IMF urges Phl to spend more, expand tax base

MANILA, Philippines – The International Monetary Fund (IMF) yesterday urged the Aquino administration to spend more, attract higher investments, and widen its tax revenue base to survive the turbulence in regional financial markets over the last two months brought about by fragile economic growth in the US and the debt crisis in Europe.

In a press conference, IMF assistant director Vivec Arora said the Philippines needs to raise its spending level, attract more private investors and strengthen its social safety nets.

Arora pointed out that the Aquino administration’s public-private partnership (PPP) scheme would address the need for higher infrastructure spending.

“One important policy implication is that the higher government fiscal spending in these areas will need stronger revenues. The revenue base in the Philippines is relatively low,” he said.

He cited the need for the Philippines 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.

“We know that the Philippines is still a poor country so there is a need for expanding infrastructure, there are very large development needs,” Arora said.

According to him, the ratio of revenues to the country’s domestic output as measured by the gross domestic product (GDP) is relatively low.

However, the IMF official stressed the need for the government to address the loopholes in the excise tax on sin products particularly alcohol and tobacco products as well as the value added tax (VAT) system.

“It is not just a question of raising tax, the government also needs to address the loopholes and at the same time improve tax administration,” he explained.

For his part, IMF director for Asia and Pacific Department Anoop Singh said the quest for a faster and more inclusive growth is well recognized in the Philippine Development Plan (PDP) to help the country navigate the uncertain global environment while creating policy space to meet future potential shocks.

“This needs fiscal resources, this is something that is important for many countries in Asia. The objective is to streamline tax policy to ensure incentives that remain are efficient. I dont think that the purpose is simply higher taxes. The purpose is more efficiency, more streamlining,” Singh explained.

He added that the PDP recognizes the need for higher spending on health and education and greater public investment to achieve higher per-capita income growth that usually tends to reduce poverty incidence.

“A continuation of revenue-based fiscal consolidation, reorientation of expenditure toward social and infrastructure priorities, and reforms to strengthen the investment environment will be key to these efforts,” the official said.

According to him, higher infrastructure spending would help raise the economic growth potential of the Philippines to about seven percent to eight percent from the current level of five percent over the medium term.

Singh pointed out that Asia has not decoupled from advanced economies and remains greatly exposed to risks of contagion from fragile global economic environment as shown by the turbulence in regional financial markets over the last two months.

“Greater fears about growth prospects amid sticky inflation mean policymakers in many countries face a delicate balancing act in the short term,” he said.

To address the risks, he explained that Asia needs to increase domestic demand over time and reduce income inequality in the region through more exchange rate appreciation and greater priority to spending in infrastructure and social safety nets.

The IMF recently downgraded the GDP growth forecast for Asia to 6.3 percent instead of 6.8 percent this year and to 6.7 percent instead of 6.9 percent for next year in line with a weak global economic outlook. The IMF lowered the GDP growth forecast for the Philippines to 4.7 percent instead of five percent this year and to 4.9 percent instead of five percent for next year.

“While our baseline scenario is for a relatively modest slowdown in GDP growth, the risks for Asia and Pacific region have tilted decidedly to the downside since last April, owing to greater global uncertainty,” Singh said citing the escalation of the Euro area financial turbulence and renewed slowdown in the US that could have trade and financial spillovers to Asia. –Lawrence Agcaoili (The Philippine Star)