Bitter medicine for debt relief

It’s hard to condemn the national government for incurring a P3.2 trillion debt in the two years that the country was coping with the pandemic. As a 17-year-old succinctly said, “If these loans had saved my grandma from dying, I’d gladly pay back the debt in the next 10 years.”

Filipinos generally are not debt averse. Even if some do harbor the belief that being debt-free reflects prudent management, when faced with damning circumstances, borrowing to avoid death or tragedy as the next best option comes easily.

Apparently, this is the logic behind the national government’s decision to borrow, and borrow heavily it did, to cope with the pandemic. Aside from borrowing money for ayuda to families and workers hardest hit by the lockdowns, the healthcare system needed to be propped up. Then came the need to buy millions of vaccine doses to be given free to qualified Filipinos.

Under such dire circumstances, no one talked about how all the monies would be paid back. Death by debt, allegorically speaking, could not be any worse than a real-world death because of the virulent virus or death from starvation.

Turnover notes

With the old government preparing to give way to the new, part of the turnover notes relevant to this column’s subject is the Department of Finance’s proposed measures to pay back all of the P3.2 trillion in a span of 10 years, the first due date falling next year.

The Finance department calculates that the government will have to earn an additional P249 billion yearly until 2032 to pay off the debt’s principal loan without resorting to new borrowings to meet upcoming payment calls.

The DOF’s rescue plan for the next 10 years sounds easy-peasy, at least in some parts. Divided into three, the first part containing 13 measures, of which eight items have a computed value of P247.8 billion if implemented next year.

The first item here that should give the state treasury P97.7 billion yearly is the deferment of a scheduled personal income tax deduction from 2023 to 2025. To be hurt are salaried workers with an annual compensation of P250,000 and little over, but not so much those earning by the millions.

The second item on the list, and which represents the biggest revenue generation source of P142.5 billion, would be the expansion of the value-added tax (VAT) base by repealing exemptions, except for such sectors as health, agricultural products, education, and finance.

The third weightiest item commanding a revenue generation source of P38.3 billion yearly would be the reform of the Motor Vehicle Users Charge by introducing a single and unitary rate based alone on gross weight of all motor vehicles.

Tax leaks

Of the three, the proposed repeal of VAT exemptions would be the most challenging, with discussions expected to be tedious and lengthy. The VAT charge is currently at a high of 12 percent, yet total government collections are at only four percent of gross domestic product (GDP) when most countries have it at 12 percent.

Clearly, the administration of VAT from levy to collection needs to be reviewed and tightened, with this problem begging a better implementation system since its introduction in 1988 through an executive order by the president, and by law expanding its coverage in 1994.

New tax measures will help fill in some gaps on the first year, especially from those that have gone through some discussion on the legislative floors. Clearly though, a lot of improvements in tax administration can generate the much needed revenues to pay off the COVID debts.

Our real estate tax valuations, for example, are so messed up and prone to corruption, depending on the influence of landowners on local governments. The DOF has proposed internationally accepted valuation standards, as well as the professionalization of land valuation, but deliberations on this are taking its sweet time in Congress.

Fallback plan

Just in case collections to pay for COVID debts fall short on the first year, the DOF has lined up some relatively quick doable new revenue measures that could be implemented in 2024.

These include further reforming the so-called health taxes to include alcopops, cigarettes, e-cigarettes, sweetened beverages, and even junk foods. Such measure falls in line with previous administrations’ campaigns to raise retail prices of “unhealthy” products for a number of reasons, including generating more funds for the public healthcare sector. From these, P91.4 billion is expected to be collected.

The other fallback initiative deals with petroleum excise taxes for a minimum of three years while imposing and increasing taxes on domestic and imported coal, respectively. Increasing taxes on petroleum products or coal, however, will have a direct impact on inflation even if negligible.

The DOF is perhaps relying on an assumed reduction of crude oil, and subsequently almost all related fossil fuels by 2025, by which time the pandemic supply chain woes, as well as the effects of the Russian-Ukranian conflict, will have been resolved and quieted down.

Bitter medicine

There is no argument that the new government has to find extraordinary new sources of money to pay off the COVID debt instead of borrowing more or reducing the budgets of other government agencies in the coming fiscal years.

It will take, however, the utmost effort of the new government to agree on the importance of taking the DOF’s proffered medicines, however bitter they may be. This will definitely test the campaign slogan of unity that the incoming administration had rallied its more than 30 million voters to support.

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