Sans fiscal consolidation plan, government urged to consider new taxes

It’s been half a year since President Marcos was sworn into office following a landslide win, and it’s been a semester since he started facing soaring inflation, rising interest rates, ballooning debt and swelling deficit, among many other problems on both the global and domestic fronts.
STAR/File

MANILA, Philippines — Six months into the Marcos administration and it seems the government has yet to clearly state its plan on how to consolidate the country’s finances badly hit by the pandemic, only cementing expectations of new taxes sooner rather than later.

It’s been half a year since President Marcos was sworn into office following a landslide win, and it’s been a semester since he started facing soaring inflation, rising interest rates, ballooning debt and swelling deficit, among many other problems on both the global and domestic fronts.

Such myriad challenges require concrete and immediate solutions, and yet the administration appears to be lacking on such aspects, at least in the view of some economists interviewed by The STAR.

They said that a time when the government needs to balance economic recovery and address a limited fiscal space, a fiscal consolidation plan is necessary especially in an environment of rising interest rates.

Economists are in agreement that at the current fiscal position of the Philippines, new tax measures are necessary if the government wants to really grow the economy.

Foundation for Economic Freedom president Calixto Chikiamco argued that the Marcos administration has no fiscal consolidation plan, especially as the remaining tax reform packages started by the Duterte government remain hanging in Congress.

Leonardo Lanzona, economist and professor at the Ateneo de Manila University, emphasized that the Duterte administration left the new government with the Corporate Recovery and Tax Incentives for Enterprises Act, the Foreign Investments Act and the Public Service Act.

Seen as structural reforms, Lanzona said the economic team of the Marcos government had high expectations that these laws would bring in enough investments to tide the economy during the post-pandemic period.

“They saw no need to introduce other reforms that address supply-side constraints emerging from the pandemic. This poor response was aggravated by the Russia-Ukraine war,” Lanzona said.

“The main point is that there was no response that dealt specifically with effects of the pandemic on production and structural transformation. Because of this, the budgetary problems worsened, resulting in greater reliance on loans,” he said.

ING Bank senior economist Nicholas Mapa, for his part, noted that the fiscal consolidation plan of the administration seems to be focused on outgrowing the country’s debt level when measured against the gross domestic product (GDP) by accelerating the overall economic expansion.

But research and advocacy group IBON Foundation emphasized that fiscal policy is an important tool for economic development. Whether there is a surplus or a deficit only indicates how this tool can be used, and a balanced budget is not an end in itself.

IBON executive director Sonny Africa argued that the economy is not recovering and the effect of recent rapid growth will eventually fade in the coming quarters, thereby exposing the hollowness of such rebound.

To contain the budget deficit and debt, Africa said the government is clearly out to primarily use repressed expenditure to address the problems.

Based on the medium-term fiscal program recently revised by the Cabinet-level Development Budget Coordination Committee (DBCC), disbursements as a percent of GDP will start declining by 2023 at 21.5 percent until 2026 at 19.9 percent.

“The burden of repressed expenditure is unfortunately likely to be put on social services and other current spending because the budgets for infrastructure and debt service are going to keep increasing,” Africa said.

According to economists, adding salt to the injury is the lack of inflation plan of the government, insisting that inflation is imported and thus uncontrollable.

Inflation has already hit a 14-year high of eight percent in November and even the central bank admitted that the rate has yet to peak.

“Inflation is also created by supply constraints and the decline in output, especially in agriculture. If the government had a program that addressed the structural weaknesses exposed by COVID-19, it would have solved the inflation and the debt repayments,” Lanzona said.

“The idea was that the economy should outgrow the debts and shift supply to pull prices downwards. Despite the growth however, neither inflation nor the debt issue has been resolved. This means that whatever surprising growth we have had was insufficient to solve these problems,” he said.

Fresh but necessary taxes loom

Chikiamco maintained that the government has to pass new tax measures or aggressively undertake privatization if it wants sufficient revenues to reduce the deficit and increase spending.

Mapa is expecting some scope for fresh taxes especially as the planned reduction in income tax by 2023 will result in lower revenue collections while the projected use of capital of government institutions to fund Maharlika may mean that these agencies will not be able to seek support from the government should they face strains or challenges.

