WB urges excise tax hike, cut in perks

The World Bank (WB) has proposed that the government increase excise taxes and reduce tax incentives as a way for the Aquino administration to set in order the fiscal situation which remains hounded with record-high shortfalls.

The WB, in its East Asia and Pacific Economic Update released yesterday, said the Aquino government, in its first two months in office, began to rationalize spending and focused on increasing tax efforts to control the deficit but without policy changes, notably the rationalization of tax incentives and increasing excise tax rates, raising the tax effort will remain challenging and could undermine the government’s expenditure program.

It expects that the fiscal deficit will remain high at 4.2 percent of gross domestic product (GDP) this year.

It said while a quicker withdrawal of the fiscal stimulus program would help limit the deficit, structural reforms are needed for a durable further reduction.

In August, Aquino submitted the proposed 2011 “reform budget” to Congress, which at P1.6 trillion, spending is proposed to increase 6.8 percent from the amount targeted for 2010.

Under the proposed budget, spending on social services, notably basic education, will increase significantly.

Infrastructure spending is proposed to be reduced by 0.5 percent of GDP, mostly from the removal of congressional insertions.

The WB said the government expects private-public partnership (PPP) projects help to fill the gap in public infrastructure.

A list of priority PPP projects has been drawn up for 2011 and funding the 2011 expenditure program would solely rely on greater revenue efficiency and a moratorium on revenue-eroding measures, according to WB.

It noted, however, the budget does not propose any tax policy measures.

“Growth prospects in the near term are favorable. Strong growth in the first half of 2010 is expected to ease with the gradual withdrawal of monetary and fiscal stimulus measures and the moderation of global growth,” it said.

Assuming no material downward revisions on first-half GDP, growth is projected to slow from 6.2 percent in 2010 to five percent in both 2011 and 2012.

Sustained structural reforms will be needed, however, to increase the medium-term potential growth rate to more than four to five percent.

The inauguration of the Aquino government in July 2010 and the global economic recovery offer the Philippines a window of opportunity to embark on structural reforms to improve its development outcomes, it said.

The new government has initiated reforms to improve public finances and to strengthen the investment climate for more inclusive growth, it added.

These are commendable and should be pursued steadfastly and vigorously, according to WB. –Daily Tribune