Briefer on the Automatic Debt Servicing Provision: Involuntary Push towards Poverty and Mal-development

By the Freedom from Debt Coalition (October 2010)

Freedom from Debt Coalition
#11 Matimpiin Street, Barangay Pinyahan, Quezon City, Philippines 1100.
http://www.fdc.ph. mail@fdc.ph. +63(02)9246399 (telefax). +63(02)9211985.
1 of 5
Briefer on the Automatic Debt Servicing Provision
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
1
). 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
2
,
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].


1
The full title is: Revising the Budget Process in order to Institutionalize the Budgetary Innovations of the New
Society.
2
Prior to the war, US government revenues are already shrinking. From $50,827,000 in 1836, it dropped to
$24,954,000 in 1837. From that year up to 1843 when the depression ended, the government would only have one
year of surplus. During this period, debt climbed up to $32 million. The Mexican War then caused a further rise, to
$68 million [Gordon, 1995].
Briefer on the Automatic Debt Servicing Provision: Involuntary Push towards Poverty and Mal-development
By the Freedom from Debt Coalition (October 2010)

Freedom from Debt Coalition
#11 Matimpiin Street, Barangay Pinyahan, Quezon City, Philippines 1100.
http://www.fdc.ph. mail@fdc.ph. +63(02)9246399 (telefax). +63(02)9211985.
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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
COAs 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--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].
Briefer on the Automatic Debt Servicing Provision: Involuntary Push towards Poverty and Mal-development
By the Freedom from Debt Coalition (October 2010)

Freedom from Debt Coalition
#11 Matimpiin Street, Barangay Pinyahan, Quezon City, Philippines 1100.
http://www.fdc.ph. mail@fdc.ph. +63(02)9246399 (telefax). +63(02)9211985.
3 of 5


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 14
th
Congress, but failed
to advance
3
. 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
14
th
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

3
For the 13th Congress, bills have also been filed for this purpose but also did not advance beyond the Committee
on Appropriation: HB00164 by Rep. Constantino Jaraula, HB01426 by Rep. Roseller Barinaga, HB01592 by Rep.
Eulogio Magsaysay, HB02077 by Rep. Edcel Lagman, HB02390 by Rep. Benjamin Abalos, HB02496 by Rep. Satur
Ocampo, HB03240 by Rep. Lisa Maza.
Briefer on the Automatic Debt Servicing Provision: Involuntary Push towards Poverty and Mal-development
By the Freedom from Debt Coalition (October 2010)

Freedom from Debt Coalition
#11 Matimpiin Street, Barangay Pinyahan, Quezon City, Philippines 1100.
http://www.fdc.ph. mail@fdc.ph. +63(02)9246399 (telefax). +63(02)9211985.
4 of 5
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
Briefer on the Automatic Debt Servicing Provision: Involuntary Push towards Poverty and Mal-development
By the Freedom from Debt Coalition (October 2010)

Freedom from Debt Coalition
#11 Matimpiin Street, Barangay Pinyahan, Quezon City, Philippines 1100.
http://www.fdc.ph. mail@fdc.ph. +63(02)9246399 (telefax). +63(02)9211985.
5 of 5
challenged as fraudulent, wasteful and/or useless is an encroachment on the constitutional guarantee of
non-impairment of contracts; and (3) the governments 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).