Philippines
Fiscal Transparency Evaluation
Author: International Monetary Fund. Fiscal Affairs Dept.
Publication Date:
30 Jun 2015
eISBN:
9781513501161
Language:
English
Keywords:
ISCR; CR; government; budget; expenditure; accounting system; government's priority; budget outturn; government equity; tailoring budget flexibility; government entity
Download PDF (4.9 MB)

This paper discusses the findings of Fiscal Transparency Evaluation on Philippines. Improving fiscal transparency has been a priority in the Philippines over recent years. The government’s public financial management reform strategy has helped initiate a wide variety of reforms, which are beginning to bear fruit. Fiscal reporting is relatively comprehensive, frequent, and timely, with many areas of good and advanced practices. Fiscal risk analysis and management is relatively strong in the Philippines compared with other countries. However, improvements are needed in a few areas, especially to capture of risks from guarantees and public–private partnership, assess the scope of tax expenditures, and introduce a longer-term perspective in the fiscal sustainability analysis.

Abstract

This paper discusses the findings of Fiscal Transparency Evaluation on Philippines. Improving fiscal transparency has been a priority in the Philippines over recent years. The government’s public financial management reform strategy has helped initiate a wide variety of reforms, which are beginning to bear fruit. Fiscal reporting is relatively comprehensive, frequent, and timely, with many areas of good and advanced practices. Fiscal risk analysis and management is relatively strong in the Philippines compared with other countries. However, improvements are needed in a few areas, especially to capture of risks from guarantees and public–private partnership, assess the scope of tax expenditures, and introduce a longer-term perspective in the fiscal sustainability analysis.

Overall Assessment

A. Scoring Philippines against the Fiscal Transparency Code

1. The Philippines has a relatively favorable assessment against the draft FTC (Table 1). Overall, the country complies with generally good practices across all pillars, although with several areas for improvement in each of them.

Table 1.

Heat Map on Fiscal Transparency

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Source: IMF Staff.

Fiscal Reporting

Fiscal reports should provide a comprehensive, relevant, timely, and reliable overview of the government’s financial position and performance

2. High-quality reporting on public finances is fundamental to fiscal transparency. It provides a sound basis for analyzing and understanding the government’s financial position and performance, for forecasting and budgeting, for designing appropriate fiscal policies and managing risks, and for holding governments to account. The global crisis, and the emergence of previously unreported fiscal deficits and debt, revealed that understanding of governments’ fiscal positions was inadequate in many countries. There is now recognition that more timely data is required on the wider public sector and on a broader range of assets and liabilities, and that forecast and actual fiscal data needs to be presented on a comparable basis.

3. The Philippines exhibits several areas of good and advanced practice in fiscal reporting. Annual Financial Reports (AFRs), covering all national government entities and almost all local government (98 percent of units) and Government-Owned and/or Controlled Companies (GOCCs; 90 percent of units) are published by the Commission on Audit (COA) as three distinct datasets. However, while data for the consolidated central government is close to complete, consolidated data for the public sector and the general government as a subsector is not available, given an incomplete allocation of entities to each sector and limitations in source data. The publication of a full set of financial statements for the individual public sector entities provides data on flows, financial and nonfinancial assets and liabilities, and net worth. Good practice is achieved in presenting the annual financial reports within nine months of the end of the year. In-year cash operating reports for the national government are published monthly, generally within a month of the end of period.

4. Nonetheless, there are a number of weaknesses in the quality and integrity of fiscal data, partly reflecting multiple agencies having responsibilities for fiscal reporting. The ratings for statistical integrity and the comparability of fiscal data from different sources, as well as the inability to compare budget outturns against the original budget, are reflections of this. A specific legal basis for the production of fiscal statistics is lacking, and there is no single source of fiscal and financial information. The three major fiscal reports prepared by different agencies differ in scope and coverage and reveal several inconsistencies (Table 2).

Table 2.

Main Fiscal and Financial Reports in Philippines

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Source: IMF Staff.

5. Finally, the Constitution has created a unique set-up with respect to the external audit function. While external auditing of individual government entities is the responsibility of a constitutionally-independent Supreme Audit Institution—COA—it is itself also assigned the task of compiling the government’s AFRs. International standards suggest a separation of the function for preparing the AFRs from that of auditing them and subjecting consolidated reports to the same audit scrutiny as individual reports.

Fiscal Forecasting and Budgeting

Budgets and their underlying fiscal forecasts should provide a clear statement of the government’s budgetary objectives and policy intentions and comprehensive, timely, and credible projections of the evolution of the public finances

6. The budget is the central instrument for setting and implementing fiscal policy. It sets out the government’s fiscal objectives and policies, demonstrates how those policies will impact the public finances, and seeks the legislature’s approval for the proposed levels of taxation and expenditure. It is therefore important that fiscal forecasts and budgets are based on credible forecasts of macroeconomic developments, provide comprehensive information on the government’s fiscal objectives and budgetary plans, are presented in a way that facilitates policy analysis and accountability, and are submitted in sufficient time for the parliament to scrutinize and approve them before the budget year begins.

7. The Philippines’s budget blends features from the US and continental European systems. On the one hand, appropriations are presented on a commitment basis (obligation), and several expenses are automatically appropriated. On the other hand, the budget power is mainly in the hand of the Executive and earmarking of revenues to special accounts is a usual practice. Beyond these features, the budget framework presents additional particularities, such as an Unprogrammed Fund which provides the Executive with the possibility to increase spending for a set of predetermined actions if additional revenues or financing are secured during the year.

8. The overall assessment on the budgeting and forecasting principles is generally positive, particularly in the area of policy orientation. Fiscal objectives are precise and time-bound, and performance orientation has moved to output indicators. The authorities have successfully implemented an impressive framework for public participation with the publication of a Citizen’s Budget and the allocation of budget envelopes for projects submitted by local communities. Macroeconomic forecasts and fiscal legislation have also advanced well.

9. Recent reforms have been conducive to enhancing fiscal transparency. Several of those reforms were introduced in the context of the 2014 Budget, including publication of a three-year fiscal plan for aggregated revenue and expenditure consistent with the overall fiscal deficit objective of 2 percent of GDP and introduction of performance indicators into the General Appropriations Act (GAA). End-year and mid-year reports on the national budget, discussing overall macroeconomic and fiscal performance, were published in 2013. The authorities have also successfully addressed the recurring difficulty of adopting the GAA on time before the start of the fiscal year.

10. However, credibility is undermined by the overall complexity and flexibility of the budget framework, as discussed below. This reflects several factors, such as a complex budget structure, with considerable earmarking, special purpose funds, and automatic appropriations permanently authorized by other laws, and the government’s substantial leeway to shape the allocation and composition of spending during budget execution. As a result, budget outturns generally deviate from the initial budget law in a way that makes comparisons difficult, although all detailed data are regularly published. The fact that the deviations result from procedures in full compliance with the existing legal framework implies that the supplementary budget principle could not be rated against the draft Code—as was the case in the 2010 PEFA assessment with respect to the two PEFA indicators on the aggregate and composition of expenditure outturns compared to the initial budget. Most of the priority reform recommendations in the forecasting and budgeting pillar focus on this particular area so as to encourage the authorities to aim for progress to comply with best transparency practices.

