Tax reform to fund infra buildup and spur growth above 6 percent

Date Posted : January 16, 2017

Tax reform to fund infra buildup and spur growth above 6 percent

Date Posted : January 16, 2017

The Philippines would be hard put in the years ahead to keep Gross Domestic Product (GDP) growth above 6 percent and maintain its status as one of Asia’s fastest-growing economies without a massive infrastructure buildup funded mainly via tax reform, the Department of Finance (DOF) said.

Finance Secretary Carlos Dominguez III said funding the Duterte administration’s ambitious infrastructure program by raising sufficient revenues for tax reform, rather than relying primarily on borrowings, is necessary to keep the budget deficit within the manageable level of 3 percent of GDP beginning 2017.

The incremental revenues estimated to be collected from the first package of the Department of Finance-proposed Comprehensive Tax Reform Program (CTRP), amounting to some P163 billion in 2018, is consistent with the planned increase in the budget deficit from 2.7 percent of GDP in 2016 to 3 percent of GDP from 2017 till the remainder of the Duterte presidency.

He said that without tax reform, the deficit of 3 percent of GDP will be breached, leaving the country susceptible to an unsustainable fiscal position, which could lead to a credit rating downgrade that is below investment grade.

“The non-passage of the tax reform package now pending in the Congress will have dire consequences not only on our hard-earned gains in improving our macroeconomic fundamentals but also on the lives of our poor and vulnerable fellow Filipinos,” Dominguez said.

He pointed out that accelerating spending on infrastructure would not only fill the massive backlog left behind by the previous administrations but would also create more jobs, which would further spur economic growth and help free some six million Filipinos from extreme poverty over the next five years.

“This means there will be no letup in the Duterte administration’s commitment to spending big on urban and rural infrastructure as a growth driver, to guarantee sustained high, inclusive growth,” the finance chief said.

Dominguez explained that the economy’s growth trajectory is already approaching close to our potential growth, and higher growth will only be possible if the country has better infrastructure to support stronger demand and a burgeoning population.

He said the timely approval of the CTRP is crucial to the financial viability of the Duterte administration’s higher public spending policy because it aims to correct our tax system’s “inherent flaws, such as non-indexation to inflation of rates and large scope of exemptions and special treatments that complicates tax administration” that have for long prevented the BIR and BOC from consistently meeting, much less surpassing, their annual revenue targets.

“Without the tax reform and the higher infrastructure investment, economic growth will be slower in the coming years, and we will be hard pressed to grow above 6 percent,” he said.

“This can cost the government around P30 billion more in debt servicing. It can also leave the government more vulnerable to fiscal risk as increasing liabilities, such as pensions of uniformed personnel, will be left without funding sources,” Dominguez said.

Infrastructure spending, according to the National Economic and Development Authority, should be increased from 5.4 percent of GDP in 2017 to 7 percent of the GDP in the following years to achieve the country’s vision of reducing poverty and becoming an upper middle-income economy by 2022 and close to becoming a high-income one by 2040.

“This means there will be no letup in the Duterte administration’s commitment to spending on urban and rural infrastructure as a growth driver, to guarantee sustained high and inclusive growth,” Dominguez said.

Dominguez traced the country’s infrastructure backlog—a deficiency that has blunted the Philippines’ competitiveness in the region as an investment destination—to the sad reality that while the Philippine government has been spending on average just 2.7 percent of our gross domestic product (GDP), our Southeast Asian peers have devoted at least 5 percent of their respective GDPs to infrastructure investments.

He said reforms in tax policy, which require prior congressional approval, will raise additional revenues of P163 billion in 2018 to help bankroll the government’s ambitious infra program.

He noted that the economy’s strong showing in the third quarter with GDP growth at 7.1 percent, is its best in three years. The country’s growth was faster than China’s 6.7 percent, Vietnam’s 6.4 percent, Indonesia’s 5 percent and Malaysia’s 4.3 percent.

Dominguez said the highly optimistic outlook on the Philippines by credit raters and international institutions is premised on the delivery of President Duterte’s commitment to accelerate spending on infrastructure, which can only be accomplished through tax reform.

Package One the CTRP was submitted by the DOF to the Congress last Sept. 26.

Dominguez said the DOF welcomes the recent statement of Rep. Dakila Carlo Cua, who chairs the House ways and means committee tackling tax reform, that his panel will approve CTRP’s first package this January, while the House will likely act on it in plenary in the middle of this year.

This will let the government keep its target of implementing the tax reforms beginning 2018, he said.

In the medium-term, tax reform is expected to help reduce the poverty rate from 21.6 percent in 2015 to 14 percent in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from $3,550 in 2015 to at least $4,900 by 2022, close to where Thailand is today.

If this momentum is sustained, the country would be well on its way to becoming a high-income economy by 2040 with a per capita gross national income of a least $11,000, which is where Malaysia is right now, he added.

Package One proposes to lower personal income tax rates, broaden the Value Added Tax (VAT) base, and increase the excise taxes on oil products and automobiles.

The lowering of personal income tax rates, a promise that President Duterte made during the 2016 poll campaign, will increase the take-home pay of workers and make our tax rates more competitive, according to Finance Undersecretary Karl Kendrick Chua said.

A broader VAT base will level the playing field and reduce massive leakages, while higher excise taxes on oil products and automobiles will improve the progressivity of the tax system as richer households consume far more of these products, he said.

“Meanwhile, to protect the poor and vulnerable sectors, highly targeted transfers and subsidies will be provided as part of the ramp-up of social spending from 37.3 percent of the 2016 budget to 40.1 percent of the 2017 budget,” he said.

According to a report quoting BMI Research, sustaining the country’s high growth path is dependent on the Duterte administration’s ability to roll out big-ticket infrastructure projects.

“Economic growth performance will largely depend on the Duterte administration’s ability to cut through red tape and get infrastructure and investment projects going, as well as to reassure investors of the government’s commitment to maintain and improve the public-private partnership program,” read the report of BMI Research published in the January edition of its Asia Monitor.

Also, the Oxford Business Group has cited a November report of rating agency Standard & Poor’s that said the Philippines was a top performer in Southeast Asia in 2016 partly because of an expansionary fiscal policy that emphasizes public infrastructure.

Other institutions have also said the Philippines can sustain its high growth of above 6 percent and its status as one of Asia’s fastest-growing economies, provided that the Duterte administration delivers on its commitment to accelerate spending on infrastructure.

These private and multilateral institutions include the IMF, World Bank, ADB, Fitch Ratings, S&P Global Ratings, Nomura, First Metro Investment Corp. (FMIC), Colliers International, Nordic Business Council of the Philippines (NBCP), Philippine Chamber of Commerce and Industry (PCCI), Employers’ Confederation of the Philippines (ECOP), Goldman Sachs, Bank of the Philippine Islands (BPI), Standard Chartered Bank, Hong Kong and Shanghai Banking Corp. (HSBC), Sun Life Asset Management Co., AB Capital Securities, Lamudi PHL and the Management Association of the Philippines.


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Date Posted January 16, 2017

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