Business World, 7 April 2015


Last year’s “fiscal policy was contractionary with the budget deficit of 0.6% of GDP,” concluded Chikahisa Sumi, the International Monetary Fund (IMF) mission head who was in Manila from Mar. 25-31. That’s a diplomatic way of saying that the contribution of the government to economic growth was negative.

The deficit target for 2014 was 2% of GDP, which I think was too low for a country that is striving to catch up with its more developed ASEAN neighbors.

“Over the medium term, structural policy issues center around increasing investment, particularly in infrastructure and human capital,” the IMF mission head added. But that’s neither a new nor a surprising observation. Local economists and business leaders have been saying that all along.

Sumi concluded: “In this regard, continued efforts at enhancing revenue mobilization will be critical to address the large spending needs, including enacting measures to offset any revenue eroding policy change and preferably through a comprehensive tax reform.”

Funny, but that’s exactly what the former IMF Representative to Manila, Dennis Botman, said five years ago, on Apr. 20, 2010. Botman observed: “For the Philippines to grow consistently at the levels observed in neighboring countries, it is essential that the tax effort increases substantially.”

He added: “The additional resources can be used for higher public investment and social spending. If this is combined with improving governance and lowering the cost of doing business, investment will increase, jobs will be created, and growth will accelerate.”

“The more things change, the more they remain the same”, French novelist Alphonse Karr once said. Indeed, tax effort — defined as taxes as percent of gross domestic product (GDP) — has remained virtually the same after five years of Aquino and despite the heroic efforts of Bureau of Internal Revenue Commissioner Kim Henares.

The harsh reality is that the next administration will be faced with more formidable spending challenges. The K+12 educational reform is a good program but it is seriously underfunded.

The next administration has no choice but to continue with the costly Conditional Cash Transfer program. Even if the program is run efficiently and effectively it will cost the government a lot of money. In the last decade, poverty has remained painfully unchanged. More Filipinos need government assistance to survive and live decently.

The infrastructure gap has reached epic proportions. The government needs more than 5% of GDP for the next 10 years to keep up with its ASEAN-5 neighbors. Its priorities should be air, sea and road transport, the rail system, and the urban transit systems. Equally crucial is the provision of sufficient, affordable, and reliable power.

The Philippines is one of the countries in the world that is most vulnerable to natural calamities. As such it has to build formidable defenses and reliable infrastructure against typhoons, flooding, earthquake, storm surges, volcano eruptions and the like in the near and long term.

Over the 10-year period, from 2003 to 2013, the economic losses from natural and man-made disasters reached P312 billion, according to data released recently by the Philippine Statistics Authority. Losses from natural disasters were estimated at P307 billion, while man-made disasters cost the country P4.5 billion in revenues. The highest loss due to natural disasters was in 2013, when the economy recorded a P93-billion loss, largely because of supertyphoon Yolanda (international code name Haiyan).

Where will the next administration get the money to finance these essential public expenditures? The tax effort has to improve by at least another 3% to 5% of GDP.

The irony is that at a time when the Philippine government has to raise more taxes, there are strong pressures for it to reduce personal and corporate income tax rates. This is not only because such move is fair, but also because the Philippine income tax regime has to be reformed to make it competitive with its ASEAN-5 neighbors.

The high tax rates are a consequence of the system’s narrow tax bases. For a given revenue target, tax rates may be lowered if only many more individuals and firms will pay taxes. Lower tax rates also mean lower economic dead weight loss or economic inefficiency.

The sharp drop in world oil prices threatens tax collections. The Department of Finance estimates the revenue loss due to lower oil prices at around P40 billion. And this low oil price regime will not go away soon.

The proposal to rationalize the grant of fiscal incentives is moving so slowly in the legislative mill. There is a strong lobby to maintain the status quo.

Worse, there are a number of tax-eroding proposals, but none that would raise revenues adequately, rationally and sustainably. There is one that proposes to exempt the payment of VAT for power. Another proposal seeks to expand tax exemptions for senior citizens.

And as the 2016 national elections approaches, I expect more tax exemption proposals. They are what I call “pork barrel on the tax side.”

The fear is that these tax-giving proposals may just be too tempting for the President who has just squandered a huge chunk of his political capital. Mr. Aquino’s trust rating that started at an enviably high 78% (80 trust, 2 distrust) has plunged to a single-digit 9% (36 trust, 27 distrust).

The hope is that rationality would prevail: that the temptation for political demagoguery would be fiercely resisted and quashed. Otherwise, Mr. Aquino would bequeath to his successor a much weaker tax system than what he inherited from his predecessor.