11. The analysis also suggests possible improvements in other areas, notwithstanding the major progress made in recent years and mostly favorable ratings. For example, there is scope to shift to a full-fledged indicative medium-term budget framework and align it with the annual budget, with a reflection of costs of current and future policies. In addition, while small in terms of GDP, the management of public investment projects could be strengthened by disclosing multi-annual contractual data for all major projects and subjecting them to cost-benefit analyses.

Fiscal Risk Analysis and Management

Governments should disclose, analyze, and manage risks to the public finances and ensure effective coordination of fiscal decision-making across the public sector

12. Fiscal risks can cause fiscal outcomes to deviate from fiscal forecasts and plans. Over recent years, the realization of fiscal risks has had a substantial detrimental impact on public finances across the world, in ways that were often not foreseen and not prepared for. These risks include uncertainty around the evolution of fiscally-important macroeconomic variables such as GDP growth, inflation, interest rates and unemployment. They can also arise from sources such as explicit government guarantees, implicit guarantees to the private sector, exposure to areas of the public sector not directly under the government’s control, and changes in the values of the government’s assets and liabilities. A government’s ability to cope with fiscal risks depends on the quality of information about the risks it faces, its powers to limit exposure to those risks that can be mitigated, and its capacity to absorb the fiscal consequences of those it cannot contain.

13. Over recent years, the Philippines has strengthened its analysis and disclosure of fiscal risks, so both the government and public are far more aware of many of them. The centerpiece of this analysis is the Fiscal Risk Statement (FRS), which the government has been producing since 2012. This document provides a relatively comprehensive collation of the risks that the Philippines’ public finances faces, and lays out the risk prevention and mitigation strategies that the government has in place to reduce its exposure, particularly in the case of the natural disasters to which the Philippines is especially vulnerable. This FRS is underpinned by analysis that takes place throughout the administration, based on generally high-quality reporting across the bulk of government.

14. In order to lift this already impressive analysis to the cutting-edge practices of risk analysis worldwide, the Philippines should look to fill in the remaining gaps and expand the FRS accordingly. In many cases, this will involve extending existing analysis further, such as in lengthening the fiscal sustainability analysis over at least the next decade, and broadening the monitoring and coverage of outstanding guarantees beyond those issued to the GOCC sector. In other cases, this will involve producing significant new analysis, such as developing a full assessment of tax expenditures and better understanding the contractual obligations and potential risks incorporated in legacy public private partnerships (PPPs). Even in cases where practices are rated as good, scope for further improvements exist. For example, while subnational governments’ finances do not seem to be a significant source of fiscal risks, they still warrant close monitoring and analysis, as some run liability-to-income ratios above 100 percent. In the same vein, although the explicit and implicit exposure of the government to the financial sector appears limited, experience from other countries during the 2008/09 global crisis suggests the need for vigilance and continuous analysis.

15. As the government further refines its risk analysis and mitigation strategies, it may consider reducing the budget’s very large contingency buffers and tightening the access criteria that apply. This will help ensure that they are only used for genuinely urgent, unforeseeable and unavoidable events.

B. The PFM Reform Context

16. Recent PFM reforms, launched under the authorities’ PFM reform program, and efforts to enhance fiscal transparency—including under the GlobalInitiativeforFiscalTransparency (GIFT)—have had a positive impact on the Philippines’ assessment against the Code. The authorities’ PFM reform program has been anchored in the Philippines Development Plan (PDP) for 2011–16. On this basis, a comprehensive PFM reform roadmap has been developed and gaps, strategies, and reform objectives and goals have been identified (Box 1).

17. These efforts have also been conducive to supporting macroeconomic stability and development. Among other things, real GDP growth has been buoyant and inflation has stabilized, while a strong focus on delivering prudent fiscal policy has resulted in a steady decline in public debt (Figure 1).

Figure 1.
Figure 1.

Selected Macroeconomic Indicators

Citation: IMF Staff Country Reports 2015, 156; 10.5089/9781513501161.002.A001

Source: World Economic Outlook and IMF Staff Estimates.

18. In the same vein, Philippines has achieved a positive net worth position over the years which is stronger than in many advanced economies. This is based on an analysis of the public sector’s role in economic activity, which amounted to 21 percent of GDP in 2012, with gross liabilities of 110 percent of GDP roughly offset by a similar amount of assets—resulting in an estimated positive net worth position of 2 percent of GDP. However, the main focus of government policy-making in Philippines has been on the national government, which represented 14 percent of GDP, with the general government accounting for 17 percent of GDP of economic activity (Table 2 and Figure 1).

Table 3.

Public Sector Financial Overview

(Percent of GDP)

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Consolidated to the extent possible

Source: COA Annual Financial Reports and staff estimates

The PFM Reform Program

The PFM reform program is a key plank in support of the Philippine governance reform agenda set out in the PDP for 2011-16. It is based on recognition that multiple oversight agencies with their own data requirements and reporting formats create duplication, an inability to validate reports and analyze data, and weaken accountability. The objective is to solve the government’s fragmented financial management system by introducing a new GIFMIS, underpinned by the effective integration of processes between the central fiscal agencies.

The short-term focus has included:

  • Development of common reporting requirements of oversight and spending agencies to eliminate duplication and overlaps;

  • Harmonization of budgetary and accounting classifications to enable the comparison of expenditures for programs/projects/activities with approved appropriations;

  • Comprehensive review and revision of the Philippine Government Chart of Accounts; and

  • Harmonization of the Philippine Government Accounting System with international standards.

The 2014 Budget marked the introduction of a new budget classification based on the Unified Accounts Code Structure (UACS).

As these fundamental reforms are still largely in the implementation stage, they have not yet had significant impacts on transparency and enhanced fiscal reporting. They have the potential, however, to bring about major improvements in transparency in the short to medium term.

19. Several specific reform measures have raised the Philippines’ assessment against the Code. This has been the case in several pillars of the evaluation and bodes well for further gains in fiscal transparency going forward. Table 4 illustrates the impact of these achievements, with some dramatic improvements in specific principles, such as in the fiscal risk and public participation areas.

Table 4.

Impact of Selected Past Reforms on FTC Assessment

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Source: IMF Staff.

C. Cross-Cutting Fiscal Transparency Issues

20. The assessment of Philippines’ transparency practices has revealed two cross-cutting issues that span across the three FTC pillars. Those are: (i) the fragmentation of roles and responsibilities for fiscal management in the public sector, which may lead to a suboptimal use of the wealth of available information and undermine efficient economic decision-making; and (ii) the complexity and flexibility of, and lack of clear reporting on, the budget system, which may lead to inefficiencies in the allocation of resources and the delivery of public sector services. Apart from the broader economic implications of these issues, they directly affect the extent of fiscal transparency.

The Fragmentation of Roles and Responsibilities in the Public Sector

21. The production and dissemination of good-quality fiscal data is of fundamental importance for fiscal transparency and efficient economic decision-making. The recent IMF Board Paper on Fiscal Transparency, Accountability and Risks1 identified the divergence in reporting coverage and concepts used in ex ante budgets and ex post statistics and accounts as a major source of fiscal risks. It emphasized that many countries prepare fiscal documents, such as budgets, appropriation acts, execution reports, and financial statements, on different bases, making it difficult to assess how fiscal outcomes relate to the initial budget and overall fiscal strategy.