With the possibility of a global recession more pronounced now, greater productivity programs will be needed.

“Tax reforms will definitely be discussed in 2023. But unless taxes are related to wealth, the issues of fiscal space and debt repayment are not going to be solved,” Lanzona said.

Unfortunately, the government until now has yet to signal what kind of new tax measures or privatization initiatives it is willing to take.

“The administration appears extremely reluctant to hike taxes as this would be extremely unpopular but from past experience, we do know how immediate an impact fresh taxes may deliver to fiscal consolidation,” Mapa said.

For Africa, complementary out-of-the-box monetary and financial measures are critical.

He said larger but productive deficits can be financed by a billionaire wealth tax, higher income taxes on the wealthy and large corporations, and selling treasury bonds to the Bangko Sentral ng Pilipinas.

Earlier in his term as finance chief, Secretary Benjamin Diokno is cold on the move to slap higher tax rates for the wealthy population as this might scare potential investors for the country.

Diokno warned that taxing the rich may drive investors away, especially at a time when the economy needs as many resources as possible to drive growth.

Further, Africa warned that one of the possible reasons that the economic team is pushing for the Maharlika fund is “out of desperation to raise government revenues through its investments.”

“Any such funds are however much more productively spent immediately as stimulus today rather than invested in the hope of future returns that are not even certain,” Africa said.

“The huge losses by among the most reputedly well-managed sovereign wealth funds in the world should be food for thought, as should the global recession and possibly even financial turbulence to come,” he said.

Updated targets from the DBCC showed that revenues will grow from 15.4 percent of GDP next year to 17.4 percent by 2028. As to how this will materialize, only the economic team knows.

Diokno is banking on improved tax collection efficiency through digitalization and other efforts. But Africa argued that such a thinking may be misplaced.

“Revenues will likely fall short of targets especially as the economy slows. This will prompt even greater austerity and spur proposals for more or higher consumption taxes on goods and services that disproportionately burdens poor, low-income and middle-class families,” Africa said.

For now, the government is moving to slap taxes on digital services and on single-use plastic bags, both of which will surely generate revenues but as to whether these will be enough is uncertain. But the government could certainly be able to secure higher revenues from the unpopular wealth tax.

Africa argued that the persistent bias for wealthy families and large corporations and avoidance of higher direct taxes on their income and wealth is the biggest binding constraint to revenue-generation for relief, reform and long-term development.

On to the new year

As the economy faces headwinds from geopolitical uncertainties and possible global recession, the economy may grow below the six to seven percent target of the government.

The consecutive rate hikes done by the central bank this year could also slow down the economy, affecting particularly interest rate sensitive sectors like real estate, cars, and appliances.

On the upside, robust consumption spending, powered by growth in remittances and revenues from the business process outsourcing, are expected to continue even amid the still elevated inflation rate.

But looking at a much deeper level, Lanzona expressed hope that growth next year will come from the poorest regions in the country.

“The idea is to ensure that each region has a role to play in the country’s structural transformation. Government has a particular role to play in ensuring a comprehensive and inclusive development,” he said.

Africa maintained that the country is still struggling with the aftermath of the pandemic lockdowns and large measures of emergency cash assistance for the poorest Filipino families in the country is still in order.

Data showed that seven out of 10 households or approximately 18.6 million families, do not have any savings as of the last quarter of the year.

And this is only made worse by the continued pick up in inflation as this means less consumption for families who do not have any buffers to compensate for any rise in prices of basic goods and services.

Beyond immediate relief, Africa hopes the administration will give production support to farmers and small producers to ensure a supply response and mitigate inflationary effects from large cash transfers.

The government is likewise urged to declare national industrialization as the major strategy for Philippine development while international trade and investment deals should be modified as necessary to support domestic industrial policy.

“It is never too late to implement the right economic policies. In the current context of a fading economic rebound, persistent job scarcity, and low household incomes this starts with increasing the purchasing power of families to improve their welfare and spur economic activity,” Africa said.

“The situation is so urgent as to demand bold and new initiatives. The situation is extremely unusual and demands so much more than business-as-usual economic policies,” he said.

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