

Total Cash Deficit

Borrowings

Use of the Treasury Cash Balance ( +)

1979

-11,235

l,IOH

-10,127

13,429

991.2

i

~· ~ ;;· '"""' ;:::-'

~

§ 19HO

-20,430

-1,3SO

-21, 7HO

17,SOO

-HI 0.4

19HI

-19,609

1,962

-17,647

14,6H2

146.3

19H2

-3H,359

11

-3H,34H

26,422

-53H.H

19H3

-2H,539

973

-27,Fi66

37,6H2

420 ..C)

19H4

-29,555

-5,336

-34,B91

30,000

3H\.3

19H5

-3B,437

3,94H

-34,4B9

4 7,000

n.a.

-\B6,164

1,321

IB4,H4H

IB6,715

590.1"

1979-B5

" I979-B4 period.

SOURCES: Calculated fi·om Bank ofThailancl, Annuallc"mnomir RrjJOrt, various years; and Bank ofThailand, Quartrrly lc'mnomir Bullt!lin, various issues.

;::::_

""'~

20H

Piboon JjmjJmjml and Pong'jmnu Svrtrmmdm

Fi nmzr:in[f ofthP BudgPl Drjicit. There are three major sources of financing of the government budgetary deficit, namely, a surplus in the non-budgetary account, borrowings, and the treasury cash account. Among the three sources of financing, boiTowings is the most important. The reasons for the decline in the use of the treasury cash balances to finance the deficit include the following: their use enlarges the monetary base and is therefore inflationary, and the balance in the account has now reached a critical level. Because foreign grants and loans are fiscal transactions outside the annual budget, they are included in the non-budgetary transactions. Therefore, government borrowings f(Jr financing the deficit comes from five domestic sources, 1 namely, the Bank of Thailand, the Government Savings Bank, commercial banks, other financial institutions and the general public. In the 1970s the government chose the easiest way, that is, it borrowed from the Bank ofThailand. This way oftinancing deficit is open to criticism because it enlarges the monetary base and thus stimulates inflationary pressures. Recently, however, the Bank of Thailand has become less significant as a source of government borrowings (see Table 6.12). Commercial banks have become the most important source since 1982, accounting for more than 40 per cent of the total borrowings. Another reliable sourceofgovernment borrowing is the Government Savings Bank, which contributes about 20 per cent of the borrowings. From 1980 onwards, the general public has also had an increasing role as a source of government borrowings. Its contribution in the 1970s was almost negligible. A transfer of the major source of borrowings from the Bank of Thailand to the commercial banks and the general public may create a problem of the so-called "crowding-out effect". This means that there is greater competition for the sources of finance between the private and public sectors. This might affect the rate of interest. However, the more competition there is, the more the interest payment is likely to reflect the n~al opportunity cost ofborrowings, provided the rate is not controlled.

Probable Economic Effects The discussion in this section concerns the effects of the Thai fiscal system on resource allocation and growth, economic stability, and income distribution. Resource Allocation and Growth Taxes can have a powerful influence on the way in which resources are allocated among industries. In Thailand, import tariffs have played a dominant role in the development of domestic industries. The present tariff structure, with its graduated tariff rates, tends to favour industrial activities producing finished consumer goods and discriminates against the production of capital and intermediate products. Various studies on effective protection rates (EPRs) have shown that they are highest for consumer goods industries, the lowest for capital and intermediate goods production, and even negative for exportoriented industries.~ If promotional privileges granted by the Board oflnvestmen t (BOI) are taken into account, the disparity in the EPRs is even larger. Thus, the pattern of resource allocation among industrial activities is distorted not only

TABLE 6.12 Central Govemment of Thailand: Domestic Borrowing, by Sources, FY 1979 to 1985 (In million baht)

._ ...:~

~

~ ~ ~

"'~

;::,

;::!

Fiscal Year

;::,..

...

~

~

Source

1979

1980

1981

1982

1983

1984

1985

~· ~

::;· ......,

l. Bank of Thailand

7,578 (56.43)

3,787 (21.64)

8,100 (55.17)

4,871 (18.44)

8,644 (22.94)

4,304 (14.35)

4,190 (8.92)

;::-'

~

;::, ;::!

;::,..

2. Commercial Banks

2,107 ( 15.69)

6,436 (36.78)

2,633 (17.93)

11,418 (43.21)

15,381 (40.82)

9,420 (31.40)

15,414 (32.80)

3. Other Financial1nstitutions

539 (4.01)

963 (5.50)

262 ( 1.78)

2,169 (8.21)

1,826 (4.85)

2,797 (9.32)

9,045 (19.25)

4. General Public

705 (5.25)

1,914 ( 10.94)

1,507 (10.26)

3,186 ( 12.06)

4,113 (10.92)

5,409 (18.03)

7,003 (14.90)

5. Government Savings Bank

2,500 (18.62)

4,400 (25.14)

2,180 (14.85)

4,593 (17.38)

7,500 (19.90)

7,900 (26.33)

11,200 (23.85)

185 (0.70)

218 (0.58)

170 (0.57)

148 (0.31)

6. Others

-

-

Note: -negligible. Figures in parentheses are percentages of total domestic borrowings. ~

SOURCES: Calculated from Bank ofThailand, A nnurzl J~'mnomir Rtf){)r/, various years; and Bank ofThailand, Quarlrrly Fmnomir BullPtin, various issues.