22. Such fragmented fiscal reporting arrangements can be observed in the Philippines. While the evaluation of the country’s reporting against the Code indicates many areas of strength—coverage, timeliness and frequency, and quality—the scoring on the principles measuring the integrity of fiscal statistics and financial statements points to a key area for improvement. The Philippines fares relatively well in principles where a single agency is mandated with responsibility for fiscal reporting and accounting and reporting policies are clear, such as for the Annual Financial Reports prepared by COA and the monthly cash operations reports by the Bureau of Treasury (BTR) for in-year reporting. However, where multiple agencies are involved in fiscal reporting and coordination is incomplete, concerns on data comparability and integrity arise. As a matter of fact, reconciling information on fiscal forecasts, budgets, outcomes, and statistics is a particular challenge in Philippines, as four different entities (DBM, BTR, COA, and NEDA) are involved in these roles.

23. This multiplicity of institutions with responsibilities in reporting and the absence of a common reporting framework to date contribute to the inconsistent application of definitions, concepts, and formats.2 To some extent, the granting by the Constitution of the function of keeping the general accounts of the government to COA may have contributed to an insufficient development of the internal reporting capacity of the Executive branch of the government. This also raises a major transparency issue in that COA is assigned the role as an external auditor but cannot independently validate the Annual Financial Reports it prepares.

24. A lack of clarity of roles and responsibilities is also apparent in other areas. For example, public corporations are actively used to undertake quasi-fiscal activities in support of social objectives that should be borne by the budget, undermining transparency and leading to potential vulnerabilities. In addition, the authorities have only recently begun to investigate tax expenditures; some 18 investment promotion agencies are currently allowed to grant tax incentives under 180 pieces of legislation. The lack of central control and information on their costs and benefits is an area of concern in light of the country’s relatively low tax-to-GDP ratio. Similarly, while the new Fiscal Risk Statement captures many of the government guarantees issued to GOCCs, there is no clear accountability of monitoring of other guarantees, such as those possibly extended to the private sector. Moreover, little information is available on obligations and risks related to the large stock of legacy PPPs, as responsibility for the collation and analysis of such contracts is not clarified.

The Complexity and Flexibility of the Budget System

25. The Philippines’ budget system has an unusually large amount of complexity and flexibility built into it. To some extent, this reflects the specific challenges the country faces, such as the frequency of natural disasters that require quick responses from the state. Also, the at times difficult relationship between the Executive and Congress has delayed budget approval beyond the timeline envisaged by the Constitution and made the passage of supplementary budget legislation cumbersome. As a result, the annual budget law has become an imperfect indicator of the government’s priorities for resource allocation and service delivery, as budget outturns differ noticeably from the budget law. While this has not affected macroeconomic and fiscal policy outcomes over the last few years—to the contrary, the authorities’ fiscal policy stance has been prudent and resulted in highly positive public debt dynamics—this could rapidly change should the political or external environment become less favorable.

26. This complexity and flexibility has several aspects to it:

  • Budget structure: Consistent with good practice, expenditure cannot be obligated without appropriations authorized by Congress. However, as shown in Box 3 and Figure 5 below, the structure of the budget is complex, as it encompasses a large number of earmarking, special purpose funds, and automatic appropriations permanently authorized by other laws.

  • Available appropriations in excess of initial budget assumptions: Total spending (obligations) during a fiscal year may deviate significantly from the initial budget assumptions. Available appropriations continuously exceed the obligation program, since unobligated appropriations from the previous year can to some extent be carried over and a so-called Unprogrammed Fund is available to be released during the year under pre-defined circumstances. In 2012, the government released half of the authorized fund, increasing the obligation program by more than 4 percent.

  • Flexibility during execution: The Executive has considerable leeway in shaping both the allocation and composition of expenditure through four channels. First, the President can reallocate appropriations between agencies to a large extent. Second, appropriations are gradually released to departments by DBM, based on its assessment of whether the government will be able to meet its overall fiscal deficit target, implying that spending entities cannot initially access all their programmed appropriations. Third, the Unprogrammed Fund and continuing appropriations can be released, as discussed above. And fourth, some other budget lines (related to Special Purpose Funds and some other appropriations) are transferred to the main (NGA) budget lines during the year for implementation.

Figure 2.
Figure 2.

Coverage of Public Sector Institutions

Citation: IMF Staff Country Reports 2015, 156; 10.5089/9781513501161.002.A001

Source: COA.
Figure 3.
Figure 3.

Comparison of the 2012 Cash Flow Statements from BTR and COA

Citation: IMF Staff Country Reports 2015, 156; 10.5089/9781513501161.002.A001

Source: BTR and COA final published cash reports for 2012, and staff calculations. Data in percent of 2012 GDP. Off-budget accounts assessed following method explained in principle 2.1.1.
Figure 4.
Figure 4.

Expenditure Funded by Retained Revenues

(Percentage of central government gross expenditure

Citation: IMF Staff Country Reports 2015, 156; 10.5089/9781513501161.002.A001

Source: IMF Staff Estimates
Figure 5.
Figure 5.

Evaluation of the Size and Composition of Central Government Expenditure in 2012

Citation: IMF Staff Country Reports 2015, 156; 10.5089/9781513501161.002.A001

Source: DBM and COA reports, staff calculations(1) Estimate of Central government total expenditure out of quasi-fiscal activities of GOCCs(2) SPFs are assessed through release of appropriations and not disbursements (see detail in 2.4.2 Supplementary Budget)(3) Off-Budget Accounts total expenditure is assessed through the report on remittance of NGAs revenues to the General Fund(4) Social Security Funds expenses net of the NG subsidies to PhilHealth (14 bn in 2012)

27. These features are not inconsistent with the national legislative framework. Philippines scores well in terms of budget unity as the General Appropriation Act (GAA) includes appropriations for 85 percent of these funds. But the fact is that total budget obligations during a fiscal year can exceed—sometimes substantially—the initial budget law. In addition, the existing budget framework allows for the government to significantly alter the composition of expenditure during the course of the fiscal year.

28. However, these features of the budget system complicate fiscal reporting and give rise to vulnerabilities. The basis of forecasts, appropriations and outcomes presently differ and reporting is spread across different agencies that follow different definitions and approaches for reporting within the fiscal year. This is, however, slated to change in 2014 as a result of the new Unified Accounts Code Structure (UACS) and budget classification. In addition, the recent first-time publications of mid-year and end-year reports on the national budget and the coverage of a large majority of off-budget accounts in documentation for the 2014 budget were major steps in disclosing and reconciling numbers and enhancing transparency. While large contingencies help build a buffer against shocks such as natural disasters, an ability to expand the spending envelope significantly beyond the fiscal policy objectives entails risks to macroeconomic stability and the achievement of development objectives. This is even the case when safeguards appear to be in place, such as access criteria or linking additional appropriations to the availability of revenue or financing. It may also undermine some of the noteworthy reform efforts in the PFM area, such as the benefits of the medium-term budget framework or the use of performance information in the budget process.

29. While other countries have also aimed to enhance, or preserve, flexibility in budget planning and implementation, the global trend goes toward firmer fiscal frameworks. In the run-up to the 2008 global crisis, many countries had moved spending off-budget, especially when public scrutiny had focused on the central government budget while urgent spending demands persisted. Heightened public awareness of this issue, and tighter national or international fiscal rules (such as in the EU), has prompted countries to clarify and streamline their fiscal frameworks.

D. Priority Recommendations

30. Table 4 outlines the high-priority recommendations for addressing the Philippines’ fiscal transparency gaps. The recommendations are the result of the detailed evaluation of existing practices against the 36 principles under the Code, as undertaken in Annexes I to III. They also reflect an assessment of priority which in many cases was based on a quantitative analysis and, in some cases, on judgment, taken into account country-specific circumstances. Implementing these recommendations would address the majority of the identified transparency gaps, lifting the assessment closer to international best practices. Many of the recommendations are already underway and built into the PFM reform program.

