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Destroying a Freeloader, ‘Palamunin’ Mentality

May 24, 2012

NOTE: I posted the following on this Facebook group.

Sometimes we have to be charitable with some people who hold dogmatic welfare faith and beliefs.

Bhavan Karnani, a Filipino Freethinker, claimed that the Philippines has one of the lowest welfare spending on earth. This guy is somehow trying to debunk our free market and anti-PALAMUNIN arguments by telling us: “But hey look! RP is one of the lowest welfare spenders on earth!”

Allow me to analyze whether this guy knows what he’s talking about, or whether he based his conclusion on junk economics.

What’s the barometer they used to come up with the data or ranking, which shows that the Philippines has ‘very low’ welfare spending? It’s GDP or gross domestic product. Is this proper? My reaction is: LOL!

Using that strategy, it appears that the Philippines has 17.3% government expenditure of GDP.

Here’s a clearer data from CIA World Factbook:

  • GDP (official exchange rate): $216.1 billion (2011 est.)
  • Government revenues (collected from taxes): $31.99 billion (14.8% of GDP)
  • Government expenditure: $36.71 billion (2011 est.)
  • GE minus GR is $4.72 billion!!!
  • Budget deficit: 2.2% of GDP (2011 est.)
  • Public debt: 49.4% of GDP (2011 est.)

What do those basic facts prove? They simply prove that RP spends more than it collects.

However, what’s wrong with using GDP to prove that “Hey! Our welfare spending is one of the lowest among all countries on earth!”

That’s just wrong, stupid. And let’s try to show why!

What is GDP, anyways? GDP is defined as the “monetary value of all the finished goods and services produced within a country’s borders in a specific time period.” It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

Just to clarify: GDP is not government revenue. In effect, GDP is the result of all economic activities and consumptions, both private and public, in one economic setting in a specific period.

But some people like Bhavan are complaining that our government spending is very low or minimal compared to our GDP. they say, ‘it’s just 17.3% of GDP.’

What does their utterly destructive ignorance imply? It implies that perhaps the government should up its spending to make it closer to the GDP.

So, since our welfare spending is $36.71 billion (2011), our government should increase it to make it proportional to our $389.8 billion GDP. Remember, RP has 17.3% spending vis-a-vis GDP. That’s very low, according to people like Bhavan.

I asked Bhavan what’s his acceptable rate. He refused to give his answer. So, I assume it should be over 30%, which is a very moderate and not-so-desperate figure.

Countries above 30% include:

  • Albania (32.3%)
  • Algeria (35.4%)
  • Bhutan (34.6%)
  • Kenya (30.1%).

Meanwhile, countries with the highest public spending, and which are supposed to be the happiest according to Bhavan’s logic, include:

  • Zimbabwe (97.8%)
  • Timor-Leste (97%)
  • Kiribati (114.6%)
  • Cuba (78.1%)

These are the countries that focused more on welfare spending rather than economic growth. Let reality speak whether life is happier in these absolute welfare states.

What will happen if we try to increase our welfare spending by 30%? The government must secure the following:

  1. Using the GDP figure above, 30% of GDP is $64.8 billion. That’s what the government should spend to make welfare spending closer to its GDP.
  2. As stated above, the 2011 spending is 36.71. Where will the government get the remaining $28 billion?

According to Bhavan (if 30% is his acceptable rate), the answer is modernized and efficient tax collection system by the BIR. Well, good luck with that.

My projection is that even if every taxpayer in this country is willing to pay his/her taxes, the BIR is lucky to collect additional $5 billion revenues. Thus, the only solution to achieve that figure is to levy more taxes and increase tax rates. That’s the only solution. The question is: What’s the proposed rate? And, will this government have more people and businesses to tax should it add taxes and increase tax rates? I don’t think so. My personal guess is, many businesses and millionaires would flee this bankrupt country before the government could impose more taxes and increase tax rates.

I believe that the best barometer is not GDP but government revenue. Why? How about those countries that do not levy higher tax rates like Hong Kong and Singapore? It’s absurd- or even utterly ignorant- to argue that government spending must be based on- or proportional to- the country’s GDP. Government spending solely depends upon the government’s total tax collection or revenue.

Also, government spending depends upon the economic policies and political system of a nation. There are nations that don’t spend much on welfare, so they don’t collect more taxes. The focus of these nations is on economic growth, because it’s what makes people happier.

Bhavan Karnani also claims Hong Kong is also one of the lowest welfare spenders based on the global ranking using GDP as the determinant.

Let’s look at the basic facts about Hong Hong’s economy and spending to see whether Bhavan truly knows his figures or facts:

HK’s total population is 7,153,519 (July 2012 est.). It’s the 99th least populous nation on earth. Philippine’s total population is 103,775,002 (July 2012 est.) This means that RP is supposed to have a higher GDP and more taxpayers than HK.

In terms of labor force, RP has 39.81 million (2011 est.), while HK has 3.701 million (2011 est.) To junk economists, they might assume RP has a more developed economy compared with HK. Of course such an assumption is WRONG. That’s not how economics works.

  • GDP (official exchange rate): $242.4 billion (2011 est.)
  • Unemployment rate: 3.4% (2011 est.); RP’s unemployment rate is 7.2% (2011 est.)
  • National revenues: $55.53 billion
  • Government expenditures: $46.97 billion (2011 est.); RP: $36.71 billion– That’s a very high government spending for a 7-million country.
  • HK’s taxes and revenues: 22.9% of GDP (2011 est.)
  • Budget surplus: 3.5% of GDP (2011 est.)

Who says HK does not spend much on welfare?

Despite Hong Kong’s lower tax rates, less taxes, less taxpayers, it still collects more revenues? Why is that? It’s because the Laffer curve works!

Imagine, HK, which has 7.153 million population and 3.7 million labor force, collected a total of $55.53 billion in revenues in 2011. That is way higher than RP’s total collection of $31.99 billion!

The lesson here is: study economics and use more logic!

5 Comments leave one →
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