Business World
Reforms undertaken in recent years in the fiscal, monetary and financial sphere contributed importantly to the resiliency of the Philippine financial sector, keeping it relatively insulated from the global financial tsunami. In the fiscal area, the reform pillars were the adjustments in the VAT system and in power tariffs. These were instrumental in reversing the deficit in the consolidated public sector from 5.5% of GDP in 2002 to a surplus of 0.5% by 2007 and in bringing down the non financial public sector debt from over 100% of GDP in 2003 to only 61% by 2007.
These in turn helped to enhance confidence and stability of financial markets that contributed to reduced risk premium, greater willingness to hold Philippine credit, and lower interest rates.
Improved fiscal headroom has placed the Philippine government in a position to consider using some spending to cushion the economy from the synchronized recession happening externally. The operational word, as a World Bank friend observed, considering the still high debt ratio relative to peers and vulnerability to financial market sentiment is "controlled fiscal stimulus."
I would consider "control" to mean not just avoiding overspending, but also spending as planned. This is a matter that the BSP brass, concerned over the burden on monetary policy, has recently commented on, remarking at the disappointing first-quarter growth outcomes that could have been cushioned by government spending planned under the widely heralded economic resiliency plan.
Most importantly, control means having an eye on long-term fiscal sustainability despite a short- term spike in the deficit needed to prevent a recession. Even the monopoly printer of the world's money realizes this. Fed Chair Ben Bernanke, in a testimony to Congress, said: "Unless we demonstrate a strong commitment to fiscal sustainability in the longer run, we will have neither financial stability nor healthy economic growth."
While a fall in revenues as a result of lower growth is something financial markets understand, indeed is part of what economists call "automatic fiscal stabilizers," there have been structural erosion and administrative lapses gnawing away at fiscal sustainability that needs to be addressed. These include: the inflation eroding the value of non-indexed sin taxes, the exemption of minimum wage earners from income taxes, lower corporate income tax, new exemptions legislated for tourism, etc. Likewise, continuing slippages in tax administration, notably VAT and tariffs on imports particularly oil, is a cause of concern, the latter especially so with the approach of June 2010. The under-declaration of imports of about 2% of GDP due to "election-related lenience" (the terms used by the IMF in its report, "Philippines: 2007 Article IV Consultation- Staff Report") could have cost P20 billion in lost collections in 2007. In addition, the tax effort (tax-to-GDP ratio), has already fallen to 14.1% last year from 14.3% in 2006, which are low versus the best level achieved during the Ramos period of 17% in 1997, when the Philippine credit rating was at least two notches higher than it is now. The tax effort even fell further to 11.5% of GDP in the first quarter (not considering seasonality).
In light of this, the public needs to support the vigorous efforts of the Department of Finance (DoF) to push forward with its agenda for long-term fiscal sustainability, especially in an environment where there are pressures to turn back the fiscal reform clock.
The architecture that underpinned much of the reforms over the years is a buoyant system that casts a wide net and is neutral across sectors. It was considered that an expanded VAT, covering heretofore earlier exempted sectors like professional services, power, and fuel while exempting purchases of the poor (like agricultural products in their raw state), best achieved this objective. This VAT pillar is supposed to sit side by side with: a) a flat low rate and non-distorting tariff system, b) an income tax system that is equitable and simple and depends on withholding mechanisms where feasible and c) a robust excise tax system on goods whose social costs are not reflected in their commercial cost, i.e., liquor, tobacco, and oil.
How do some of the initiatives stack up against this model? One initiative gaining ground is to revert to a system of taxation of distribution utilities in power to a franchise tax instead of a VAT. This is the second attempt to dilute the structural reform under RA 9337 (RVAT). When the legislative franchise was approved for Transco, the law reverted the taxation to franchise tax in lieu of all taxes. Apart from making government lose an estimated P7.1 billion in VAT and income taxes annually, this new bill will create holes in the self-policing nature of a widely cast VAT net where one person's tax payment is another one's tax credit. Finally, electric power is an item of consumption that is elastic with income (the DoF says that 93% of power is consumed by the high- and middle-income groups). If the intent is to help the poor, it is better to do it by way of expenditures for education and health as well as the newly adopted conditional cash transfer program.
Also actively under discussion are DoF initiatives to prevent further erosion of the value of collection from "sin taxes"- alcohol and tobacco - and to increase the take from these. The Philippines has one of the lowest levels in Asia of taxation of these two products as well as of oil. Consumption of all three products is imbued with what economists call "negative externalities," i.e., the broader public carries the costs for the consumption of the good in the form of pollution, public health care costs, driving accidents, crime, etc. not reflected in the price of the good. Thus, there are special taxes on such goods/activities (on top of what is already collected in the form of VAT and income taxes) to discourage consumption and to provide government resources needed to address their ill effects. Given the influence of the industry players that will be affected by this renewed initiative of the DoF to yet again align our collection from these to international standards, it will sadly likely fail to pass again for the nth time of trying in decades. That is, unless the political leadership is prepared to spend political capital for it. (Something that is perhaps being saved for more ambitious objectives than fiscal sustainability at this time).
Finally, there is the tax on text - a fiscal measure that surfaces every now and then as a quick fix, even when it does not fit the architecture. The proposals in its various forms have technical flaws and they have legal flaws, all of which have been ventilated in Congress' halls. In my view, though, the basic flaw is philosophical, i.e., why are texting and other products/services of telecommunication companies being treated like sin products in approaching it for taxation? Why is it being singled out for imposition of a special levy or burden? Does it give rise to costs to the public which the individual consumer is not bearing?
This is the opposite of the reality. Improving communication among people is something that creates "positive externalities." It creates welfare-enhancing benefits to larger society, including allowing OFWs to strengthen bonds with their family and the national community. It is key to the development of new businesses that help keep joblessness at bay and the economy afloat - from the BPOs that contribute 4% of GDP to the hundreds of thousands of sellers of text load. It improves efficiency in communications for production activities from the largest conglomerates to the smallest micro-entrepreneur or farmer trying to find out the price of produce in the market.
In its present reincarnation the tax on text comes in the form of a 20% tax on gross SMS receipts (the current Senate version) and a more complicated version (via House resolution) where the NTC implements a P0.05 per text tax in the form of a kind of fee. Considering that the current cost of texting via promos is only P0.10 to P0.30 per text, such a tax is no different from excise tax ranging from 20 % to as high as 50% - on a product that is not a sin, but is indeed a blessing.
(Disclosure: The author is a director of Globe Telecom, and more importantly is an inveterate texter.)
