IMF urges Aquino administration to focus on improving tax collection efficiency

MANILA, Philippines – Members of the visiting International Monetary Fund (IMF) team said yesterday that the new administration under President Aquino should first focus on enhancing and improving its tax collection efficiency before introducing new tax measures as part of efforts to put its fiscal house in order.

IMF assistant director in the Asia & Pacific Department Vivek Arora said in a press conference Tuesday evening the intention of fiscal authorities to reduce the Philippines’ budget deficit to two percent of gross domestic product (GDP) over the medium term from 3.9 percent of GDP last year was through the improvement of the government’s tax administration.

“The staff shares the authorities’ emphasis on strengthening tax compliance in order to quickly resuscitate government revenue. In addition, it will be important to broaden the tax base and reform excise taxes,” Arora said.

The IMF team noted that the government’s revenue effort or the ratio of revenues collected to the GDP as the global economic crisis took its toll on the collections of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) last year.

Data from the Department of Finance (DOF) showed that the government’s revenue effort slipped to 14.6 percent of GDP last year from 16.2 percent of GDP in 2008 while the tax effort or the performance of the BIR and BOC likewise fell to 12.8 percent from 14.2 percent.

Due to the full impact of the global financial crisis, the Philippines booked a record budget shortfall of P298.5 billion or 3.9 percent of GDP last year, eclipsing the previous high of P210.7 billion or 5.3 percent of GDP recorded in 2002.

On top of improving the government’s tax collection efficiency, he explained that the government should also pursue other measures such as the rationalization of fiscal incentives, improving the design of the value added tax law as well as the indexation of excise tax on sin products particularly cigarettes and liquor.

Arora said the new government should only consider introducing new tax measures if the improvement in tax administration fails to yield higher revenue collections.

“Our sense is that ther are many measures that could be taken in tax complaince and administration that would be very productive to raise revenues instead of creating new ones,” he added.

The Cabinet-level Development Budget Coordination Committee (DBCC) decided to raise the budget deficit target to P325 billion or 3.9 percent of GDP instead of P293 billion or 3.5 percent of GDP this year from P68.1 billion or 0.9 percent of GDP in 2008.

However, the IMF official said it is important for the Philippines to reduce the budget shortfall this year to help sustain the strong economic growth.

“The authorities’ intention to reduce the deficit substantially over the medium term is thus very welcome. A reduction in the budget deficit this year would be a useful step in this direction and would also help safeguard macroeconomic stability,” Arora told reporters.

On the spending side, Arora said there is a need for the Aquino administration to look into the subsidies extended to government-owned and controlled corporations (GOCCs) particularly the ailing National Food Authority (NFA) that could be used for other purposes including funding the government’s conditional cash transfer (CCT) program.

The IMF team said there is a need to unwind the government’s monetary and fiscal stimulus in light of the recovering domestic output with the stronger-than-expected GDP growth of 7.3 percent in the first quarter of the year.

“The Philippines has emerged relatively well from the global financial crisis. The monetary and fiscal policy stimulus in response to the global crisis in 2008 and 2009, as well as resilient remittances, helped to cushion the downturn and is now supporting the strong recovery,” Arora said.

According to him, the IMF now sees the country’s GDP expanding by six percent instead of 3.6 percent this year and by 4.5 percent instead of four percent next year while inflation is expected to remain comfortably within the target of 3.5 percent to 5.5 percent this year and three percent to five percent set by the Bangko Sentral ng Pilipinas (BSP).

“A measured withdrawal of fiscal stimulus would be appropriate in light of the ongoing recovery, as well as high government debt in the Philippines and the intensification of sovereign risks in global markets,” he added. The DBCC sees the GDP expanding between five percent to six percent instead of 2.6 percent to 3.6 percent this year and by seven percent to eight percent next year.

He pointed out that monetary authorities should continue to unwind its accommodative policy stance including the liquidity enhancing measures that were introduced during the height of the global financial crisis. –Lawrence Agcaoili (The Philippine Star)