A pleasant evening to all of you:
It is truly a pleasure to spend this evening with a group that is exerting every means to draw investments into our economy. The Duterte administration is pushing a broad range of institutional and economic reforms with the goal of not only achieving high growth but also shaping that growth so that it will become truly inclusive. To achieve this goal, our growth must be investment-led instead of consumption-led.
Investment-led growth creates meaningful employment. It draws our young workers into jobs that require globally competitive skills. It allows us to optimize assets that are scarce such as land and water. It draws us to our advantages such as a young labor force capable of learning and doing new things.
To produce investment-led growth, however, we need to rapidly upgrade our infrastructure. After many years, of spending less than our neighbors for quality infra, we now face a huge backlog that this administration aspires to close in the medium term. To achieve that, however, the government must be armed with ample revenues to do a groundbreaking public investments program. This is where the Finance Department comes in and where its role becomes absolutely critical.
Today, we are gearing up for another major push to further improve tax administration and raise the revenues required to fund an ambitious infra program. You know very well how our neighbors overtook us during the last two decades by investing 5% of their GDP in infra while we invested only about half of that. As a consequence, their economies became more efficient and competitive. They brought down logistical costs and made goods available more cheaply.
By contrast, we suffer the effects of what might be called an “infrastructure gap.” We lack efficient ports and airports, roads and bridges. That lack merely magnified the archipelagic nature of our economy — itself already a hindrance to economic integration. Our insufficient infrastructure backbone constrains economic inclusion. Areas in our economy, especially isolated islands and parts of large islands that did not have sufficient power supply, were kept out of the mainstream of modernization. We cannot have a truly inclusive growth pattern until we are able to close the infrastructure gap.
The new administration, as you are well aware, embarks on an ambitious economic program. We seek to bring down poverty incidence to 14% of the population by the end of President Duterte’s term and bring the country to high-income status by 2040. By that year, we hope to have eradicated extreme poverty. To accomplish this, we are targeting a GDP growth rate of 7% or better over the next six years. By rapidly modernizing our agricultural sector, we are looking to relieve rural poverty. That is key to bringing down the poverty rate.
The economic objectives require increased investments in infrastructure. Some of the new infra will come in the form of public-private partnerships. To fund increased public investments in infra, education and public health, we will need to raise an additional P366 billion per year over the medium term.
During the campaign, President Duterte committed to cut individual and corporate income tax rates. We are going to do that not only because it was a campaign promise but, more important because it makes good economic sense. We cannot hope to attract investment flows into our economy if our tax rates are substantially higher than in neighboring economies. We seek to bring personal income taxes from the top rate of 32% to a more reasonable 25%.
Apart from removing a disincentive to investment, lower income tax rates reduce the incentive to evade taxation. Combined with a program to overhaul our tax system to make it simpler for the taxpayers to comply, we hope to broaden the tax base. It is difficult to imagine that an economy as complex and as dynamic as ours is has a large taxpayer base of fewer than 3,000 individuals and companies.
The Philippines and Thailand collect about the same amount from the VAT system. However, Thailand has a VAT rate of only 7% while we have a 12% rate. Clearly, there is a lot of inefficiency in this otherwise effective revenue source. We need to close the leakages in our VAT system by reducing exemptions created by populist legislation. By closing those leakages, we broaden the VAT base.
Through continuing reforms in tax administration, we hope to draw significantly more revenues. Broadening the income tax and VAT bases should produce enough revenues to offset the lowering of income tax rates. That, however, will only make us revenue neutral. In order to fund a massive infra program that will enable our economy to compete effectively as well as increase investments in human capital, we will have to introduce new revenue measures.
Those resisting the tax reform package argue that improvements in tax administration should yield the necessary revenue to fund government programs. I wish that were true. It would make my life immensely easier. The fact, however, is that the efforts of the two main revenue agencies, helped by administrative reforms put in place, are now yielding over 97% of targeted collections. This demonstrates that the targets were fair and achievable if the agencies exert the right effort. Even if we hit 100% of collection targets through the heroic efforts of the BIR and Customs, the revenue generated will still fall short of what we need to close the infra gap and invest in our human capital.
We expect Congress to be a staunch partner in reinventing our tax system so that it becomes simpler, fairer and more efficient. Reforms in tax administration can only go so far. Reforms in tax policy will help complete our reforms in tax administration.
In just seven months, the change has been palpable in our revenue agencies. There are now fewer complaints about misbehavior at the BIR and the BOC. We adopted more reasonable targets but warned our revenue personnel the Attrition Law will be applied with determination.
Our tax effort continues to remain one of the lowest in the region. This reflects in the low investment rate that is due to small public investments as much as it is due to a chronically low savings rate. While we are seeking to grow our capital market, broaden the reach of our banking system to reach 86% of Filipinos who remain unbanked, public investments must be raised. The infra gap raises costs all around and prevents our economy from being fully competitive. That further compounds the poor investment rate.
This is the moment to cut the knot that binds our country’s development. Our population is nearing a demographic “sweet spot” where millions of young Filipinos will be joining the workforce. We need to train them in the high skills required for a 21st-century economy. We need to close the infra gap to bring isolated island economies to the mainstream of our growth. We need to modernize our digital backbone, our airports, and ports, our roads and bridges to take advantage of the opportunities offered by the large trends in our region.
We cannot, for instance, grow our tourism sector unless we build the necessary infra to feasibly move tourists to our prime destinations. We cannot compete for capital if we lack the power resources to support an enlarged industrial base. We cannot expand our BPO sector unless we bring in a cutting edge digital infrastructure. In a word, the favorable economic trends in the region will again pass by us if we do not seize the moment.
Unless we produce new revenues, we cannot build the infra we need. That will cause us to miss all the other opportunities brought about by our solid credit ratings, our stable banking and finance sector and our demographic advantage over aging Asian economies such as Japan. This is the time for our economy to break out from low growth and broad poverty.
The key to this is the tax reform package that will bring in an additional P800 billion in revenues. The revenue flow will enable public investments that will sustain our growth rate at 7% or better in the coming years. At that pace of growth, coupled with inclusive policies, we should be able to bring down the poverty rate to 14% by the end of the Duterte administration. It will make our economy a growth driver for the region and a model for the rest of the world.
We have to do this now and I ask for your support to see this through. And since this is such a pleasant evening, let me end by quoting from William Shakespeare:
“There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life is bound in shallows and miseries. On such a full sea, we are now afloat, and we must take the current when it serves, or lose our ventures.”
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