Arroyo knows better than anyone that raising government revenue is one of the crucial challenges her administration faces if she is to keep her electoral-campaign promise to improve the lives of the nation's working poor—and to avoid a potentially disastrous economic crisis. The Philippine economy has long been one of Asia's worst performers, left in the dust while neighbors Thailand and Malaysia have raced ahead. Over the past five years, Philippine GDP growth averaged 3.9%, compared with 6.5% for other developing countries across the region. Chronically high unemployment (currently 13.7%) means about one out of every 10 of the country's 86 million people are compelled to seek work overseas, often in miserable or dangerous circumstances. Jobs are in such short supply that street demonstrators in Manila last week protested a government ban on sending workers to Iraq—a ban Arroyo enacted after Filipino truck driver Angelo de la Cruz was taken hostage by Iraqi insurgents on July 8 and threatened with beheading unless the Philippines withdrew its soldiers. The protesters were undeterred by the bloodshed and kidnappings—they said they were willing to risk their lives for relatively high-paying jobs abroad.
As unpromising as things are for ordinary Philippine workers, they are equally dismal for the government, which has been nursing a budget deficit that has ballooned fourfold since 1998 to $3.6 billion last year. Manila has been borrowing heavily to run the government—since 1998, public-sector debt has increased by 83% to $96.8 billion, a rate of growth that many say is unsustainable. Without significant changes, "we'll have bigger problems down the road," warns deputy central-bank governor Amando Tetangco, "including the possibility of a crisis."
One obvious solution is to boost revenue by repairing the tax system. A large problem is that too many Filipinos treat tax bills like parking tickets—they simply don't pay them. According to credit-ratings agency Standard & Poor's, government revenue amounted to just 14.5% of GDP in 2003, compared with an average of 25.5% in other countries with a similar credit rating. At least 30% of the Philippines' potential tax take is lost to cheats and government corruption each year, according to Standard & Poor's. Only 7 million taxpayers have registered with Parayno's Bureau of Internal Revenue—everyone else either isn't reporting income to the government or has been exempted from paying taxes.
Arroyo, who trained as an economist at Georgetown University, declared in her State of the Nation address last month that her priority is to fix the economy "before it finds itself beyond hope of repair and [the Philippines is] doomed to share the fate of failed nations." She has followed up with a broadside of proposed reforms to eliminate the national budget deficit in six years, including eight new tax measures and other initiatives that she estimates will raise an extra $1.8 billion annually. She wants to change the corporate tax code so that amounts owed would be determined by gross rather than net income, which in theory would allow Big Business fewer deductions. She also wants to raise the country's "sin taxes" so that the levy for sales of cigarettes and alcohol keep pace with inflation. (Since 1998, taxes on certain alcohol and cigarette brands have been set by the legislature at fixed amounts.) The tax bureau estimates that this change alone could increase tax receipts by at least $225 million annually.
Not surprisingly, the proposed increases are running into resistance from lawmakers and the public. Persistent press reports that the government wants to impose a small tax on every SMS message sent via a mobile phone drew protests in the capital from opponents arguing that the levy will unduly hurt the poor, who rely on SMS as the cheapest form of communication. The administration later denied an SMS tax was being considered—but that hasn't stopped a group of activists calling itself TXTPower from complaining. "We don't need any new taxes," says Anthony Ian Cruz, one of TXTPower's organizers. "The solution for the government is spending public money more prudently."
Unfortunately for Arroyo, many in the government agree. She needs to pass much of her agenda through Congress, but even her supporters there are arguing that the Philippines needs better tax collection, not more taxes. "The President must rein in the tax terrorists in her Cabinet," says Joker Arroyo (not a relation), a Senator who is usually a key supporter of the President.