31. Several of these proposals involve making better use of existing information and analysis and can thus be implemented almost immediately. For example, the government already produces a sophisticated short-term DSA; extending it over a longer time frame would yield significant benefits with only a small increase in effort. Others, such as tailoring budget flexibility, will require more deep-seated reforms, changing the way the underlying budget systems operate.

32. Over time, these reforms would allow the government to:

  • Publish a consistent set of documents that provides the public with the means to track the operations of government from one year to the next and over the course of the year; and compare the budget to the final accounts on a consistent and transparent basis;

  • Increase the credibility of the budget, so that the plans presented to Congress and the public at the beginning of the year bear much closer relation to the fiscal outturns at the end of the year;

  • Better understand the implications of policy actions today on longer-term fiscal sustainability;

  • Fully delineate the government’s policy activities from purely commercial activities, facilitating international comparisons;

  • Better allocate resources to priority areas over the medium term, building in the cost of all existing policies, including the multi-annual cost of PPP obligations; and

  • Be assured that the financial accounts and reports are a true and fair view of the state of public finances, and have been audited by a fully independent pair of eyes.

Annex I. First Pillar: Fiscal Reporting

A. Coverage of Fiscal Reports

1.1 Coverage: Fiscal reports should provide a comprehensive overview of the fiscal activities of the public sector, according to international standards.
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Assessment: Annual financial statements for almost all the individual institutional units of the public sector are publicly available. These statements are subject to regular audits by COA. The public sector institutions in the Philippines are classified according to three subsectors, namely:

  • National Government Agencies (NGAs), including the General Fund, Special Accounts of the General Fund, Special Funds, and off-budget accounts;

  • Local Government Units (LGUs), including provinces, cities, municipalities and barangays (municipal subunits); and

  • Government Owned and/or Controlled Corporations (GOCCs), including government financial institutions, social security funds, utility companies, boards, commissions and other authorities.3

The audited financial statements for individual entities are annually aggregated and consolidated, to the extent possible, in the AFRs for each of the subsectors. The AFRs are compiled by COA. Coverage of institutions included in these reports has steadily improved (Table 6), covering all national government entities and almost all local governments (98 percent of units) and GOCCs (90 percent of units) in 2012. These reports consolidate the data for each of the three subsectors of the public sector, to the extent possible. As indicated in Figure 2, data for the consolidated central government are close to complete when consolidating the national government AFR with the individual accounts of the social security institutions (SSIs), although a small number of non-market GOCCs still need to be identified to allow for full consolidation of the central government sector. Local government data are available as a distinct dataset, but are not consolidated with the data of the central government to derive the minimum size of the general government sector. Moreover, although almost all entities of the public sector are covered in the AFRs, full consolidation of the general government or public sector is not possible at this stage, especially for GOCCs, due to the deficiencies in the sector classification of GOCCs and in source data to identify and reconcile all intra- and inter-public sector flows and stock positions.

Table 5.

Priority Recommendations for PFM Reform

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(1) Improvement of the Supplementary Budget principle score would result from the implementation of both recommendations No. 4 and 10.Source: IMF Staff.
Table 6.

Philippines—Coverage of Institutions in Annual Financial Reports

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Source: COA.

Indication of importance for further reform: The lack of a consolidated presentation of the Philippines’ general government and public sectors hampers fiscal analysis and international comparability. This gap also obscures quasi-fiscal activities that take place in the GOCCs.

Priority Recommendation No. 7 in Table 5:Compile and report fully consolidated data for the public sector and its subsectors in line with international standards. Using a building-block approach, the development of the data could be phased in as follows:

  • Consolidate SSIs with the national government data to derive a consolidate central government excluding nonmarket GOCCs;

  • Identify and include the nonmarket GOCCs in the consolidated central government;

  • Consolidate local governments with the consolidated central government to derive general government data;

  • Consolidate nonfinancial public corporations with general government data to derive the nonfinancial public sector data; and

  • Consolidate financial public corporations with the nonfinancial public sector to derive public sector data.

In all cases, intra- and inter-sectoral flows and stock positions should be appropriately identified and eliminated in consolidation.

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Assessment: The AFRs cover the majority of financial and nonfinancial assets and liabilities of the public sector. They use a modified accrual basis of recording which captures expense when incurred and revenue when it accrues, with financial assets and liabilities recognized for bridging the gap before cash flows occur. The Constitution requires COA to submit to the President and Congress, within the time fixed by law, an annual report covering the financial condition and operation of the government. Consistent with this mandate, the annual report includes a full balance sheet and statement of equity of government. Equity refers to the residual interest of the government in the reporting agencies, calculated as the excess of each agency’s assets over its liabilities (i.e., the net worth of government). The asset and liability positions of NGAs, LGUs, and GOCCs are reported in their respective AFRs. For each of these subsectors of the public sector, intra-governmental stock positions are consolidated to the extent possible; adverse audit opinions in the individual financial statements indicate cases where full consolidation is not possible, especially in the case of GOCCs.

A public sector balance sheet was constructed from publicly available information (Table 2 in the Overall Assessment section). The aforementioned limitations on consolidation may result in an overestimation of financial assets and liabilities of the public sector, although it will not have an influence on the net worth position. Liabilities include the actuarial value of government employee pension obligations. Although this liability is reported in the financial statements of the Government Service Insurance System (GSIS), it is incorrectly classified as equity in the balance sheet of the AFR. This classification results in an overestimation of equity and an underestimation of liabilities in terms of pension obligations in the AFR. In addition, liabilities regarding pension payments to military personnel are excluded from the AFRs; COA estimated that this liability amounted to PHP 61.63 billion in 2012. In line with existing accounting policies, historical costs are generally used for the valuation of nonfinancial assets, thus not allowing a market value assessment of these assets. For financial instruments, some are valued at fair values. Although subsoil assets are not recognized in these balance sheets, these assets are considered to be relatively small (see principle 3.2.7). Furthermore, the balance sheet excludes assets and liabilities of PPPs under the control of government that cannot be quantified.

Indication of importance for further reform: Coverage of stocks is advanced in Philippines. The availability of full information on the balance sheet of the government facilitates an analysis of assets and liabilities and allows for the development of an integrated asset and liability management strategy, with a view to managing risks. In this regard, classification of government employee liabilities should be improved (see also principle 1.3.1). To further enhance usefulness of these data, consideration should be given to improve accounting policies so as to use market valuations for the measurements of assets and liabilities, where appropriate.

Priority recommendation: None.