~

210

Piboon UmfJrajml and Ponp;jmnu Svrlarundm

by the tariff structure but also by the BOI incentives. The whole structure of industrial protection has resulted in a movement away from Thailand's comparative advantage. The business tax in Thailand is at the manufacturers' level and is applied to gross receipts. As a result, input taxation is not eliminated. Low or zero rates, however, are applied to capital goods and raw materials likely to be used in the manufacturing process. Even then, cascading effects are bound to occur, and specialization is discouraged. The business tax has also frequently been used as an instrumen tot' protection as evidenced by differences in tax rates on domestic and imported goods. In theory, the business tax should be as neutral as possible and the desired protection should be provided for by tariffs. This is the principal reason for the parliamentary approval in 1989 for the introduction of a value added tax (VAT) at the manufacturer-importer level at a rate of 10.0 per cent. Its implementation has, however been postponed to a date yet to be announced. The main reason appears to he that its implementation could result in a substantial increase in the price level, at least in the initial year. The excise taxes could also have an important impact on resource allocation. However, in the case of Thailand the extent of such effects is relatively less because they are collected from a small group of commodities. It should be noted that the government is planning to expand the excise tax base by transferring more commodities from the business tax to the excise category. In addition, as noted, the government is to introduce some form ofVAT to reduce or eliminate the cascading effects. Initially, the VAT is to be applied to three categories of commodities, namely, lighting products, petroleum products and cement. Moreover, a World Bank study ( 1984) showed that most shortcomings in central government expenditure were in operating and maintaining existing facilities, especially roads and the irrigation network, and there was a lack of adequate expenditure on non-wage inputs such as medical supplies and educational materials. The recent trend towards increased wage and debt service expenditure at the expense of non-wage and non-debt spending is, indeed, a matter of serious concern as not only capital expenditure but also other essential current expenditure are reduced as a result. The extent to which the revenue structure has contributed to economic growth is difficult to assess. But it is evident that import substituting industries have grown rapidly because of the relatively large domestic market. However, the domestic market alone cannot be depended upon to provide an impetus for self-sustaining growth. The emphasis has to be shifted towards export markets and backward linkages to processing activities at the intermediate stages, not only for industrial growth but also to improve the trade and current account balances. The government's promotion policy has played an important role in encouraging more investment in the private sector, especially since the 1967 enactment of the present Investment Promotion Act.:1 The incentives provided pertained mainly to tax, including reductions and exemptions in import duties on machinery and raw materials, corporate income tax holiday, and others. But while these incentives may have resulted in a higher growth in private investment, they also entailed serious distortions in the production structure.

Fisml System and Pmrtires in Thailand

211

The contribution of government expenditure to economic growth may be assessed by examining the role of public investment expenditure in the country's gross capital formation. Public investment expenditure may compete with the private demand for resources, resulting in higher costs to the private sector. On the other hand, government investment projects may be complementary to private sector activities, particularly in the case ofgovernrnent provided infrastructures such as dams and roads. Gross domestic investment in Thailand ranged between 20 and 28 per cent ofGDP during the period 1966-85 (see Table 6.13). This ratio may be regarded as rather low when compared to the countries at the same developmental level. Nevertheless, during the 1966-85 period, economic growth in Thailand has been high, that is, more than 7 per cent per annum. Annual growth rates of private and public investment fluctuated widely from year to year (see Table 6.13). During the first and second development plan periods (1961-66 and 1967-71), public investment expenditure grew very rapidly, with construction activities as the main sector which received most of the capital expenditure in the budget. This paved the way for an equally remarkable growth in private capital formation. At the same time the pattern of private investment was changing from agricultural-based sectors to more sophisticated industrial activities, particularly in import-substituting industries, such as automobile assembly, textiles and canned food. In the 1970s, however, the government policy began to shift towards a more passive role to allow for more investment in the private sector, as evidenced by greater promotional activities and the lower public investment to GDP ratio. As a result, the relationship between public and private investment in the third and fourth plan periods began to deviate from the pattern observed in the earlier periods. Between 1971-74 the public investment to GDP ratio declined by more than half (see Table 6.13). But realizing this shortfall, the government provided greater encouragement to the private sector in the form of fiscal incentives. Private investment did increase substantially between 1972 and 1974, though it is difficult to say what role fiscal incentives played in this increase. Public investment expenditure regained its previous momentum in the late 1970s, during which substantial resources were directed to the development of large-scale industries related to the discovery of natural gas. Private investment initially responded positively, at least up to 1979, and then started to decline, relative to GDP. This decline may be explained by adverse external factors such as oil price increases, but as pointed out by Ganjarerndee ( 1984), crowding out effects may have played a crucial role in this respect.

