Improving tax efficiency not enough, says S&P

STANDARD & Poor’s (S&P) warned the new Philippine government that it cannot rely on improving tax efficiency if it wants to pursue a sustainable budget deficit. In an e-mail to The Manila Times, Benard Agost, a sovereign analyst at the international credit rating agency, said ditching the previous administration’s balanced-budget goal would not affect the country’s credit rating.

But the new government cannot capitalize on intensified tax collection only if it wants to keep its deficit ceiling within a sustainable range.

“Setting aside of the balanced budget goal, in itself, does not have any implication for the sovereign ratings. Rather, what we consider to be determining factors are the extent of the fiscal deficit, the financing mix, and the quality of the spending on the expenditure side,” Agost said.

The official said that the Philippines’ revenue generating capacity is low given its rating category. Given this, the new administration cannot just bank on efficiency improving measures to eliminate its structural revenue weaknesses.

“It has to be pointed out that the Philippines’ revenue generating capacity is low in its rating category, and trying to eliminate structural revenue weaknesses purely through collection efficiency measures and without broadening the base is unlikely to be successful,” he said.

Newly appointed Finance Secretary Cesar Purisima last week said that the government under President Benigno Aquino 3rd would not aim for a balanced budget—ditching a recommendation from the previous administration’s economic team to balance the budget between 2013 and 2016.

For this year, the Aquino administration aims to raise the government’s tax effort to 15 percent. This is higher than the previous target of 13.6 percent, but still below the Asian average of 16 percent.

Last year, the country’s tax effort ratio stood at 12.8 percent.

Tax effort measures the government’s efficiency in collecting taxes by dividing tax revenues into the country’s gross domestic product, which is the total amount of final goods and services produced.

S&P said that the new government should review the five revenue-enhancing measures that the previous Philippine economic managers had proposed.

These include raising the value-added tax to 15 percent in exchange for lowering the income tax rate, streamlining fiscal incentives, implementing a simplified net income taxation scheme, restructuring of excise taxes on alcohol and tobacco products, and the harmonization of petroleum product excise taxes.

These proposals are expected to bring in P94 billion in additional revenues.

“Passing and implementing those [revenue enhancement measures] would be an important positive step in reducing the structural revenue weakness [of the Philippines]. Nevertheless, we cannot and do not advise on what measures governments should take to address revenue deficiency, and ultimately it is up to policy makers to decide what combination of revenue and expenditure measures would be used to reduce fiscal shortfall,” Agost said.

The key thing for the new administration, he said “is to keep deficit at a sustainable levels, such that the public debt trajectory remains on a downward path, to reduce the fiscal and external vulnerabilities posed by the high public and external debt burden.” –KATRINA MENNEN A. VALDEZ REPORTER, Manila Times