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Assessment: The AFRs of national government agencies, local government units (LGUs), and GOCCs include an income statement and a cash-flow statement (Table 7). These accounts therefore cover cash flows, accrued revenues and expenses, and some realized and unrealized valuations and volume changes (other economic flows). In line with prescribed accounting policies, the modified accrual basis of accounting is used in the compilation of these accounts. Income is recorded upon delivery of goods and services, except for tax revenue, duties, fees, fines and penalties, and user charges, which are recognized upon collection. Contributions to government employee pension funds are included in the business income; they should be classified as the incurrence of a liability. Expenses are recognized when obligations are incurred, and these are reported in the financial statements in the period to which they relate. Obligations arise from an act which binds the government to the immediate or eventual payment of a sum of money. Foreign-currency denominated assets and liabilities are revalued based on the central bank’s weighted average exchange rate—any differences in the revaluation of marketable financial assets and liabilities are recognized as a gain or loss on foreign exchange or other price changes. Some economic flows related to the value of nonfinancial assets are not recorded in the accounts, since the ‘historic cost less accumulated depreciation method’ is primarily used to value property, plant, and equipment. In addition, depreciation is calculated using a straight-line method, and estimated useful lives of the assets ranges from 5 to 40 years, as prescribed by COA. This method may not always reflect an asset’s true economic value and could thus have an impact on the value of other economic flows recognized in the accounts. The monthly COR of government incorrectly includes a notional revenue and expense amount in respect of tax expenditure (see also principle 3.2.2).

Table 7.

Philippines—Income Statement for 2012

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ConsoIidated to the extent possible

Source: COA and staff estimates

And other operating expenses.

Indication of importance for further reform: The reporting of flows is comprehensive and likely to improve further as the authorities make continued progress in their move toward implementing IPSAS as accounting standards. Market valuations of assets and liabilities allow an analysis of flows, superior to that presented when using historic cost valuation methods for fixed assets, and face values for financial assets and liabilities. Although AFRs measure some financial instruments at fair values, which allow the recording of their other economic flows, this practice could usefully be extended to improve the valuation of all assets and liabilities. Similarly, accumulated depreciation on a straight-line method may not reflect the true economic value of nonfinancial assets. Valuation techniques of these assets could be further improved over time.

Priority recommendation: None

Frequency and Timeliness of Fiscal Reports
1.2. Frequency and Timeliness: Fiscal reports should be published in a frequent, regular and timely manner.
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Assessment: BTR publishes in-year fiscal reports in the form of a monthly National Government Cash Operations Report (COR). It covers the budgetary and non-budgetary national government and is generally published 3 to 5 weeks after the end of the reference month. The December report is published as part of a year-end report and disseminated two months after the end of the year, while the January report is published 3 to 4 weeks after the release of the final year-end report. An advance release calendar is published for these reports. As indicated in the annual SDDS Observance Reports, occasional slippages in the timeliness of the monthly reports occur due to delays in the finalization of source data. In addition, the DBM also publishes its assessment report on the national government disbursement performance on a monthly basis.

Indication of importance for further reform: The frequency and timeliness of in-year reporting is already at an advanced level, although two areas for improvement exist. First, the quality of the in-year reports could be further enhanced, as discussed in principle 1.3.1. And second, closer adherence to the advance release calendar is also warranted.

Priority recommendation: None.

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Assessment: A full set of final annual financial statements for each individual national government agency, LGU, and GOCC is published by COA. For the past three years (2010–12), these have been published prior to end-September of the following year (as required by Section 41 of Presidential Decree No. 1445, the Auditing Code of the Philippines).

Indication of importance for further reform: Performance on this dimension is good. While completion within 6 months of year-end would mean outturn information is available during preparation and deliberation for next year’s budget, increasing the timeliness of the annual financial statements is not a priority compared to other dimensions of fiscal reporting.

Priority recommendation: None.

Quality of Fiscal Reports
1.3: Quality: Information in fiscal reports should be relevant, internationally comparable, and internally and historically consistent.
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Assessment: For annual data, the AFR and the Budget of Expenditures and Sources of Finance (BESF) report tabled with the annual budget contain detailed breakdowns according to administrative, economic, and functional classifications. The economic classification is not fully consistent with the GFS economic classification, but it can be bridged to it, except for some detailed level of transfers that cannot be distinguished. A new UACS was introduced in the 2014 budget. This will in the future enable the compilation of fiscal reports that are more consistent with the GFS economic classification. The BESF contains a functional classification of expenditure for national government that is broadly consistent with the GFS functional classification. Spending by program is not currently reported, but a new program classification was introduced in the 2014 budget.

Monthly CORs contain data on revenues by main tax type and expenses with some economic classifications. The data on total expenses are reported with “of which” lines for the allotment to LGUs, interest payments, subsidies, tax expenditures (a non-cash item), equity, and net lending. At present, it is not possible to identify social transfers, or distinguish spending on investment from spending on goods and services on a monthly basis. The data also lack details on compensation of employees. The monthly data do not disclose expenses by administrative unit either.

The Department of Budget and Management (DBM) publishes a quarterly report of appropriations, allotments, and unobligated balances by administrative unit. DBM also publishes on its website a monthly report of disbursements by national government agencies, and of budgetary support to GOCCs and LGUs.

Indication of importance for further reform: Fiscal reports in the Philippines provide information that clearly indicates the use of public resources, but could be further enhanced. Reporting revenue by tax type and expenditure by economic classification that is fully consistent with international standards improves the usefulness of fiscal reports for economic analysis. In addition, reporting spending by a functional classification that is fully consistent with international standards, and spending by program, would also facilitate policy analysis and accountability and support the introduction of performance-informed budgeting.

Priority recommendation: None.

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Assessment: The Philippines regularly publishes two of the three internal consistency checks called for under the Fiscal Transparency Code.

  • The monthly COR for the national government presents the cash surplus/deficit (i.e., above-the-line data) and the financing of this balance (i.e., below-the-line data). Financing data separately identify external and domestic loans incurred less amortization, as well as the change in cash balances of the national government.

  • The annual BESF reconciles the outstanding balances of debt of the national government by explaining amounts of new borrowing and principal repayments. These data are presented at face value, and the value of debt denominated in foreign currencies is converted to Philippine peso using end-of-period market exchange rates.

  • The annual financial statements recognize changes in the volume or value of assets and liabilities in accordance with accounting policies. However, a full stock-flow reconciliation of financing and the change in stock of debt is not available.

Indication of importance for further reform: The authorities should consider reconciliations of fiscal balances with financing, and financing with changes and balances in outstanding government debt and cash balances. This would serve as an automatic cross check of the reliability of flows and stock data. In particular, financial statements could usefully be enhanced by presenting reconciliations of outstanding balances of assets and liabilities by separately recognizing financing transactions and other changes in value of these asset and liabilities.

Priority recommendation: None

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Assessment: Revisions to fiscal data are properly disclosed and explained. Regarding annual data, the AFRs are based on preliminary reporting from some agencies, with any revisions subsequently incorporated in the following year’s AFRs in the form of a restatement of the previous year’s comparative data. Any fundamental errors in recording income and expenses of previous years are corrected using a prior year’s adjustments account. Reasons for the restatement of data are presented in notes to the individual financial statements of the agencies concerned. In 2009-11, restatements to the AFRs of the national government were minor, and the reasons and amounts were disclosed in the notes to the financial statements. With respect to in-year reports—the monthly CORs issued by BTR—revisions to data in one month are either corrected the following month, or included in the December report. These revisions are not disclosed.

Indication of importance for further reform: Revisions to fiscal data in recent years do not seem to have been of a magnitude to warrant priority attention. However, disclosure of revisions to monthly CORs would be desirable.

Priority recommendation: None.

Integrity of Fiscal Statistics and Financial Statements
1.4. Integrity: Fiscal statistics and financial statements should be reliable, subject to external scrutiny, and facilitate accountability.
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Assessment: The task of collecting, compiling and disseminating fiscal statistics for the public sector based on international statistical standards (GFSM 2001) is vested in two entities. Those are the Department of Finance’s (DOF) Fiscal Policy and Planning Office (FPPO) and the Bureau of Treasury (BTR). The DOF publishes data on revenues, expenditures, financing and consolidated surplus/deficit. The BTR reports on national government cash operations and debt.

