Study: Govt’s fiscal path to derail RP economy

The fiscal path of underspending taken by the Aquino administration and the possibility that it would further raise the 12 value added tax to improve its tax effort could derail the economic rebound being experienced by the Philippines, according to a study released Wednesday by the Metrobank Group.

The need to improve the country’s tax take that pales in comparison with its Asia Pacific neighbors does not necessarily mean going through underspending and the introduction of new tax measures, Pauline Revillas, Metrobank research analyst, said in The Philippines’ Tax Effort Ratio.

“Any measure to increase the country’s tax effort should not come however from the reduction in government spending and/or new tax measures like increasing VAT rates as these would not support a higher economic growth trajectory, being contractionary policies,” Revillas said.

The Aquino administration should go for measures such as pruning the huge losses of government-owned and -controlled corporations, thus plugging the leaks that have been in the system for so long, she said.

It should should maximize the multiplier effect of government spending in the public private partnership initiative, Revillas added.

“Slowly, the markets will see how exactly will our tax effort move from hereon to next year, amid the still difficult times the whole global economy is still undergoing,” Revillas explained.

Department of Finance data showed that the country’s tax effort –the ratio of tax take of the Bureau of Internal Revenue and the Bureau of Customs (BOC) to domestic output or gross domestic product improved at 14.5 percent in the second quarter from 12.3 percent in the first three months.

The tax effort dropped to 12.8 percent last year from 14.2 percent in 2008 and from 17 percent in 1997.

“Tax effort has been relatively low in the Philippines compared to our Asian counterparts, with rating agencies often citing the country’s weak tax effort in their assessments of credit worthiness. While the country is currently enjoying good economic prospects on the back of faster GDP growth, it is also important that the government take concrete steps in reducing budget deficits and increasing tax collection efforts,” Revilla said.

Government should review the automatic debt service policy with more than 50 percent of government revenues allocated for debt payments that render insignificant the amount invested in infrastructure and social services.

“Again, this would explain why investment spending in the Philippines is low compared to other Asian countries –the country is not spending enough to develop infrastructure that would encourage more foreign investments, given that local government investment spending is always an after-thought rather than a driver,” Revillas said.

Government should also focus on smuggling, she said, citing data from the International Monetary Fund that showed that the value of goods shipped to the Philippines averaged $47.5 billion in the 2002-2007 period while BOC data showed that the average amount of imports was only $32.5 billion during the same period.

The Philippine GDP grew by 7.9 percent in the first half of 2010 from 1.2 percent a year earlier.

The Aquino administration is operating with a programmed deficit of P325 billion this year, equivalent to 3.9 percent of the GDP. The deficit incurred by the Arroyo administration totaled P298.5 billion –also equivalent to 3.9 percent of GDP – in 2009.

The deficit widened by 8.6 percent to P228.1 billion in the first eight months, from P210 billion in the same period last year.

Last month, the government booked a P1.3 billion surplus, from a deficit of P22 billion in August 2009, as revenues rose by 13.5 percent and expenditures fell by 9.0 percent. —VS, GMANews.TV