DOF warns of wider budget deficit

MANILA, Philippines - The government may face a wider budget deficit if Congress approves its substitute tax reform bill without incorporating other revenue-generating measures, the Department of Finance (DOF) said yesterday.

Based on the preliminary estimates of the DOF, the newly crafted tax reform bill may widen the budget deficit to 3.7 percent of the country’s gross domestic product (GDP) in the first year of its implementation.

A fiscal deficit of this amount is broader than the three percent deficit cap being targeted by the Duterte administration in view of its massive infrastructure program.

The substitute bill – which was crafted by a technical working group formed by the House committee on ways and means – consolidated and fine-tuned all pending tax-related bills in the lower house, including the first package of the Comprehensive Tax Reform Program (CTRP).

The addition of other revenue-generating measures such as the tax on sugar and sugar-sweetened beverages would be able to cushion the fiscal deficit expected to be incurred by the approved bill, the DOF said.

The sugar tax, for example, can generate an estimated P40 billion in additional revenue for the government and may narrow down the budget deficit to only 3.3 percent of the GDP.

An adjustment on the excise taxes for sugar was originally included in the third set of the CTRP, but lawmakers are already considering the inclusion of the sugar tax in the first package.

The measure had earlier been lobbied in the lower house through House Bill 292, which seeks to impose an excise tax of P10 per liter on sugar-sweetened beverages.

On Wednesday, the House committee on ways and means approved the substitute tax reform bill, with 17 in favor, four opposition and three abstentions.

Included among the key features of the substitute bill are the lowering of personal income tax rates indexed to cumulative consumer price index (CPI) inflation every three years; unifying estate and donor’s taxes at a flat rate of six percent; broadening the tax base by removing special laws on value-added tax exemptions; and the increase of excise tax for petroleum products, except liquefied petroleum gas used as feedstock, at a staggered basis from 2018 to 2020 but with no indexation to inflation.

It also provides a five-bracket excise tax structure for automobiles with a two-year phase-in period for the tax increases, and the earmarking of 40 percent of the proceeds from the fuel excise tax increase for social protection programs for the first three years of the tax reform measure’s implementation.

Finance Undersecretary Karl Kendrick Chua said the substitute bill only had “moderate changes” from the first package of the CTRP originally submitted by the DOF last year.

The estimated revenue to be generated and its impact on the fiscal deficit is still undergoing review by the DOF.

Chua said with the approval of the new bill, the DOF is still optimistic that the tax reform program would be approved at least by the House of Representatives before the Congress ends its first regular session in June.

However, the undersecretary said, “we will also convince the plenary to include some original provisions that were removed.”