There is no specific legal basis for these activities. Executive Order of the President No. 127 (EO 127) in general terms calls for the DOF to compile fiscal data (interpreted by the FPPO as being for the public sector). EO 449 implies that the BTR, as fiscal agency for the national government, should collect and compile fiscal data for the national government. The data are compiled in accordance with COA rules contained in the Government Accounting and Auditing Manual (GAAM) 1992 and the revised chart of accounts issued in 2004. While the National Statistical Coordination Board (NSCB) is responsible for designating statistical responsibilities across the government, the number of different entities responsible for different aspects of fiscal reporting poses considerable coordination challenges and weakens fiscal reporting.

Indication of importance for further reform: In the Philippines, a specific legal basis for the production of fiscal statistics is lacking, and there is no single source of fiscal and financial information. However, a clear allocation of responsibilities for verifying and disseminating fiscal statistics, supported by a specific legal basis, is important to ensure the integrity of fiscal data. The currently dispersed institutional responsibilities create a need for closer coordination and consistent reconciliations between the different fiscal data series in order to ensure the quality of fiscal statistics and data. This has adverse effects on the integrity of fiscal statistics and fiscal data.

Priority recommendation No. 1 in Table 4: Consider strengthening the executive branch’s capacity to consolidate and report fiscal statistics and data. This could entail establishing a centralized data compilation unit in one of the central fiscal agencies and introducing a specific legal basis for the compilation, verification and dissemination of fiscal statistics.

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Assessment: While audits of individual agencies’ financial reports are undertaken by an independent Supreme Audit Institution—COA—there is no separate independent audit of the consolidated Annual Financial Reports; this differs from international practice. The individual financial statements of national government agencies, LGUs, and GOCCs are prepared by the individual entities themselves to national accounting standards (the government is moving to adoption of IPSAS). These individual financial statements are then audited by COA, a body independent of the Executive established by the Philippine Constitution. COA conducts financial compliance audits, as well as value-for-money audits and special audits. COA publishes its opinion on the entity financial statements in its Annual Audit Reports, while significant and common issues are summarized and reported in the Audit Performance Summary Report. However, the Constitution also assigns to COA the function of keeping the general accounts of the government (Article IX-D Section 2 (1)). COA therefore itself aggregates and consolidates the individual entity statements into the overall Annual Financial Reports (AFRs) of the government. COA is therefore not in a position to provide an independent assurance as to the reliability of the government’s AFRs that it prepares. International practice suggests that the consolidated reports should be subject to the same audit scrutiny as the individual reports. The consolidated AFRs therefore do not contain an audit opinion on the reliability and fair representation of the AFRs.

Indication of importance for further reform: Independence of the external auditor from the audited entity is a fundamental principle to ensure the integrity of fiscal accounts. In its absence, the credibility of financial reporting is called into question. Consolidation of financial data and preparation of the year-end financial statements of government is therefore usually an executive function performed by a central finance agency in most countries. For example, in this region all member countries of ASEAN aside from the Philippines assign the function of preparation of the government’s financial statements and AFRs to an agency or agencies of the executive branch of government, while those reports and statements are subsequently subjected to independent audit by a SAI. This principle is enshrined in international standards, including those promulgated by the International Organization of Supreme Audit Institutions (INTOSAI), as summarized in Box 2.

Supreme Audit Institutions and Independence

The independence of the SAI from the entities is established in INTOSAI Declarations and in International Standards of Supreme Audit Institutions (ISSAIs), as well as UN Declarations. It is also the basis of the design of Public Expenditure and Financial Accountability (PEFA) indicators

Excerpts from ISSAI 1

Foreword: The chief aim of the LIMA Declaration is to call for independent government auditing. A Supreme Audit Institution which cannot live up to this demand does not come up to standard.

II. Independence. Section 5: Independence of Supreme Audit Institutions

1. SAIs can exercise their tasks objectively and effectively only if they are independent of the audited entity and are protected against outside influence. Although state institutions cannot be absolutely independent because they are part of the state as a whole, SAIs shall have the functional and organization independence required to carry out their tasks.

2. In their professional careers audit staff of SAIs must not be influenced by the audited organizations and must not be dependent on such organizations.

UN Guidance

The importance of SAI independence was recognized in UN General Assembly Resolution A/66/209 on ‘Promoting the efficiency, accountability, effectiveness and transparency of public administration by strengthening supreme audit institutions’, issued in December 2011. The Resolution recognized, inter alia, that SAIs can accomplish their tasks objectively and effectively only if they are independent of the audited entity and are protected against outside influence.

PEFA

PEFA indicator PI-25 on the coverage and timeliness of annual financial statements envisages, in the description of the indicator, that the function of compiling the government’s consolidated financial statements is a function of the Executive branch of government. It notes that ‘in some systems individual ministries, agencies and deconcentrated units issue financial statements that are subsequently consolidated by the ministry of finance. In more centralized systems all information for the statements is held by the ministry of finance’. Validation of the statements through certification by the external auditor is covered by PEFA indicator PI-26.

Priority recommendation No. 8 in Table 5: Establish a function for auditing of the consolidated AFRs that is separate from the function of preparing them. From the perspective of established international practice, responsibility for compiling the AFRs of the government should be assigned to one of the central fiscal agencies in the executive branch of government. Recognizing that this may require an amendment to the Constitution, which may be difficult to achieve, a second-best solution could be to establish a function within COA for preparing the AFRs that would be clearly delineated and separated from the function of auditing them, while also strengthening the executive branch’s capacity to consolidate and report fiscal data. Possibilities for COA to delegate this function to an entity separate from COA in the executive branch should also be investigated. The authorities should study if such legal changes below a constitutional amendment would satisfy international standards.

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Assessment: Three major fiscal reports are prepared by BTR, DBM and COA with various scopes and basis of reporting:

  • BTR’s monthly National Government COR presents revenues and disbursements on a cash basis.

  • The Statement of Allotment, Obligation and Balances (SAOB), prepared on a quarterly basis by DBM and on an annual basis by COA, presents the release of appropriations and their use by NGAs. It has the scope (national government) and basis (obligations) of the General Appropriation Act (GAA).

  • The AFRs prepared on an annual basis by COA present all revenues and expenditure of NGAs, including the use of retained revenues in Off-Budget Accounts (see discussion of those accounts in principle 2.1.1). Data are reported on a modified accrual basis.

The COR is the only report that can be easily compared with information presented in the budget. Indeed, the BESF includes an aggregated revenue and disbursement plan presented on a consistent basis with the COR. This is also the basis for reporting the government fiscal deficit objective of 2 percent of GDP. The SAOB cannot be easily compared with the initial budget for reasons developed in principle 2.4.2. The AFR cannot be compared with the initial budget because of their differing scope and basis.

There are other reasons that affect the comparability between those reports. The 2012 cash flow statement of the AFRs reported total operating and investing outflows of 33 percent of GDP, compared to 17 percent of GDP for the COR, mainly because the former includes internal cash flows between agencies. Once these flows are eliminated and other factors are taken into account, a gap of 1.3 percent of GDP remains to fully reconcile BTR and COA cash reports for 2012 (Figure 4). While they both report on the national government, COR and SAOB cannot be reconciled for the lack of a bridging table that would separate payments on the current year’s obligations from payments on the previous year’s obligations.4 Moreover, each of the above-mentioned reports adopts its own classification which further limits comparability. Finally, many inconsistencies can be found between the SAOB published by DBM and the one published by COA, with a total difference for 2012 of PHP 32 billion, or 0.3 percent of GDP (Table 8), while those two reports should match perfectly.

