An act providing a national stimulus strategy to restore economic growth and employment, appropriating funds therefor, and for other purposes

By Rep. Joey Sarte Salceda, Second District, Albay

Salceda to bail out to companies, help MSMEs with 53B in wage subsidy and bridge loans of up to Php100M each, and re-purpose Build Build Build towards healthcare and education upgrade.

The Philippine economy has been seriously disrupted by the global pandemic of the Coronavirus Disease 2019 (Covid-19) and the threat of a global recession is imminent. To combat this, it is necessary to take agile interventions to boost Gross Domestic Product (GDP) levels and support a positive GDP growth rate which will ultimately provide implications for future recovery.

Interventions must provide immediate relief to firms and individuals, reduce permanent damage to the economy, and maintain employment levels. Sustaining the critical components of our previous economic growth in this time of crisis will position the Philippines for a stronger recovery.

Transitional and structural interventions

This measure proposes transitional and structural interventions.

The transitional interventions aim at providing relief for firms and individuals through (a) ensuring the liquidity of firms; (b) reducing regulatory compliance costs while encouraging maintenance of the labor force; and (c) boosting aggregate demand at the household level to support firms through universal approaches for ease and speed of administration.

The structural interventions seek to reduce permanent structural damage caused by the Covid-19 crisis via (a) preventing widespread bankruptcies; (b) maintaining the employees of firms at a viable size; and (c) encouraging firms’ viability by empowering them to proceed with pre-Covid-19 expansion and productivity boosting plans.

This measure pursues a policy of full employment by boosting aggregate demand. It prefers spending to fiscal interventions that erode the tax base that will significantly affect the country’s ability to sustain growth. Between a tax cut and increased spending, spending should be preferred.

This bill will be the centerpiece of a whole-of-government, whole-of-nation approach to restore the country’s growth trajectory towards achieving high-income status.

A National Stimulus Strategy

Economic outlook

1. The economy is widely expected to contract, although there remains some possibility for slight growth. 

Economic outcomes will depend largely on the strength of government response to Covid-19. The more credibly government can bring down infection rates to manageable levels, the sooner the economy can cautiously operate.

2. Estimates suggest that the economy may grow by as much as 3% and contract by as much as 0.8%. 

3. The key driving forces to the resumption of growth will be the accessibility of testing, the availability of a vaccine, and the agility and strength of the stimulus response:

a)     While awaiting a vaccine, it is testing that would determine the gradual return to normal business operations and societal functions. We assume that the Philippines will make inroads starting May 2020.

b)  The discovery of a vaccine is the most critical determinant of recovery. We assume that a vaccine will be found later in 2021 and it would be implemented in 2022.

c)  Given Philippine fiscal, monetary and external balances, it is the agility and strength of the structural response that would shape the complexion and direction of Philippine socioeconomic prospects.

4. Because economic outcomes will be tied very closely to public health outcomes, the country’s and the world’s economic prospects will depend largely on the global effort to find a vaccine for Covid-19.

5. Sectors will have different levels of exposure to economic difficulty. Responses must be calibrated with due consideration to their specific characteristics, capital requirements, market complexion, and business structure.

6. Some structural adjustment programs that can be administered to help exposed businesses include negative interest loans (for liquidity and labor retention); a bail-out system to rescue companies that will fail without support but would have been profitable without the temporary conditions brought about by Covid-19; an enhancement of the country’s infrastructure program; and a Credit Mediation and Restructuring Service for those companies whose financial position have been severely affected by this unprecedented (and therefore, likely, financially unconsidered) crisis.

Fiscal position

7. Revenue effort typically suffers a 1.6-1.8-percentage-point reduction in the first year after a major economic crisis (equivalent to around P300 billion in lost potential revenue), and another 0.6 pp loss on the second year (around P120 billion). This can be mitigated as long as government maintains a position of spending support over tax cuts.

8. Philippine GDP in recent years has been around 3% higher than world average, with a margin of +/- 1 percent to account for local circumstances. A 1.3% GDP growth for the Philippines would be optimistic (and would require some stimulus), considering global growth prospect at -1.90% in 2020. 

Even without any additional spending, deficit to GDP for 2020 is likely to hit beyond 5.83%. 

9. Interventions can be structured such that one stage builds on the progress of the previous stage, and that one stage is not the prerequisite for the other. In most cases, these stages will have to coincide.

Key challenge

10. A key challenge, however, will be meeting the spending needs of the country without compromising its strong deficit-to-GDP and overall debt-to-GDP position. Maintaining our responses reasonably within a set framework for both will be critical to long-term growth.

