Alarm over seniors’ tax break

PRESIDENT Gloria Arroyo’s support for a sales-tax exemption for the elderly may reverse the fiscal improvements she made in office, Finance Undersecretary Gil Beltran said Friday.

“Arroyo was running the economy like an economist, but now she is running it like a politician,” said Beltran, who has worked in the Finance Department since the Marcos administration in the late 1970s.

“These are populist measures, but to be fair, when administrations are about to end, these populist measures become very, very attractive to congressmen.”

As her presidency winds down, Mrs. Arroyo has freed half a million minimum-wage workers from income tax, boosted exemptions for salaried employees, and delivered tax credits to Filipinos overseas and their families.

Now she plans to sign a bill exempting senior citizens—those aged 60 and above—from paying the 12-percent value-added tax on medicine, domestic air fares, restaurant meals, and hospital services.

The combined loss of revenue would be P70 billion this year, Beltran, 53, said.

This year’s budget shortfall may widen to a record P293 billion, up from P290 billion last year, according to a government forecast. The Philippines has a long-term credit rating of Ba3 at Moody’s Investors Service, three levels below investment grade. Moody’s raised the rating in July.

“Something has got to give, and it looks like it’s becoming more of a sovereign risk—not imminent, not dangerous yet, but it’s working its way there,” said Vishnu Varathan, an economist at Forecast Singapore Pte.

“It’s a tricky issue marrying politics and economics, and that gets difficult to manage.”

Credit default swaps for the country’s dollar-denominated debt on Friday surged to the highest since Nov. 27. The contracts climbed 13 basis points to 204 basis points, according to Bloomberg data.

The cost to protect $10 million of five-year debt from default is equivalent to $204,000 a year.

CDS contracts pay bond holders face value in exchange for the underlying securities should the borrower default. A decrease in the price indicates investor perceptions of credit quality have improved, and an increase suggests they have deteriorated.

The budget deficit had focused Mrs. Arroyo’s attention on finding revenue sources, the President’s spokesman said Thursday.

“Fiscal consolidation has been a priority of the President,” Ricardo Saludo said in a televised briefing in response to a question about the likely effects of the sales tax exemption.

“She has never shirked from that, to expand government revenues through fiscal reforms.”

The government plans to borrow a record P718.5 billion from overseas and domestic markets this year to finance a record P1.58 trillion of spending. The fiscal outlook helped drive benchmark five-year bond yields last week to the highest in more than a month.

National Treasurer Roberto Tan said this week at least $500 million of Samurai bonds would be on offer.

Some of the notes will be guaranteed by Japan Bank for International Cooperation under a so-called market-access program to ease funding costs for developing nations, according to the JBIC Web site.

Government proposals since last year to reduce tax incentives to investors and simplify the levy on cigarettes and liquor and on income taxes—all intended to boost revenue—were not passed into law.

Mrs. Arroyo in 2006 expanded the value-added tax law, increasing sales taxes and adding fuel and other previously exempt products. The changes narrowed the budget deficit to the lowest in 10 years in 2007.

The gain from the expanded tax was estimated to be about P76 billion in 2009, Beltran said. –Karl Lester M. Yap, Bloomberg