Discussants:
Mr. Margarito Teves, Secretary, Department of Finance
Mr. Bert Hofman, Country Director, World Bank
Introduction
The purpose of giving this lecture is to start a paper on how on how taxation and government expenditures in the Philippines could be reformed. This short paper is the bare bones of a longer paper that would hopefully be finished in a month or two. With regard to sustainability of the national debt, our view is that a 150 billion peso deficit (or even 200 billion) would not be a threat to the sustainability of the public debt if:
(a) Macroeconomic stability and fiscal credibility can be maintained.
(b) Government expenditures and programs give taxpayers good value for money.
1. Off‐budget deficits (e.g., arising from contingent liabilities) can be eliminated or significantly
reduced, and
(c) The tax system is buoyant (i.e., tax‐GNP ratio is not falling).
Unfortunately, except perhaps for the first assumption, all of the above assumptions stand on very weak grounds unless major reforms are undertaken. The problems with the second assumption need no further elaboration. On the other hand, off‐budget deficits have been large and there’s no reason to be complacent just because off‐budgets deficits have not contributed to the build up of the debt of the national government since 2004. Indeed, that the global financial crisis has resulted in nationalization of losses of the financial sector in developed countries—which supposedly have much stronger regulatory
institutions and environment than the Philippines—should serve as more than ample warning. The decline of tax effort (as measured by the ratio of tax revenue to GNP), on the other hand, deserves a second look. The prevailing but faulty interpretation of the data suggests that it should not be difficult to raise tax effort since the fall in tax effort occurred fairly recently (after the Asian Financial Crisis). However, a closer look that relies less on benchmarking tax revenue with GNP would show that much of the decline in tax effort is due to the business cycle (e.g., the unsustainable boom in corporate profits
prior to the Asian Financial Crisis), the change in the level and composition of imports and the irreversible reduction in tariffs (which is at the core of much of the government’s economic reform program). The only factor that should be easy to reverse (but not easy politically) is the obvious fact that inflation has eroded the revenue from excise taxes. On the other hand, while the EVAT was the appropriate response to the fall in tax effort due to the fall in corporate profits and revenues from
duties and taxes on imports, part of the gains from EVAT must be given up to reduce corporate tax rates and increase personal tax exemptions. 1
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1This note is prepared for the 4th Ayala Corporation‐UPSE Economic Forum. The authors are Professor and Ph.D. candidate, respectively, of the University of the Philippines School of Economics. The views and conclusions here are the authors alone and do not necessarily reflect the opinion of the Ayala Corporation, the UP School of Economics or other institutions they are affiliated with.