June 12, 2023 | 12:04 am
Introspective By Romeo L. Bernardo
I am pleased to share with
readers, the fiscal sector section of our June 7 Quarterly Economic
Outlook Report, “Growing Pains.” Christine Tang, Shane Sia and I wrote this for
GlobalSource Partners (globalsourcepartners.com), a New
York based network of independent analysts in emerging markets.
The National Government debt was
steady at 61% of GDP in Q1, held down by a smaller budget deficit and a high
denominator that reflected both real GDP growth and higher inflation. With
nominal GDP expected to normalize ahead, the Finance department has come up
with proposals to boost revenues and manage expenditures (see the Table)
to bring the overall deficit down from the 6.1% of GDP target this year to 3%
by the time this administration ends.
Based on the latest fiscal
program, revenues, expected to dip to 15.2% of GDP this year from 16.1% last
year, are targeted to grow 2 ppt to 17.2% by 2028 while expenditures, also
expected to decline to 21.3% of GDP this year from 23.4% last year, are
programmed to slide by 1 ppt more and maintained at around 20% of GDP.
OURVIEW
The previous administration raised the tax effort by 1.4 ppt between 2016 and
2019 through a comprehensive package of tax reforms. Given what this
administration has presented so far, it is not clear that it can achieve a 2
ppt increase in the tax effort by 2028 with the package it has drawn up so far.
The target requires government to generate incremental annual revenues of 0.3%
to 0.5% of GDP but the revenue flows we have seen are not large: a.) PIFITA
(Passive Income and Financial Intermediary Taxation Act) is expected to be
revenue neutral, b.) the other three measures for near-term implementation are
not expected to yield much, about half of 0.1% of GDP per the IMF’s 2022
Article IV report, and, c.) the second set of measures are estimated to yield a
flat stream of annual revenues equivalent to 0.3% to 0.4% of GDP starting 2025.
The proposed budget reforms could
help improve tax administration (e.g., digitalization) and create fiscal
space through efficiency gains but we expect the benefits to be spread out over
long time periods. Likewise, the recently approved Maharlika Investment Fund as
well as the merger of the two banks, targeted by end-year, will need time to
yield the promised benefits. In the limelight now is the politically sensitive
military and uniformed personnel (MUP) pension reform which the IMF’s latest
end of mission statement cited as “important to create fiscal space for
economic and social priorities.” Department of Finance (DoF) officials are now
doing the rounds of consultation with MUPs and the likely outcome would be a
set of more modest changes that will reduce the annual drain on the budget and
slow the growth of pension liabilities. (See the Box.)
Overall, we think that unless other
revenue measures are identified, a gentler slope for debt reduction can be
expected. Government is currently targeting to bring down the National
Government debt ratio from 61% last year to below 51% by 2028.
Romeo L. Bernardo is principal
Philippine adviser to GlobalSource Partners (globalsourcepartners.com).
He serves as a board director in leading companies in banking and financial
services, telecommunication, energy, food and beverage, education, real estate,
and others. He has had a 20-year run in the public sector including stints in
the Department of Finance (Undersecretary), the IMF, World Bank, and the ADB.
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