11. Furthermore, revenue effort typically declines following economic shocks. Critical to our ability to pay for sound interventions will be our ability to arrest the potential fiscal bleeding.

a)   Revenue effort tends to go down drastically during economic crisis.

b)     Given the choice between spending measures and tax relief, spending is preferable. Spending can boost GDP and arrest the decline in revenue. Tax cuts are hard to rollback.

Potential interventions and financing

12. The following is an outline of possible interventions. Project costs may be adjusted upon the advice of the implementing agencies. (See page 25)

13. Below is a proposed schedule for rollout of additional spending or adjustments, taking into consideration deficit and financing issues. (See page 26)

14. Summarized, the following are likely scenarios for our macro-fiscal position. (See page 26)

Overview of structural adjustment programs

15. While the socioeconomic conditions of the country will require immediate transitional measures, the country’s medium to long-term prospects will require significant, creative, agile, and strong structural adjustment measures. This is to preserve employment and economic structure and put the country back on the path of sustained growth.

16. The fiscal implications of these proposed programs are:

a)     High initial cash outflow, but almost entirely recoverable over time.

b)   Primarily outright or convertible loans, which would address the issue of moral hazard.

c)     NEIC (National Emergency Investment Corporation) to assume obligations of firms that under normal circumstances would have been viable but underwent difficulty during the pandemic. This would make it a potential revenue earner under less difficult conditions.

d)     Debts assumed by NEIC and CRMS (spell out) can be counted as NG debt instead of being part of the year’s deficit.

e)     Government has the capacity to restructure private-sector obligations at an advantageous negotiating position with banks, as the government is a lower-risk borrower.

f)   Obligations will be contained in vehicles, which would allow the National Government to insulate the NG fiscal position from the programs’ obligations.

17. Being recoverable investments, these proposed structural programs take a small net fiscal cost compared to the overall fiscal space for other programs.

18. The net fiscal cost of the proposed structural measures (NIL, NEIC, CRMS) would only be P25 billion, or 1.7% of an estimated P1,456 billion in spending for 2020. 

Some P265 billion (or 88% of deficit spending) can still be allotted for other measures.

Proposed structural measures

19. Negative interest loans. Negative interest loans will incentivize companies to continue investing in their companies, with some costs shared with the government. The maximum loanable amount shall be fifty (50) percent of the company’s direct labor costs. The loan shall be payable in three to five years, with the corresponding interest rates as follows:

      Term               Interest rate

     3 years                   9%

     4 years                   7%

     5 years                   5%

20. In return for what are essentially subsidized loans, the government shall set labor retention as the primary conditionality.

21. To ensure that eligible micro, small, and medium enterprises (MSMEs) will have access to negative interest loans, LandBank and DBP shall open an MSME Safeguard Facility dedicated exclusively to these enterprises.

Help for MSMEs

22. Credit refinancing and mediation service. To ensure that MSMEs are able to fulfill obligations under more favorable terms of credit, the Philippine Guarantee Corporation (PGC) can provide an MSME Credit Mediation and Restructuring Service to:

a)     Assist MSMEs in negotiating more favorable credit terms with banks, lending institutions, and financial intermediaries; 

b)   Provide technical advice and assistance with credit mediation; and 

c)   Offer loans with favorable terms for refinancing the obligations of MSMEs.

23. National Emergency Investment Corporation (NEIC). We also propose a body similar to Power Sector Assets and Liabilities Management (PSALM) Corporation to minimize permanent damage to the economy by bailing out firms who would go bankrupt because of current Covid-19-driven difficulties, but which would otherwise be profitable under different conditions.

24. The NEIC shall have the following characteristics:

a)   Supervised by the Department of Finance (like GSIS and SSS);

b)     Fiscally comparable to Central Bank – Board of Liquidators or CB-BOL (P480bn Marcos bad loans of DBP-PNB) and PSALM (P1.2trn stranded costs and stranded debt); and 

c)     Perform as capital allocation firm of the government

25. The NEIC will perform the following functions:

a)   Consolidate troubled businesses and decide simultaneously how these would be resolved in a common procedure;

b)   Offer loans in exchange for equity of the same value in corporations that would otherwise have continued operations but are at risk of bankruptcy due to the impacts of Covid-19;

c)   Assume in exchange for equity of the same value the financial obligations of corporations that would otherwise have continued operations but are at risk of bankruptcy due to the impacts of Covid-19;

d)   Evaluate the performance and ensure good corporate governance in the corporations where it invested;

e)   Perform due diligence activities inherent in its nature as a capital allocation firm of the Government; and

f)   Perform such other functions as may be inherent or necessary to dispense of its role as a capital allocation firm from which reasonable returns are expected.

