IMF pushes tax reform, incentives rationalization

MANILA, Philippines – The International Monetary Fund (IMF) yesterday urged the Aquino administration to broaden its tax base and strengthen tax administration by overhauling its excise tax system on sin products and rationalizing its fiscal incentives to raise much needed revenue to bankroll social and infrastructure spending.

In its latest Public Information Notice, IMF said broadening the government’s tax base and strengthening tax administration is crucial in the Aquino government’s commitment to trim the budget deficit to two percent of gross domestic product (GDP) starting 2013 from the current level of 3.3 percent of GDP.

“Achieving the deficit targets and increasing social and infrastructure spending will require substantial revenue efforts, including broadening the tax base and strengthening tax administration,” IMF stated in the notice dated March 1.

The Executive Board of the IMF recommended early actions to reform excise taxes, rationalize fiscal incentives, and address gaps in the value added tax (VAT), complemented by reforms to strengthen the budgetary framework, and control of the civil service wage bill.

“Directors welcomed the planned gradual withdrawal of fiscal stimulus and the focus on medium-term consolidation, which would create space for priority investment,” the IMF said.

The multilteral lender welcomed the preparation of the Medium Term Philippine Development Plan (MTPDP) as well as the ongoing efforts of the Aquino government to improve the country’s business climate and administration and at the sametime deepen capital markets.

IMF said the public private partnership (PPP) program of the government would help promote private investment and at the same time address impediments to job creation and productivity.

The country’s budget deficit widened to a record level of P310 billion or 3.2 percent of GDP last year from P298.5 billion or 3.9 percent of GDP. This year, fiscal authorities intend to trim the deficit to P290 billion or 3.2 percent of GDP.

The current administration has committed to trim the deficit to two percent of GDP starting 2013 until the end the President Aquino’s term in 2016.

The IMF pointed out that the main elements of the government’s fiscal strategy are a greater tax effort, a reorientation of expenditure towards social sectors and infrastructure, and a debt management strategy that reduces the reliance on external debt and lengthens the maturity structure.

The government expects to raise its tax effort to 14.1 percent of GDP this year from 13.8 percent last year through higher collections by the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC).

“Fiscal consolidation is needed in order to create more fiscal space for the budget to be able to respond effectively to future shocks. Consolidation would improve medium-term growth prospects by lowering sovereign risk and enhancing investment and it would reduce the share of debt service in government expenditure,” IMF added.

The lender encouraged fiscal authorities to accelerate the pace of debt reduction.

Earlier, Finance Secretary Cesar Purisima reiterated that the Aquino government has no plans to push new tax measures despite pressures from economists as the government intends to focus on further improving its collection efficiency.

“Obviously and politically that is not feasible at this point until we do our part of the bargain which is the promise of the President that we fix the holes first in the system and that is what we are focusing on and I believe that we have initial successes and hopefully we hit a tipping point at some point so that the gains will be more substantial than what we have seen,” Purisima stressed. –Lawrence Agcaoili (The Philippine Star)