Stabilization The results from many previous studies (Siamwalla 1975, Loohawenchit 1982, Panitchapakdi 1983) confirm that the fiscal authorities in the past did not utilize government expenditure to any significant extent as a discretionary tool for stabilization purposes. 4 Thanapornpun ( 1984) also pointed out that government expenditure tended to be preventive rather than curative, which made the fiscal

Piboon Umjnajmt and Pont,rjmnu SvPtamndm

212

TABLE 6.13 Thailand: Private and Public Investments, 1966-87 Private Investment

Public Investment

Total Investment

% ofGDP

% ofGDP

% ofGDP

16.7 19.2 19.1 19.8 18.6 17.5 14.1 16.1 18.6 16.2 14.3 18.2 17.2 17.8 15.5 13.7 13.4 14.4 14.5 13.6 13.8 15.8

7.0 7.8 7.9 8.4 8.1 7.5 6.9 5.0 3.6 4.7 6.1 7.0 7.4 7.2 8.9 9.6 7.9 7.9 8.0 8.1 7.6 6.8

23.7 27.0 27.0 8.2 26.7 25.0 21.0 21.1 22.2 20.9 20.4 25.2 24.6 25.0 24.4 23.3 21.3 22.3 22.5 21.8 21.4 22.6

Calendar Year

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

SOURCES: Calculated from Bank ofThailand, Annual Economic Report, various years; and Bank of Thailand, Quarterly Economic Bulletin, various issues. system passive. Discretionary fiscal actions have been mainly concentrated on controlling the supply of agricultural products. Such actions included policies concerning rice premium, export and import duties and quantitative export restrictions. Government expenditure may be a better tool for stabilization purposes provided the government budget is well planned, so that the actual expenditure does not diverge much from the planned expenditure. In fact, only 80 per cent of the actual expenditure is disbursed from the budget appropriation of the corresponding fiscal year, and the remaining 20 per cent is disbursed from the budget appropriation of the previous years.

Fisml Systnn and Pmrtirrs in Thailand

213

Whether or not a fiscal system of a country is an effective instrument for stabilization purposes depends upon its structure. It is believed that a proper fiscal structure for stabilization purposes should exhibit the following characteristics. The fiscal system should exhibit high income elasticity and builtin flexibility in order to curb the short and medium-run price pressures. However, in Thailand, income elasticity of the overall tax revenue, as noted, is rather low, being only 0.98 (Table 6.5). This implies that the automatic response ofthe tax changes in income is small and often inadequate. A smaller elasticity of the overall tax revenue compared to that of overall expenditure (see Table 6.14) means, that during the expansionary period, an increment in tax revenue will be smaller than an increment in expenditure. This can sometimes stimulate further price pressures. Moreover, time lags in legislation and administration in the existing budgetary procedure make the discretionary fiscal measures quite ineffective for stabilization purposes in Thailand. The government must be able to control the magnitude and the direction of the fiscal policy measures. However, as noted in the Introduction, during the fifth national plan period, the actual government tax revenues have fallen short of the planned target.

TABLE 6.14 Central Govemment of Thailand: Income Elasticity' of Govemment Expenditure, 1966-85 The Government Expenditure on

Elasticity

1.

Economic Services

1.1175

2.

Social Services

0.7713

3.

Defence

0.8144

4.

Current Expenditure

1.1012

5.

Capital Expenditure

1.1201

6.

Total Expenditure

1.2628

" Estimated from the following equation Log G =a+ b log GDP where: G = government expenditure category GDP = gross domestic product SOURCES: Calculated from Bank ofThailand, Annual Economic Report, various years; and Bank of Thailand, Quarterly Economic Bulletin, various Issues.

214

Piboon JjmjHajHll and Pongpanu Svelarundra

On the expenditure side, even though the government has recently successfully curtailed and postponed many large national projects in order to reduce the size of the budget deficit, it still faces difficulties in controlling the level and direction of government expenditure. These difficulties arise firstly, because most government agents have been trying to keep the status quo and resist drastic changes in the budgetary direction. Secondly, the regularly committed budgetary expenditures, such as administrative expenditures and repayment of public debt, make up a large proportion of the total government expenditure. Moreover, the size of military expenditure cannot be reduced for political reasons. These factors provide little room for the government to channel expenditure in the desired directions. Because of the low elasticity of most taxes, they are quite ineffective as an automatic fiscal stabilizer. Most of the fiscal measures from the revenue side are, therefore, discretionary actions. These discretionary measures are mainly concerned with the changes of import and export duties, and excise taxes. It should be mentioned here that although their rates have been frequently revised, their main objective has been raising of revenue rather than stabilization. Inromf Distribution In Thailand, studies of the distributive impact of the fiscal system have been done mostlyforgovernmentrevenue (seeApiratanapimonchai 1975; Tearprasert 1975; Pahira 1978) ." Most of the studies confirm that the overall tax structure in Thailand varies from being mildly progressive to regressive. None of them confirm the role of the revenue system in significantly improving the income distribution of the Thai people. This is in spite of the fact that they employ different income definitions, tax coverages and incidence assumptions. The most recent study on th