Involuntary Push towards Poverty and Mal-development

 

by the Freedom from Debt Coalition (FDC)

 

Section 26(B), Book VI of the 1987 Revised Administrative Code as instituted by Executive Order (EO) 292 says that:

                Automatic Appropriations. — All expenditures for … (b) principal and interest                             on public debt, … are automatically appropriated.    

It was during the Martial Law in the Philippines that automatic appropriation for debt service was first codified, in Section 31(B) of Presidential Decree 1177 (Budget Reform Decree of 1977 ). In consonance with her “honor-all-debts” policy, Aquino signed into law the Administrative Code of 1987, copying en toto Section 31(B) of PD1177 into Section 26(B) of the code. Section 31(B) of PD1177 also serves as its legal basis.

Automatic appropriation for debt, on top of other automatic appropriations, severely compromise the Congressional “power of the purse“ since only a little amount of the budget is left for Congressional reallocation as Congress cannot increase the budgetary ceiling (Article VI, Section 25-1 of the 1987 Constitution, as affirmed by Sec. 24, Book VI of EO292). The level of borrowings too, is effectively set by the amount of principal amortization to debts which are to be “rolled over”, since they are not part of the budget but instead deducted to new “financing” of the government.

 

Origins of the Automatic Appropriation

It is interesting to note that the US government also had an experience with an automatic appropriations law on debt service, but this was during a war. It was in 1847, during the Mexican War , that the US Congress for the first time altered the practice of appropriating specific amounts of money for each expense it authorized. Instead it empowered the Treasury to pay all interest and principal on the national debt as it came due, regardless of the amount paid out. This creates the first “automatic” appropriation legislation – authorizing the Treasury to pay the debt as it became due without obtaining specific congressional approval [Krishnakumar, 2005].

This institution of an automatic appropriation for debt was largely unopposed because the measure was needed in order to maintain capacity to borrow at reasonable rates, and in order to save Congress the trouble of passing a specific bill every year. Thus, for many years this was the only federal spending that was put on what a later age might call “automatic pilot” [Gordon, 1995].

Our budget thus, with Section 31(B) in place, is under an “automatic pilot” which prioritizes loan repayments rather than social or economic services, with our helpless Congress scrambling to allocate what meager is left after paying our debts.

 Challenges on Constitutionality

This provision is responsible for the fact that for all post-EDSA governments, from 1986 to 2008, debt service for interest payments alone already averaged around 25.72% of the national government budget. Moreover, from 1986 to 1996 and 1999 to 2008, interest payment allocation exceeded education spending, despite the provision in the Philippine Constitution, Article XIV, Section 5.5, stating that education is supposed to receive the highest budgetary allocation.

The Supreme Court actually ruled that that debt service can exceed education spending and that automatic appropriations on debt is constitutional. Guingona, et. al. vs. Carague, et. al. (G.R. no. 94571, 22 April 1991) states that while Congress is mandated (by Section 5-5, Article XIV of the 1987 Constitution) to “assign the highest budgetary priority to education” in order to “insure that teaching will attract and retain its rightful share of the best available talents through adequate remuneration and other means of job satisfaction and fulfillment” … “it does not thereby follow that the hands of Congress are so hamstrung as to deprive it the power to respond to the imperatives of the national interest and for the attainment of other state policies or objectives… Thus, if in the process Congress appropriated an amount for debt service bigger than the share allocated to education, the Court finds and so holds that said appropriation cannot be thereby assailed as unconstitutional.”

There are other challenges. Former Senior Commissioner of the Commission on Audit (CoA) Bartolome C. Fernandez Jr., who crafted during his time COA Resolution No. 89-44 (adopted Sept. 7, 1989) which is COA’s official position on the Section 26(B) of EO 292 amid doubts as to the continued applicability and effectivity of PD 1177 (Sec. 31) vis-à-vis the constitutional injunction that “No money shall be paid out of the Treasury except in pursuance of an appropriation made by law” which “shall originate exclusively in the House of Representatives” (Sec. 29(1) and Sec. 24, Art. VI, 1987 Constitution).

