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Youngest gun

Youngest gun

In a seat traditionally occupied by elder statesmen, Sec. Karl Chua, 43, has demonstrated uncommon wisdom and a commitment to long-term reform

By RAFAEL A. S. G. ONGPIN

The good news is that Dr. Karl Kendrick Chua is now a full Socioeconomic Planning Secretary, no longer just Acting Secretary. Dr. Chua is both the youngest cabinet secretary of this administration, and the youngest to be appointed to the Socioeconomic Planning post, at age 41. He was confirmed on June 2nd, just over a month short of his 43rd birthday on Jul  14. Sen. Ralph Recto, who held the post for about a year, was previously the youngest at 44 years old when appointed in 2008.

 

Dr. Chua is seen not only as bright and personable, but also capable, with good managerial capability, and fiscal responsibility. A father of one son, born 2016, he usually goes to work on a bicycle and brings lunch from home. He earned both his masters and doctorate in economics from the University of the Philippines, where he was a student of Bangko Sentral Governor Ben Diokno and a schoolmate of Secretary of Tourism Bernadette Romulo Puyat, who taught economics there for over a decade. Dr Chua worked for Andersen Consulting, then the World Bank from 2005, was appointed WB country economist for the Philippines in 2008, and was a WB senior economist from 2012 to 2016, when he resigned to join government as an Under- secretary of Finance, where he was instrumental in crafting many tax reforms.

One characteristic of Dr. Chua’s financial management is that he has advocated long term fundamental reforms instead of short-term reactive measures. He craft- ed a P2.5 trillion Economic Recovery Program, no mean feat, in a short time. This program, which is as big as 14% of GDP, has clever long-term initiatives, such as tax incentives for individuals and businesses to locate in less developed rural areas, in order to spread economic growth outside congested urban centers.

The GDP measure, which is the standard used by most of the world in determining economic growth or contraction, does not discern or express income and wealth inequality adequately. Because a large part of the economy is controlled by a small per- centage of the population, the high growth of the last 15 years or so was not accompanied by a drastic reduction in the poverty rate until very recently. While per capita income calculated from GDP has risen, the reality is that rich Filipinos are getting richer faster than poor Filipinos are getting less poor.

Many of the initiatives driven by NEDA, under Dr. Chua, are meant to address these inequalities and broaden the base of progress. For example, under the TRAIN Law of 2017, employees earning up to P250,000 annually (P20,833 a month) are finally exempted from income taxes, or even filing income tax returns, a measure which had languished in Congress for at least 30 years. Previously, the exemption was for mini- mum wage earners only, which was difficult to calculate, as minimum wage varies from place to place. This also meant that a salary increase below 6% above minimum wage would cause the employee to effectively be earning less.

To compensate for these lowered taxes, The TRAIN law raised consumption taxes sharply on certain goods, particularly “sin taxes” on alcohol, tobacco and cosmetic surgery, sweetened beverages, and automobiles. While this was roundly criticized at the time, it certainly was progressive in that it transferred more of the tax burden to those who had money to spend on luxuries.

The secretary is not necessarily an evangelist of the Laffer Curve, which basically says that when you raise taxes above the level that people are willing to pay, they simply won’t pay taxes. However, many of the DOF tax reforms have used this principle, lowering certain taxes to achieve better collections. An example is the inheritance tax. Under the TRAIN law, Capital Gains, Inheritance Tax and Donor’s Tax are now all at 6%. In the past, Capital Gains was 5-6%, much lower than Inheritance and Donor’s Tax, which were as much as 20%. Thus, a lot of estate planning involved incorporating the assets into companies and selling the assets, or the companies themselves, to the heirs, thus evading the inheritance tax by paying Capital Gains instead. In the new scheme, it makes no sense to evade the inheritance tax. By making it reasonable, the government stands to collect much more than it used to.

The outcome was an 18.4% increase in tax collections for 2018, as reported by Finance Sec. Carlos Dominguez. This was accompanied, as critics predicted, by in- creased inflation due to more money in the system, but the Bangko Sentral was able to rein in the price increases.

As a forecaster, Chua remains optimistic, projecting 2021 GDP growth at 6-7%. Of course, this is coming from an abysmal -9.5% growth in 2020, so maybe it’s not overly optimistic, as it means a net -2.5 to -3% vs 2019. But as Chua himself has said, 75% of the economy was shut down during the

first lockdown in 2020, whereas during the ECQ in 2021, perhaps only 25% was shut down, so he believes recovery is on the way.

From the Department of Finance, Chua was chosen to succeed Dr. Ernesto Pernia, who resigned in April 2020, saying “This is due partly to personal reasons and partly to differences in development philosophy with a few of my fellow Cabinet members.” Manila Times columnist Rigoberto Tiglao, however, claimed that Pernia was ejected for failing to implement the National ID program, known formally as the Philippine Identification System (Philsys), which had been signed into law in August 2018. The agency in charge of the rollout, according to this law, was the ill-equipped and underfunded Philippine Statistics Authority (PSA), which falls under the Socioeconomic Planning portfolio.

The Philippines is one of only nine countries left in the world without a national ID system. The rollout finally started in October 2020. However, the program is far from achieving any sort of traction. The original target was for 26 million Filipinos to be issued ID’s by 2020. In typical Duterte government fashion, the PSA announced in December of that year that 9 million had been registered with the program, conveniently omitting that almost none of these had actually been issued an identification card, having only completed the first step of a three- step process. Recently, the PSA signed a deal with SM Prime Holdings Inc. to provide registration centers at SM Malls nationwide.

The importance of a national ID to economic development cannot be understated. It is thought that less than half of all Filipinos have some form of what bureaucrats love to call “valid” ID— as if there was such a thing as “invalid” ID. About 90% of the initial registrants (admittedly, biased towards the poorer sectors of the populace) said they had no bank account, and indeed, could not get one, simply because of the lack of identification. They simply cannot even prove that they exist.

This state of affairs was brought into even sharper relief during the pandemic, when it turned out that food and monetary aid meant for the underprivileged was being stolen, traded, or otherwise mis- allocated, simply because neither the local nor national government could identify qualified recipients.

With a widespread implementation of the National ID, government subsidies and aid will be better allocated and more effective, and there is much better potential for financial inclusion, as low-in- come people can now have bank accounts and be able to borrow money.

The president just signed the latest package of tax reforms, called the CREATE Law, on March of this year. It has been called the largest fiscal stimulus ever enacted into law in the history of the country, and one of the key features is that it gradually lowers corporate tax from 30%, at the rate of 1% a year, to be competitive with regional neighbors at 20% a decade from now.

There is still time for NEDA and the DOF to put together one last package before the administration ends, and we will see what clever ideas they will come up with this time. In the remaining time of this administration, Dr. Chua is seen as a firm hand on the tiller of the nation’s economy, in close partnership with his former boss, Finance Sec. Carlos Dominguez, and former mentor, Bangko Sentral Governor Ben Diokno.

 
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