Table 8.

Comparison of the 2012 Statements of Allotment, Obligation and Balances from DBM and COA

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Source: DBM and COA final published reports for 2012, and staff calculations. Data in billions PHP.Sum may differ due to rounding effects. Actual difference on personnel services equals 73 million PHP.

Indication of importance for further reform: Comparability of fiscal data in time and across the various fiscal reports is crucial for transparency and trust in the official data. The introduction in 2014 of the UACS should help address this issue. However, the absence of a common presentation prevents users from identifying easily the main gaps and investigating them.

Priority Recommendation No. 2 in Table 5: Present all forecasts and reports with the same budget structure and prepare reconciliation tables. This means that all fiscal reports should present the same aggregated classification to ensure comparability across themselves, with the help of bridging tables, and with the actual adopted budget, and not a ‘modified’ version of it.

Annex II. Second Pillar: Fiscal Forecasting and Budgeting

A. Fiscal Forecasting and Budgeting

2.1. Comprehensiveness: Fiscal forecasts and budgets should provide a comprehensive overview of fiscal prospects.
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Assessment: The structure of the budget is complex and encompasses a large number of funds, which reflect various financial arrangements (Box 3). Appropriations detailed in the GAA comprise of regular appropriations for NGAs, Special Purpose Funds, and automatic appropriations permanently authorized by other laws, including debt service. Special legal provisions can, however, authorize agencies to retain some revenues and deposit them in commercial banks. The GAA does not authorize expenditure of those Off-Budget Accounts, but revenues and expenditures are fully reported in the financial statements produced by COA.

Typology of Budgetary and Extrabudgetary Funds in the Philippines

The word “fund” is widely used in the context of the budget of the Philippines and encompasses various financial arrangements.

The General Fund refers to the national government account managed by BTR, where all revenues are deposited unless provided differently by law.

Special Purpose Funds (SPFs) are budget lines which are not allocated to NGA at the time of budget submission and are to be used for a pre-defined purpose. They comprise of centrally managed expenditure (budgetary support to GOCCs), contingency reserves (Calamity Fund), and other special budget lines. Most of the SPFs are actually implemented by NGAs during budget execution. There are 12 SPFs in the 2014 budget.

The Unprogrammed Fund is an SPF which comprises of unfunded programs at the date of budget submission. Those appropriations can, however, be released if additional resources (revenues, or loans in the case of donor-funded projects) are secured during budget execution (see principle 2.4.2).

Special Accounts in the General Fund (SAGFs) are actual funds included in the budget. They receive own revenues earmarked by law, but their implementation abides by the general rules of the budget: agencies remit those revenues to the General Fund and expenditure is limited to appropriations released by DBM. SAGFs are, however, treated as automatic appropriations; thus, appropriations can be released beyond the initial forecast in the budget up to the available balance of the account. There are 65 SAGFs in the 2014 budget.

Off-Budget Accounts (also called off-budgetary funds) generally designate extrabudgetary funds, with cash deposited with government financial institutions outside the BTR. By law, agencies are allowed to retain some revenues and spend them during budget execution. There is no general framework for Off-Budget Accounts but the most common are Retained Income Funds (universities and hospitals fees), Revolving Funds (commercial activities of NGAs) and Trust Funds (donations and grants). There are currently about 200 Off-Budget Accounts.

Budget documentation now includes information on Off-Budget Accounts. Starting in 2014, the BESF includes an appendix detailing a list of Off-Budget Accounts by concerned agency, with for each entity (i) information on actual revenues, expenditures and balances for the last year, (ii) a forecast of revenues and expenditures for the current and forward year, and (iii) a short description of the fund, including its legal basis. According to the revenues statement included in the COA reports, this list covers about three-fourths of the revenues collected by Off-Budget Accounts in 2012. The authorities are committed to complete the list for the 2015 budget documentation.

However, budget documentation on Social Security Institutions (SSI) remains limited. SSI are not included in the budget and are managed by four GOCCs (GSIS for civil government employees’ pensions, SSS for non-government employees’ pensions, and PhilHealth for mandatory health insurance, ECC for employees’ work related injuries). Although the aggregated revenues and expenditures of major GOCCs are presented in an appendix to the BESF, SSI are not explicitly identified as such, and GSIS and SSS do not usually submit their figures on time for the BESF.

Indication of importance for further reform: A fragmented budget process hampers the ability of the government to reconcile its economic policy with detailed policy measures. This is because it (i) prevents an assessment of the overall macroeconomic impact of fiscal policy and (ii) limits reallocation from low-priority policies to high priority policies. Budget documentation should therefore present and discuss a consolidated view for central government revenue, expenditure, and financing.

In the Philippines, the size of central government operations not authorized by the budget is not out of line compared to other countries (Figure 4), with the qualification that the weight of quasi-fiscal activities of GOCCs is assumed to be limited (see Figure 5). However, this is a snapshot at the current moment in time; it is reasonable to assume that in particular the Social Security Funds—the largest share of unreported operations (about 2 percent of GDP)—are projected to grow dynamically in the future.

The numerous Off-Budget Accounts do not represent a significant share of central government expenditure (some 3½ percent, or ¾ percent in terms of GDP), but those accounts tend to accumulate surpluses. Based on available information, the total balance of those funds at end-2012 is estimated at 1½ percent of GDP. Since the use of those accounts is not reported in the deficit objective of the government, there is a risk that those balances may be reallocated in the future to fund new policies outside of the budget process.

Priority recommendation No. 3 in Table 5: Prepare a comprehensive annual budget document covering the whole central government, and present mid-year and end-year reports with the same coverage. This entails the following:

  • The BESF should be introduced with a note that would (i) present the macroeconomic environment and government forecasts, with a discussion of their underlying assumptions and impact on the fiscal aggregates; (ii) discuss the submitted budget in the context of fiscal policy objectives and the medium-term fiscal plan; (iii) detail the main policy choices with their financial impact over the next three years; and (iv) present and discuss aggregated fiscal forecasts for social security funds. The purpose of this note would be to provide technical details and reconciliation tables; it should not be confused with the President’s message which has a more political objective. This document should be completed with forecasts and a discussion of central government activities of GOCCs, once this information is available (see principle 1.1.1 “Coverage of institutions”).

  • The mid-year and end-year reports should follow a similar outline and present updated forecasts or actuals compared with both the initial adopted budget and the previous year’s actuals. Differences between successive vintages of fiscal forecasts and between forecasts and actuals should be broken down into the effect of policy decisions, macroeconomic determinants, and technical revisions.

Moreover, implementation of the priority recommendation No. 10 presented under principle 2.4.2 would also have a positive impact on Budget Unity (Tailor budget flexibility to actual needs by streamlining earmarking and Special Purpose Funds, including the Unprogrammed Fund).