Fernandez believes that “was deemed inconsistent with the 1987 Constitution pursuant to its Transitory Provision to the effect that only those decrees and other executive issuances ‘not inconsistent with this (1987) Constitution shall remain operative until amended, repealed or revoked (Sec. 3, Art. XVIII).’ The inconsistency was demonstrated by the fact that PD 1177 was issued by President Marcos alone and not enacted by Congress and, hence, was not an appropriation law within the contemplation of the Constitution; that it did not originate from the House of Representatives or undergo the legislative process of appropriation mandated by the Constitution; and that being an executive issuance under a regime of authoritarianism, it was promulgated without the consent of the sovereign people. Given such inconsistency, the COA concluded that PD 1177 ceased to be operative after the ratification of the 1987 Constitution.” [Inquirer, 2010].

 

Repealing the Automatic Appropriation

Bills repealing or amending the automatic appropriations provision or Section 26(B) of the Revised Administrative Code of 1987 has been re-filed by many representatives in the 14th Congress, but failed to advance . These bills include HB00179 by Rep. Juan Edgardo M. Angara, HB00329 by Appropriations Committee Chairperson Rep. Edcel Lagman, HB01115 by Bayan Muna Rep. Satur Ocampo, HB01134 by Gabriela Rep. Liza Maza, HB01721 by Rep. Ma Rachel J. Arenas, HB03284 by Rep. Rufus Rodriguez, and HB04426 by Rep. Narciso Santiago III. During the House deliberations on HB 2454 (2008 GAB), there has been a consensus between Minority Leader Rep. Ronaldo Zamora and Lagman to support the repeal of the provision.

In May 2009, FDC President and Rep. Walden Bello filed HR01509 urging the House to fast track the passage of appropriate bills calling for the repeal and/or amendment of the automatic appropriations provision so as to pave way for a moratorium on the payment of external debts so the country can effectively deal with the economic and climate crises. The proposal, however, has been pending on the Committee on Rules since December 2009.

For the Senate, Sen. Pia Cayetano (who just won a second-term after the 2010 elections) and Senate Minority Leader Aquilino “Nene” Q. Pimentel, Jr. (PDP-Laban) during the 2008 budget deliberations called for the repeal of the automatic appropriations, which was re-echoed by the media. Cayetano also filed Senate Resolution 235 to review the provision. Bills explicitly repealing the provision like SB1558 by Sen. Jinggoy P. Ejercito-Estrada and SB1591 by Sen. Antonio “Sonny” F. Trillanes IV were also filed in the 14th Congress.

Congressional Suspension of Interest Payments for Illegitimate and other Debts

Even with automatic appropriations was in place, in 2008, FDC was able to push for a substantive change in the policy behavior of Congress and the Senate when it comes to the debt. If in the previous Congresses they had been reluctant to touch the debt service appropriations on the issue of illegitimate debts, they now explicitly reduced debt payments with illegitimate debts as the reason. Based on the ratified Bicameral Conference Committee Report for House Bill 2454, then proposed 2008 General Appropriations Bill, interest payments for foreign loans was reduced by Senate and the House of Representatives by PhP 25.9 billion:

• PhP 15.9 billion corresponding to savings as a result of the appreciation of the peso with the exchange rate recomputed at PhP 41 to a dollar from a high assumption of PhP 48: $1 in the NEP ( National Expenditure Program) or a PhP 7 differential (savings of PhP 2.272 billion is generated for every peso appreciation); The FDC research cluster provided the figure (included in all scenarios on savings from PhP 48: $1 to PhP 38: $1).