Parayno acknowledges that the inability of his understaffed bureau to catch deadbeats is part of the problem. He's been trying to come up with creative ways to strengthen collection and reduce corruption. Tax inspectors now carry wireless handheld computers that enable them to instantly check the tax status of any company or restaurant they visit by tapping into a database. To smoke out sticky-fingered tax officials, Parayno is employing "lifestyle checks" that compare their homes and cars with what they can afford on their government salaries. He is also stepping up efforts against people suspected of evading taxes. Last month, the Supreme Court revived a 1994 case against cigarette magnate Lucio Tan, one of the country's richest men. The government alleges that Tan owes about $460 million in unpaid taxes, interest and penalties. (A spokesman at Tan's Fortune Tobacco didn't return TIME's phone calls seeking comment but his lawyers have consistently denied the charges.) More investigations seem likely. "Businessmen must adopt an attitude of tax acceptance, not tax avoidance," President Arroyo recently lectured. "They must stop trying to outrun the tax collector."
Parayno has had some success. Tax revenues are 10% higher so far this year than in the same period in 2003. But squeezing a populace that in general doesn't have much money can only get the Arroyo administration so far. Ultimately, Arroyo must kick-start economic growth. Although the country has scored a few successes—the Philippines, like India, has tapped into the global trend for outsourcing and now has some 60,000 people manning call centers—meager investment is holding the economy back. Net foreign direct investment totaled a mere $161 million in 2003, down from $1.7 billion in 2002.
The terrorist bombings, kidnappings and endemic corruption that plague the Philippines keep foreign investors at bay, but so do restrictive laws. For example, the country has some of the richest deposits of gold, copper and other minerals in the world—natural resources that could be developed using foreign capital. But the Philippine mining industry is stunted by a law enshrined in the constitution that limits foreign investment in mining projects to only 40%. As a result, the country exports only about $630 million of minerals a year, even though the government sees a potential of $5 billion. In January, the Supreme Court dealt another blow to the sector when it ruled that the government cannot circumvent the law by offering foreign investors service contracts allowing them greater control over mining operations than the constitution permits. (The government is appealing the decision.)
Meanwhile, Manila's rising deficit and government debt load is making investors and officials jittery. The country "is definitely on the watch list," says Peter Marber, president of the Atlantic, an emerging-markets money-management firm in New York City. "Investors want to see a reversal of the deteriorating conditions." Nobody expects the economy to suddenly implode and the government to default as Argentina's did in 2001-02. But if the Philippines' debt burden continues to grow, Manila's creditworthiness could come under pressure, impairing its ability to borrow and ultimately making it necessary for the government to beg creditors for new terms. In a worst-case scenario, the consequences could be severe: a weakened currency, stalled investment and higher unemployment. How much time the Philippines has before this happens is hard to determine, but Arroyo's new government clearly needs to act fast, says Agost Benard, an associate director at Standard & Poor's: "There is no room for complacency. If they don't show they can enact reforms, that will be very bad for sentiment."
And for citizens. More than 40% of the country's population lives on $2 or less a day—and with 28% of the government budget being used just to make interest payments, there is little money left over to help the poor. Ten years ago, 31% of the national budget was spent on economic-development programs such as school and road construction. That figure fell to 19% in 2003. At the Pasay East High School, a dilapidated two-story building in one of the poorest districts of Manila, 5,000 students share just 34 classrooms and books are scarce. Half of the students have to arrive at 5:30 a.m.—with so little space, the school runs classes in two shifts each day. "I see no hope ahead," laments Juanita Hizbola, head of the social studies department.
Similar despair is felt by Angelo de la Cruz, the 46-year-old truck driver and father of eight who became famous last month for being kidnapped in Iraq. De la Cruz, who was released after Arroyo agreed to pull the country's 51 troops out of Iraq, risked his neck driving oil tankers in battle-scarred cities like Fallujah for $8 a day because he could find no equally lucrative work in the Philippines. "I knew Iraq was dangerous," he says, "but I had no choice." Back home in his ramshackle village of Buena Vista, his high profile hasn't provided him with a job. "I don't know what I'm going to do here," he frets. Arroyo saved his life. Now her challenge is to make life better for millions of Filipinos just like him.