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Assessment: Budget documentation presents forecasts of macroeconomic variables. The assumptions underlying the budget are prepared and approved by an interagency committee (DBCC) comprising the BSP, DBM, DOF, and NEDA. When budget preparation begins in December, the DBCC sends to departments and agencies projections of key variables for the budget year and the following year as part of the Budget Priorities Framework (BPF). Updated tables, with a more comprehensive set of variables and a three-year horizon, are published in July in the BESF. Forecasts cover production, income, inflation, unemployment, interest rates, exchange rates, crude oil prices, exports, imports, and international reserves. DBCC members present these forecasts and underlying assumptions to Parliament at the time of budget submission in a series of Powerpoints that are not made available online. The assumptions are subsequently scrutinized by the Congressional Policy and Budget Research Department (CPBRD), which publishes an independent evaluation (“The Macroeconomic Perspective”).

Indication of importance for further reform: Accurate and unbiased macroeconomic forecasts are essential to sound budget preparation and management, as fiscal slippages are often related to overoptimistic growth assumptions, in particular in upturns. With regard to real GDP, Philippines’ forecasting record is close to the average of comparator countries, both in terms of bias and accuracy (Figure 6). On average, annual real growth is overestimated by 0.6 percentage points, while the absolute forecast error is about 1.7 percentage points per year over 2000–12. Inflation projections are prepared by the BSP with advanced forecasting techniques—both econometric and model-based. These projections do not present a bias, but the absolute forecast error, equivalent to 2 percentage points per year, is significant, with the largest errors being recorded during the crisis years (Figure 7). The difficulty to predict inflation is partly related to the prevalence of natural calamities (typhoons, earthquakes), which result in sizeable supply shocks.

Figure 6.
Figure 6.

Real GDP Growth Forecast Error

(Budget Year; error = actual - forecast; Absolute Average over 2000-12)

Citation: IMF Staff Country Reports 2015, 156; 10.5089/9781513501161.002.A001

Source: Authorities and IMF estimates.Note: For Philippines, calculations use the mid-point of the forecast range.
Figure 7.
Figure 7.

Inflation Forecast Error

(Budget Year; error = actual - forecast; 2000-12)

Citation: IMF Staff Country Reports 2015, 156; 10.5089/9781513501161.002.A001

Priority recommendation: See priority recommendation No. 3 discussed in principle 2.1.1 “Budget Unity” (Prepare a comprehensive annual budget document covering the whole central government, and present mid-year and end-year reports in reference to it).

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Assessment: The authorities are in the process of implementing an MTBF. Since 2013, budget documentation has included three-year projections of aggregate revenue, expenditure, and financing in cash for the national government. Medium-term expenditure is broken down into current spending, capital spending, and net lending. There is no detailed breakdown by program, or agency beyond the budget year. Moreover, the DBM prepares forward estimates (projected commitments under current policy), which are sent to departments and agencies at the beginning of the budget process and serve as their indicative budget ceilings. These entities have to prepare their budget proposals with a two-year horizon in program format (budget year plus following year).

Indication of importance for further reform: PFM outcomes can greatly improve by adopting a forward-looking perspective on budgeting. MTBFs enable governments to demonstrate the impact of current and proposed policies over the course of several years, signal or set future budget priorities, and ultimately achieve better control of public expenditure. The Philippines is still at the early stages of this process and would greatly benefit from further integrating medium-term plans into the annual budget process.

Priority recommendation No. 9 in Table 4: Shift to a full-fledged indicative MTBF would require that multi-year expenditure and revenue estimates presented with the annual budget reflect the future costs of current and future policies. As a first step, medium-term expenditure plans should be presented in a framework similar to the annual budget, that is by department or agency (and, eventually, by program). Departments and agencies should prepare their budgets with a three-year horizon. In addition, the consistency of updated medium-term expenditure projections with approved expenditure plans should be monitored ex post and enforced to strengthen expenditure control.

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Assessment: All major investment projects over PHP1 billion are disclosed on an annual basis in the ODA Portfolio Review produced by NEDA. The information available includes the total cost, a description of the project, and the source of financing. The projects worth over PHP1 billion are almost exclusively financed through foreign concessional financing and thus go through a feasibility study, which includes a cost-benefit analysis as well environmental impact assessments. However, these major projects only represent around one-tenth of investment expenditure. The majority of projects are much smaller, domestically-financed investments. The budget details each investment and provides information on the annual spending for each project, although it falls short of providing details on multi-annual obligations. While these individual investments are smaller, they are often approved under larger banner programs, such as road and bridge upgrades, that are not subject to the same feasibility studies as the major projects. Publicly available information indicates that between 50 and 75 percent of public contracts are awarded on the basis of open competition, although all major foreign financed investments are put out for open tender.

Indication of importance for further reform: Public infrastructure expenditure makes up only about 4 percent of GDP, of which only the foreign-financed investments worth 0.4 percent of GDP have their multi-annual contractual data fully disclosed and are subjected to cost-benefit analyses. While the remaining 3½ percent of GDP of domestically-financed projects are much smaller in nature, the fact that they make up the vast majority of infrastructure increases the importance of publicly providing their obligations and rationale for being approved. The recent improvements in procurement practices means the majority of investments are openly tendered.

Priority recommendation None.

B. Orderliness of Fiscal Forecasting and Budgeting

2.2. Orderliness: The fiscal powers of the executive, legislative, and judicial branches of government should be defined in law, and the government budget should be presented, debated and approved in a timely manner.
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Assessment: The legal framework is comprehensive and covers most aspects of PFM. The responsibilities regarding revenue collection, budget preparation and execution are defined in Book IV of the 1987 Administrative Code. Article IX of the Constitution gives mandate to COA for accounting and auditing all levels of government. Decision-making processes, including guidelines for preparing the budget and managing expenditure, are governed by Book VI of the Administrative Code. The general requirements for the content of reporting are provided by the Constitution (Annual Financial Reports), Book VI of the Administrative Code, the general provisions in the GAA, and in various other pieces of legislations. All such rules are further specified into circulars. Recent improvements include the adoption of a GOCC Governance Act in 2011 and of the “Transparency Seal”, which requires each NGA to post on its official website a complete set of information, including its official mandate and annual financial reports.

However, the legal framework suffers somewhat from fragmentation. This is well illustrated by the general provisions of the GAA, which in many instances mention the various regulations NGAs must abide by to avoid them being overlooked. In addition, the many Special Accounts in the General Fund and Off-Budget Accounts are created by separate laws outside of the budget process and tend to define one-off regimes that do not always appear to be consistent with the overall budget framework.

Indication of importance for further reform: Although the legal framework comprehensively covers most PFM aspects, full transparency would suggest that it also be clear, self-consistent, and easily accessible. The instances of fragmentation, especially regarding Special Accounts and Off-Budget Accounts, suggest that the authorities should assess to what extent the multitude of laws are fully compatible. Undertaking such an assessment goes beyond the scope of this FTE.

Priority recommendation: None.

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Assessment: The budget is submitted to the legislature and made available to the public more than three months before the start of the financial year and is usually approved and published by the start of the financial year. Timeliness of budget submission and approval is provided by the Constitution. Indeed, Section 22 of Article VII and Section 26 of Article VI of the Constitution stipulate that the President must submit the BESF to Congress within 30 days from the beginning of the regular session of Congress (fourth Monday of July) and Congress must pass the GAA before the beginning of the financial year. Otherwise, the GAA from the previous year is automatically reenacted, which used to happen regularly until the 2009 budget, as noted by the 2010 PEFA assessment. Table 9 presents recent submission and publication dates.

Table 9.

Recent Budget Submission and Publication Dates

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Source: Country Authorities.

Date of the President’s budget message to Congress

Date of publication of the General Appropriation Act by the Official Gazette