Bureaucratic rightsizing a big part of fiscal reform push

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“The prodigal perverts by not confining his expense within his income, he encroaches upon his capital… By diminishing the funds destined for the employment of productive labor, he necessarily diminishes the quantity of that labor which adds a value to the annual produce of the land and labor of the whole country.”

— Adam Smith,The Wealth of Nations (1776),Book 2 Chapter 3,Of the accumulation of capital,or of productive andunproductive labor

Among the displeasure by the public of the huge and elaborate government bureaucracies, both national and local, is that they produce very little except more regulations, restrictions and prohibitions, require more taxes, fines and penalties. So the public desire less bureaucratic restrictions and taxation, more free enterprise and competition.

Reforming the government bureaucracy has been tried in many administrations before but did not prosper. Here are 10 things about the bureaucracy and ways to reform it.

1. Salaries, allowances, pensions, other pay by National Government personnel expanding fast. Total personnel expenses from 2015 to 2021 expanded two times, while nominal gross domestic product (GDP) has expanded only 1.5 times. During strict lockdowns in 2020, many private sector jobs and pay evaporated, even as government pay continued to increase.

2. Government compensation is now 6.6% of GDP. From only 5% to 5.5% in 2013 and 2015, the average share from 2020 to 2022 has increased to 6.6%.

Note that these numbers refer only to National Government permanent positions and do not include casual, contractual and other nonpermanent staff. They also do not include employment by local governments.

3. Military and uniformed personnel (MUP) compensation and pension rising faster than civilian personnel. From the 2015 level, their compensation and pension had doubled by 2020 or after five years, while civilian personnel compensation and pension had doubled by 2022 or after seven years (Table 1).

4. National Government permanent positions increased from 1.15 million in 2005 to 1.43 million by 2015, then to 1.82 million by 2020. On top of these, there were also increases in National Government nonpermanent staff including contractual workers, plus increases in local government personnel.

5. From 2019 to 2020 lockdown, private sector employment declined 3.3 million but government employment remained flat. Overall employment in October 2019 was 43.14 million, shrank to 39.84 million in October 2020. But government permanent personnel remained flat at 1.8 million.

6. Government compensation rising faster than overall national compensation. Since the number of government permanent staff has increased only marginally but compensation is doubling, that means government salaries, allowances and pension are rising much faster than private compensation and overall GDP.

7. National Government personnel should have flatlined or declined in 2022 after the implementation of the Mandanas ruling but this did not happen. The Mandanas ruling by the Supreme Court allocated bigger revenues and functions to local governments. Receipts by local governments increased by 22.4% from P942.6 billion in 2021 to P1,214.4 billion in 2022. National Government personnel continued to expand in 2022 and 2023.

8. The National Government Rightsizing bill is now moving in Congress. Streamlining and reducing the size of the bureaucracy, especially national agencies, should happen soon. Good thing that the House committee on government reorganization has passed the bill that aims to reduce redundancy or duplication of functions at some agencies.

9. Some of the 187 government agencies must go. Streamlining, merging, restructuring or abolishing some agencies including government corporations must happen. President Ferdinand R. Marcos, Jr. mentioned this in his first State of the Nation Address in July.

10. DBM leads the rightsizing reform. Budget Secretary Amenah F. Pangandaman is emphatic that they are supporting the president in this important reform. The fiscal pressure — National Government borrowings averaged P2 trillion/year in the past three years mainly to sustain government compensation and subsidies despite low revenues.

A big reduction in the budget deficit, annual borrowings and interest payments should happen soon. Interest payment alone was P429.4 billion in 2021, P512.6 billion in 2022 and is projected to reach P582.3 billion this year.

Now that the president and the House leadership have expressed serious intent to establish the Maharlika Investment Fund, the government is implicitly coerced to limit spending and the deficit, and generate fiscal surplus somewhere. Rightsizing the bureaucracy is an important part of this big fiscal reform, along with pension system reform in the military and police.

Bienvenido S. Oplas, Jr. is the president of Bienvenido S. Oplas, Jr. Research Consultancy Services, and Minimal Government Thinkers.