26. Upon fulfilling all assumed obligations, the NEIC may either be dissolved, or may perform an institutional function as the government’s bailout company for similar emergencies.

27. Parallel 1: Under the EPIRA, the PSALM Corporation assumed the obligations of the power sector and of electric cooperatives to the National Electrification Administration so that they can be financially viable and continue to provide rural electrification services. PSALM Corporation achieved this with considerable success, as shown below:

28. Parallel 2: The CB-BOL was created to insulate the new CB, the Bangko Sentral ng Pilipinas (BSP), from the bad assets and the obligations of the old central bank, which was much less independent and less prudently managed. 

The CB–BOL ensured that the BSP could run with a healthy balance sheet, while the NG serviced the CB–BOL obligations. 

NG servicing of CB–BOL debt were then owed by the CB-BOL to the NG. CB- BOL obligations were counted under the consolidated public sector financial position and not under the national government fiscal balance.

29. Theoretical framework without the NEIC (above, Figure 7).

30. Theoretical framework with the introduction of the NEIC (below, Figure 8).

31. A loan-based approach is mostly recoverable by the State. Further, loan-based interventions make deficit spending a loan from the future instead of being perpetually lost. These approaches are also essentially co-pay schemes that would incentivize the firm to invest wisely. A giveaway may distort the incentive to improve productivity.

32. Loan-based programs also reduce moral hazard as opposed to a total bailout and ensure liquidity and support going-concern when companies suffer losses. It is also preferable to tax cuts that will not be optimal for companies with very little, if any, income during the Covid-19 crisis.

33. Our preference for loan-based spending measures as opposed to tax relief measures come from the behaviorally-evidenced observation that tax cuts are difficult to withdraw politically and structurally once given. This may have negative implications on our long-term prospects. 

Proposed transitional measures

34. Wage subsidy. A payroll support program will be necessary to support MSMEs, that will face liquidity issues in the wake of the enhanced community quarantine (ECQ), as well as their workers who are at risk of being terminated if these MSMEs are unable to pay their wages and maintain operations. 

Apart from supporting business, the program will also provide relief to formal economy workers, entrepreneurs, and self-employed individuals, who typically belong to the middle class. Income support will also be necessary for freelancers and those in the gig economy who were unable to earn income due to the ECQ.

35. MSME employees, sole proprietorships, and freelance workers comprise 5.98 million individuals. MSMEs employ around 4.1 million formal economy workers while some 380,000 entrepreneurs are sole proprietorships, per BIR data. About 1.5 million Filipinos are freelancers, according to the 2018 Global Freelancer Insights Report. The average monthly minimum wage is around Php 9,500 per month. 

P53.8 billion wage subsidy

We propose a wage subsidy that covers around a quarter to a third of this amount. The cost of supporting their income, at P2,500 to P3.000 per month for two months, is P44.85 billion to P53.82 billion.

36. The proposed distribution mechanism for formal economy workers is via the Social Security System (SSS), assisted by the Bureau of Internal Revenue (BIR) and the Department of Labor and Employment (DOLE). 

For freelancers, we propose an open-application window similar to the Covid-19 Adjustment Measures Program (CAMP) of DOLE. We propose that there be a central, updatable database to avoid duplication. 

We also propose that the program be coupled with fee-and-charge-free registration with the SSS and the BIR for freelance workers to initiate their regularization into the formal economy.

37. MSME regularization. To ensure that MSMEs are able to avail of programs, and to broaden the tax base and encourage business practices that are compliant with the law, we propose that for a period of not more than eighteen (18) months, the Commissioner of Internal Revenue shall have the power to relax revenue regulations and waive applicable registration and similar fees on registration and renewal of small and medium enterprises. 

The Secretary of the DTI shall also have the power to relax rules and regulations governing the registration of small and medium enterprises.

38. Local Government Units (LGUs) shall be encouraged by the Department of Interior and Local Government (DILG) and the Bureau of Local Government Finance (BLGF) to waive similar local registration and processing fees. 

Negosyo Centers established under Republic Act No. 10644 shall coordinate with national and local government agencies to ensure the widest dissemination of information and benefits under the National MSME Regularization Program.

