The Market Monitor Minding the Nation's Business
As a growing number of local and foreign business groups continued to support a congressional initiative to reduce income and corporate taxes, a former budget official blasted the arguments raised by President Aquino in opposing it.
Former Budget Secretary Benjamin Diokno described as “misplaced” Mr. Aquino’s line that the tax cuts would degrade the country’s credit ratings, and added a warning the President’s intransigence might prove costlier because the Philippines tax system is out of sync with its peers in the Association of Southeast Asian Nations (Asean).
In an interview during the inauguration of the controversial Convention Center in Iloilo City recently, Mr. Aquino parroted the line of his advisers at the Department of Finance (DoF) that the tax cuts “would not be beneficial” to Filipinos because these might affect the investment grades from Fitch Ratings, Moody’s Investors Service and Standard and Poor’s, which he attributed to his “fiscal prudence” policies.
The International Monetary Fund (IMF), in its recent assessment on the economy, had also warned the government against any tax package “that would entail a net revenue loss.”
Diokno, now a University of the Philippines School of Economics professor, said the DoF’s position was “debatable” as there was little risk the country would default on its foreign debt with the tax cuts and the expected revenue loss.
“In the first place, foreign debt as a percent of the total debt is at its rock bottom,” Diokno said, adding that
the Philippines has the wherewithal to service its foreign and domestic debt.
“Right now it has a guaranteed inflow of some $25-billion to $26-billion remittances from Filipino workers abroad and the promise of a rising business process outsourcing income. It has hefty gross international reserves (GIR) of more than $80 billion, equivalent to close to one year’s imports requirement,” he said.
Diokno also found it odd that the President had likewise raised the specter of rising budget deficit with the tax cuts. “This came from someone who’s been notorious for underspending—delivering public goods and services much lower than what Congress authorized him to deliver,” Diokno said.
He added: “In 2014, the Aquino administration targeted a budget deficit of P266.2 billion or 2 percent of gross domestic product (GDP). Actual the deficit was only P73.1 billion or 0.6 percent of GDP, and this was not because of higher-than-targeted revenue intake. It was plain and simple incompetence or poor budget planning or both: planned spending of P2.284 trillion versus actual spending of P1.982 trillion, or a difference of P302 billion.”
Diokno also said poor budgeting continued up to this year. “While the budget-deficit target was P283.7 billion or 2 percent of GDP, actual deficit as of end July was only P32.2 billion, or only 11.4 percent of the planned deficit. At the present rate of project implementation, the administration would be lucky to have a one-percent deficit-to-GDP ratio for the entire year. Another opportunity lost,” Diokno said.
He said Mr. Aquino’s position revealed he was more fearful of foreign rating agencies than incurring the collective wrath of Filipino taxpayers who have to contend with the increasingly burdensome 19-year old tax system.
“Through inflation, all taxpayers, barring none, have been lumped into a higher income-tax bracket and, therefore, have to pay higher taxes than what was originally designed,” Diokno said.
“Is this what continuity is all about? What is the position of Interior Secretary Roxas on this issue? Is he going to continue slavishly Mr. Aquino’s insensitivity?”
Diokno said assuming a potential revenue loss of P40 due to reduced income and corporate taxes, that amount would only be 1.6 percent of total budget.
“One might look at it as a tax break or a reward to those who have been religiously paying their income taxes. They will either use the tax reward for consumption or investment. In both cases, they will stimulate economic expansion,” Diokno said.
Part of what would be lost due to the tax break might be recovered through higher consumption and greater investment.
“The tax break of P40 billion pales in comparison with the planned deficit: it is only 14.1 percent of the planned deficit of P283.7 billion in 2015. Actual deficit might turn out to be, at best, only one percent of GDP, half the original target. Hence, there is absolutely no threat of runaway deficit this year,” Diokno said.
He also said a tax cut would necessarily stimulate the economy, as fast as government consumption spending and speedier than public infrastructure spending.
“A tax cut, especially if it’s fair, efficient, and moderate so that it would not threaten the budget deficit to soar unsustainably, might be just what the economy needs at this time when its growth is normalizing,” Diokno said.
LUIS LEONCIO