Tax reform necessary to fund infra buildup, spur growth above 6 percent—Dominguez

Raising sufficient rev­enues for tax reform to fund ambitious in­frastructure buildup of the administration rather than relying primarily on bor­rowings, is necessary to keep the budget deficit within the manageable level of 3 per­cent of GDP beginning 2017, said Finance Secretary Carlos Dominguez III.

The Philippines, Domin­guez said 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.

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 (Neda), 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 though 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 at 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 ratings 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.