Apart from being “meritorious” on its own as a tool for overhauling the country’s “outdated” tax system, the Comprehensive Tax Reform Program (CTRP) being proposed by the Department of Finance (DOF) is a crucial funding component of the Duterte administration’s bold “Build, Build, Build” program, which will usher in the “Golden Age of Infrastructure,” according to Budget Secretary Benjamin Diokno.
Diokno said the CTRP is the third component of the Duterte administration’s three-pronged strategy to spell the financial viability of what promises to be “the boldest infrastructure development program in recent Philippine history.”
The two other means of sustaining the cash-intensive “Build, Build, Build” agenda is through an expansionary fiscal strategy by increasing deficit spending to three percent of the Gross Domestic Product (GDP); and borrowings, at a ratio of 80 percent for locally-sourced loans and 20 percent from foreign sources, said Diokno in a think piece titled “Financing the Philippine Golden Age of Infrastructure.”
“Our borrowings will be complemented by higher revenue effort resulting from tax policy and tax administration reforms,” Diokno said.
“This brings to the fore the CTRP being proposed by the DOF,” the budget chief said. “The CTRP is crucial not only in financing our spending priorities. On its own, it is meritorious. It will transform the Philippine tax system into a simpler, fairer, and more efficient tax system.”
Said Diokno: “The present one is outdated and out of sync with our ASEAN (Association of Southeast Asian Neighbors). It must be reformed for the Philippine economy to be more competitive and attractive to investors.”
“Tax reform goes hand-in-hand with our infrastructure program in terms of promoting competitiveness and fueling growth,” he said.
Diokno noted that “the economic managers have decided to pursue an expansionary fiscal strategy: the planned deficit was increased from 2 percent to 3 percent of GDP during the entire term of the Duterte administration.”
Also, he said, “we plan to borrow money to finance the deficit—80 percent from domestic sources, and 20 percent from foreign sources.”
“This 80:20 financing mix is not only sound, but it is [also] manageable and fiscally sustainable,” he said.
“We project that the debt-to-GDP ratio will decline from 42.2 percent in 2016 to 36.7 percent in 2022,” he added. “With this debt profile, we earn the envy of most developed and developing countries in the world facing much higher debt-to-GDP ratios.”
The House of Representatives approved the CTRP’s first package—House Bill No. 5636—by a 246-9 vote with one abstention last May 31 before the Congress’ sine die adjournment.
This bill, which had consolidated the DOF’s original proposal—HB 4774—with 54 other tax-related measures, seeks to make the country’s tax system simpler, fairer and more efficient by slashing personal income tax rates and, to fill up the consequent revenue loss, by adjusting excise taxes on certain products and broadening the Value Added Tax (VAT) base.
HB 5636 was passed after President Duterte had certified the bill as urgent, given that it was designed to help provide a steady revenue stream to his government’s ambitious high—and inclusive—growth agenda anchored on record spending on infrastructure, human capital and social protection for the poor and other vulnerable sectors.
In his letter to Senate President Aquilino Pimentel III and Speaker Pantaleon Alvarez, President Duterte said, “The benefits to be derived from this tax reform measure will sustainably finance the Government’s envisioned massive investments in infrastructure thereby encouraging economic activity and job creation, as well as fund the desired increase in the public budget for health, education and social programs to alleviate poverty.”
Finance Secretary Carlos Dominguez III, who had earlier asked the President to certify the tax reform bill as urgent, said in his memorandum to the Chief Executive that this TRAIN bill is “expected to help reduce 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 $3,500 in 2015 to at least $4,100 by 2022.”
In the same memo, Dominguez told Mr. Duterte of the “dire consequences” of the Congress’ failure to write a tax reform law. “The government’s strategy to embark on an aggressive expenditure program by raising deficit spending to three percent of the Gross Domestic Product (GDP) would lead to an “unsustainable fiscal position,” which, in turn, could trigger a credit rating downgrade possibly costing the government an extra P30 billion in annual debt servicing and P100 billion more in higher borrowing costs for the public.,” he said.
Diokno, in his think piece, said that knowing that “the dismal state of public infrastructure cannot, and should not, be allowed to continue,” the Duterte administration has “embarked on a bold ‘Build, Build, Build’ program. This will usher in the ‘Golden Age of Infrastructure,’ the boldest infrastructure development program in recent Philippine history.” “And as we embark on this ambitious journey, we put our money where our mouth is. The first bold step we took was to appropriate P847.2 billion in the 2017 National Budget for infrastructure projects,” he said.
He said, “This level is equivalent to 5.3 percent of GDP. This is significant because the Philippines has never reached 5 percent of GDP threshold for infrastructure spending in the last 30 years. In fact, it only averaged 2.9 percent of GDP during the last administration when the cost of borrowing money was at its rock bottom.” “But the P847.2 billion this year is just a down payment to our grand plan to spend some P8 trillion to P9 trillion — roughly $160 billion to $180 billion — for the next six years. As a share of GDP, infrastructure spending will rise from 5.3 percent of GDP in 2017 to as high as 7.4 percent of GDP in 2022,” he said.
Diokno said that “The Philippines has enjoyed strong and sustained economic growth founded on sound macroeconomic fundamentals. Having just posted a 6.9 percent growth rate in 2016, and being strategically located in the ASEAN region, the Philippine economy is indeed ‘one of the fastest growing economies in the fastest growing region in the world.’”
“With a booming market, adequate infrastructure must be put in place to support economic activity. Good infrastructure is a necessary condition in sustaining our growth trajectory,” he said.
He said “the harsh reality is that the poor state of Philippine infrastructure has been, for too long, a major constraint to growth. The traffic in Metro Manila alone speaks volumes about the urgent need for a massive infrastructure upgrade.”
“According to the World Economic Forum Competitiveness Rankings, the Philippines has the worst overall infrastructure among the ASEAN-5 countries since 2010. The country’s poor score in public infrastructure has pulled down its overall competitiveness,” he said.
Diokno said that “Change has come. Soon this will be felt as the process of transforming the state of public infrastructure in the Philippines begins. As our economy evolves into the next Asian tiger, we will make sure that infrastructure will be a driver of, rather than a constraint to, growth and development.”
“Soon, we will get a glimpse of what a modern Philippines would look like — a country with 21st-century infrastructure, better-trained labor force, more decent jobs, and higher wages, and effective and accountable governance; a more beautiful Philippines that is safer, fairer, and richer,” he added.
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