POINT OF VIEW
Business World
Unlike my good friend Alex Magno who found only "cold comfort" in the VAT measure passed by Congress, I find the final version quite adequate and congratulate our legislators, especially those who made the compromise formula happen. Indeed, this whole VAT episode reaffirms what one wise man once said - politics is the art of the possible.
From where I sit as a wheelchair economist and a former investment biker, the final VAT bill largely achieved what the Executive set out to do.
1. The political formula automatically gets the 2% increase in the VAT rate the moment the Executive finds the conditions laid down by Congress met, i.e., a National Government budget deficit above 1.5% of GDP or VAT effort above 2.8%. Both have already been met, will be met in January 2006, and will likely still be the state of affairs for many years down the road. A six-month delay but without uncertainty that it will happen is no big deal for a structural measure whose impact will be continuing over the long term. In that sense, it is inaccurate to refer to it as standby authority, but really more a directive to the President to implement the law. According to legislators/lawyers I have spoken to, this makes it immune to constitutional challenge.
2. Most exemptions have been plugged, including for power. The exemption provided to airlines and shipping is to be lamented, but in the scheme of things, not material in amounts viewed from a purely fiscal aggregate perspective, setting aside equity and governance issues.
3. I am not enthusiastic about the increase in corporate income tax to 35%. But if this is the price to pay to "sell" the VAT bill, which is expected to bring in P104 billion over a one-year period, to the public, it is an affordable price. What makes it acceptable is the sunset provision, where after a few years, the tax rate actually goes down to 30% from 32%. Thus, this should not discourage potential investments, where time horizon after set up and gestation period is usually longer.
But what explains the market's tepid reaction, as Alex observed? This is what Philip Medalla has to say:
"The main reason the bicameral committee report had a very small impact on the markets
is that the market had correctly anticipated what the legislature eventually produced." (In other words, there would have been a huge drop in the price of ROPs if, contrary to what actually happened, nothing substantial had been produced by the bicameral committee.) Also, the other reason there was little breast thumping (or reactions similar to what happens when a game-winning shot is made a split second before the buzzer) is the fact that what happened once again confirmed that it takes so much time and effort to do the obvious in this country. To use a baseball analogy, our outfielders are so bad that every flyball is an adventure. So even if the last flyball is actually caught, there is the nagging feeling the game will eventually be lost because the next flyball will be dropped or fumbled. This, of course, is a big problem since, as in any baseball game, a great number of flyballs will be hit towards the outfield.
What are the next flyballs? There are many. The most obvious are the infrastructure and education backlogs.
Anton Periquet, on the other hand, has the following view:
"I do not actually think that investors have fully priced in the effects of VAT (otherwise, we should have seen a bit more excitement - imagine, the prospect of halving our national deficit in one year!). It's just that investors today are (a) distracted by bigger, more global events at the moment, and licking their wounds after recent market corrections. In other words, they are not in the mood to play; (b) too cynical about the Philippines (i.e. they will not believe until it is in place and they see the effects). Too many things can go wrong in this country. Our omnipresent courts may still prevent PGMA from acting in January. Or PGMA herself may lose her nerve when the time comes, as the tax increases begin to bite.
Hence, the likely scenario is that the markets gradually discount the positive effects of VAT as time goes by, and as evidence trickles in showing that "it's for real." (Translation: If we believe this is for real, we should be aggressive buyers of our debt and of Philippine stocks.)"
My bottom line verdict: It is as good as it gets! And a lot better than the so-called fiscal program the President unveiled around this time last year without the benefit of much consultation. The VAT bill, no matter how cumbersome and agonizing the process and not fully satisfactory the outcome, is still something to be celebrated. It showed that it was possible for the country to form a national consensus on an important matter of long-term benefit for the country, even where it entailed short-term sacrifice. And for most of us raging incrementalists, we hope this is something we learned from, and something we can replicate in future reform efforts.