39. The regularization of MSMEs is crucial to the broad dispersal of economic assistance. The size of the Philippine informal economy is significantly above the regional average. Informality is especially more pronounced in the disadvantaged sectors.

40. If interventions are loan-based (and therefore formal), a program to introduce MSMEs to the formal economy with lower cost barriers will help benefits of interventions cascade down to disadvantaged sectors. Such an effort will also increase tax base and help recover Year 1 deficit spending.

41. Waiving of non-tax fees and charges. To reduce friction costs in doing business and barriers to regularization, we propose that all national government agencies shall waive non-tax and non-duty fees and charges on all MSMEs for a period of six (6) months

42. Temporary bridging loans. We also propose transitional credit, or “bridging loans.” Each borrowing enterprise or corporation, duly registered with the appropriate regulatory agency, may borrow not more than One Hundred Million Pesos (Php 100,000,000). 

The borrower shall pay only the interest for the first twelve (12) months of the loan, after which the principal and the interest shall be serviced for the remaining period of the loan tenor, which shall not exceed five (5) years. 

The loan shall be issued without collateral. Where applications exceed the funds available, priority shall be given to the aviation, tourism, transport, and hospitality sectors as defined jointly by the Department of Trade and Industry (DTI) and the National Economic and Development Authority (NEDA).

Non-Fiscal Reforms and Other Complementary Policies

43. Enhanced Build, Build, Build (BBB+). Prompt delivery of infrastructure projects. 

To enable the spillover effects of fully operational infrastructure sooner, the House of Representatives must consider passing some iteration of House Bill No. 5456, which grants the President special powers to expedite Build, Build, Build. This representation is prepared to recalibrate the bill to better suit the needs of the infrastructure agencies.

44. We also emphasize the need for more programs around:

a)     Health investments, especially for Universal Health Care;

b)     Infrastructure supportive of creative industries; and

c)     Infrastructure for Public Schools of the Future

45. Passage of the liberalization bills to infuse new capital to support industry. 

The Philippines will be among the few countries with positive growth potential in 2020, when global growth is expected to take considerable damage. Passing the amendments to the Retail Trade Liberalization Act (RTLA), the Public Service Act (PSA), and the Foreign Investment Act (FIA) will serve as a market signal that the Philippines is open for those looking for more favorable market conditions and growth prospects.

46. Immediate passage of the Corporate Income Tax and Incentives Rationalization Act (CITIRA). 

The House Committee on Ways and Means will continue to encourage its Senate counterparts to pass CITIRA, which has the potential to generate as much as 1.0 percent incremental GDP growth on its first year.  CITIRA will also be key to attracting enterprises seeking markets that perform better than global average.

47. Agricultural revitalization. 

Agricultural productivity remains extremely critical to holistic economic development for the Philippines. Congress must be prepared to employ its oversight powers to ensure that the executive delivers promptly on the programs under the Rice Competitiveness Enhancement Fund and the Rice Farmer Cash Transfers pursuant to Republic Act No. 11203 or the Rice Tariffication Law. Credit support, favorable policy environment and value-chain supporting programs will remain crucial to agricultural modernization.

P70 billion tax from POGOs and vehicles

48. Passage of non-growth-eroding tax measures to ensure that there is fiscal space for expansionary spending. Taxes on Philippine Offshore Gaming Operators (POGOs) and updating the motor vehicle users’ charge combined are estimated to have less than 0.1% impact on inflation. Being very targeted taxes that will impact only a small portion of the population, these tax measures will provide at least P70 billion in additional revenues for the government.

49. Approval of the Comprehensive Framework for Health Emergencies proposed under House Bill No. 6096.

Public health experts warn that Covid-19 will become a seasonal disease. The Comprehensive Framework for Health Emergencies proposed under House Bill No. 6096, which creates the Center for Disease Control and Prevention, will ensure that there is a clear, coordinated, and whole-of-government, whole-of-nation approach to dealing with sudden-onset health emergencies like Covid-19.

50. In conclusion: Interventions should provide immediate relief to firms and individuals, reduce permanent damage to the economy, and maintain employment levels. It is more difficult to expand an economy that has contracted, than to support an economy’s existing productive capacities for future growth. To protect our growth, we must keep our base.

In view of the foregoing, to ensure the future of the Filipino people and to sustain long-term economic prospects, in line with the decisive measures taken to defeat the Covid-19 pandemic, as well as in preparation for the return to normalcy, the passage of this measure is urgently sought.