• PhP 5 billion in suspension of interest payments for loans which are challenged a fraudulent, tainted and/or useless pending the Executive’s renegotiation of the loans or their eventual condonation; and

• PhP 5 billion in premature allocations for interest payments for program loans and bond issuances still in the pipeline.

Two (2) special provisions, Special Provision No. 1 on the “Use of the Fund” and Special Provision No. 2 on “Reporting Requirement” covered under the heading “Debt Service-Interest Payment”,  in the budget on debt service payments were also included:

• “Pending renegotiation and/or condonation  no amount shall be used for interest payments on debts which are challenged as fraudulent, wasteful and or useless like but not lmited to the following: a. The Small Coconut Farms Development Project, as financed by loan numbers 3204-0 PH and 3204-A PH from the International Bank for Reconstruction and Development (IBRD); b. The Austria Medical Waste Project, as financed by loan number 29451000 – Bank Austria 212.060 from the Bank Austria Aktiengesellschaft (Bank Austria AG); c. The Second Social Expenditure Management Program, as financed by loan number 7118-PH from the IBRD; d. The Secondary Education Development and Improvement Project, as financed by loan numbers PH-P200 from the Japan Bank for International Cooperation (JBIC), and 1654-PHI from the Asian Development Bank (ADB); e. The Philippine Merchant Marine Academy Modernization Project, as financed by loan numbers 4306551/199866609 and 3961971, both from Kreditanstalt fur Wiederaufbau (KFW); f. The Telepono sa Barangay Project, Phase I and II, as financed by loan number EDC 880 PHI 7535 from the Export Development Corporation (EDC), and loan I.D. 29463000 from the Credit Comm’l de France (CR COMML DE FRANCE); g. The Power Sector Restructuring Program, as financed by loan number 1662-PHI from the ADB and loan account JEXIM PSR from JBIC; h. The Power Sector Development Program, as financed by loan number 2282-PHI from the ADB and loan account JBIC UNTIED PSDP from JBIC; i. Sixth Road Project, as financed by loan number 1473-PHI from ADB and loan account EXIM 6TH RD PROJ.UNT from JBIC; j. The Angat Water Supply Optimization Project, as financed by loan number PH-P110 from JBIC; k. Procurement of Search and Rescue Vessel from Tenix Defense Pty Ltd., as financed by loan number 29462000 from EFIC IV; l. Pampanga Delta Development Project, as financed by loan number PH-P071 from JBIC; m. Bohol Irrigation Project Stage II, as financed by loan number PH-P202 and PH-P063 from JBIC; n. Remaining unsecuritized loans incurred during the dictatorship of former President Ferdinand Marcos”

• Support to priority social programs – savings generated in excess of PhP 25.9 billion from interest on foreign loans due to peso appreciation — priority requirements for education and health. Also, based on the Bicameral Conference Summary Report, the PhP 25.9 billion debt service cuts were used for augmenting the appropriations for health, education, agriculture, social welfare, infrastructure, local governance , justice and judiciary , labor and employment, energization, environment, and public safety and security, among others.

The proposal was vetoed by then President Gloria Macapagal-Arroyo. The presidential veto was justified on the following grounds: (1) automatic appropriation for debt service is allowed by law and has been declared constitutional; (2) the prohibition on disbursement of funds for interest payments on loans challenged as fraudulent, wasteful and/or useless is an encroachment on the constitutional guarantee of non-impairment of contracts; and (3) the government’s credit standing needs to be preserved and protected.

 

Sources

• Gordon, John Steele (1995, November). The Federal Debt: And how it grew, grew, and grew. American Heritage Magazine, Volume 46, Issue 7.

• Krishnakumar, Anita S. (2005). In Defense of the Debt Limit Statute. President and Fellows of Harvard College Harvard Journal on Legislation (JOL) – Volume 42, Number 1, Winter 2005.

• Fernandez Jr., Bartolome C. (2010, September 24). Debt servicing violates 1987 Constitution. Philippine Daily Inquirer (Letter to the Editor).

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