ANALYSIS: As gov’t spends big, the people tighten belts

Jose Galang - Your Business

Posted at Jul 26 2017 07:29 PM

Usually, when economic reforms are initiated, everyone is urged to bite the bullet, with the government leading the way through its own expenditure cuts. Under the tax reform scheme currently being promoted by the economic managers of the Duterte administration, citizens in the middle class and the poor sectors will be asked to make sacrifices and pay more taxes, but the government will be spending big and go on a foreign-borrowing binge for its grandiose “build, build, build” projects.

Such a surge in spending is already evident in the big leap in the government’s budget deficit to nearly P155 billion in January-June of this year, exceeding by over 7.4 percent the target for that period. Behind this deficit is a rise in expenditures to over P1.33 trillion, against a below-target revenue performance of close to P1.18 trillion which nevertheless was more than what was collected the same period last year.

Despite assurances from the economic managers that such an early financing shortfall ahead of the ambitious infrastructure program is “no cause for concern”, some potentially affected groups are raising alarm bells. More than P8 trillion to P9 trillion is expected to be spent by the government on an array of airports, shipping ports, highways, railways and bridges in the years to 2022. In some of their statements, the economic managers include education and health care also as target beneficiaries of this program.

To be able to pay for these “build, build, build” projects, the government will raise money by imposing more taxes on Filipino consumers, borrow from Philippine banks, and secure Official Development Assistance (ODA, in the form of quick-disbursing loans from foreign trading partners and multilateral institutions). The economic managers are silent on the remittances from overseas Filipino workers (OFWs)—up to $25-26 billion a year—and whether this money would be tapped for the “build, build, build” program.

But the economic officials have also introduced what appears to be a sweetener—cuts in personal income tax rates, including the exemption from income taxation all incomes below P500,000 a year—to the bitter tax pill, which is actually a package of tax measures. The most prominent of these is the imposition of an excise tax on diesel (which, under current plans, is designed to go up in step with increases in consumer prices), increased tax rates on luxury cars, and the removal of tax exemptions on a number of economic activities.

Draining pockets

Officials of the Department of Finance proclaim that the new strategy on personal income taxes will effectively put more money in the pocket of the Filipino wage earner. However, it is now becoming apparent that the proposed new taxes will also succeed in puncturing the same pocket and ultimately drain its contents.

Revenue collection has always been a weak spot in the Philippine economy. While local tax rates are described as among the highest in the Asian region, the ratio of tax collections in relation to the value of economic output (also called the “tax effort”) has been among the lowest. A combination of inefficient systems and corruption in the revenue agencies has been blamed for this record.

There is reason to fear that the expected growth in tax collections resulting from the new tax measures could also lead to an increase in the amounts that will go to corrupt officials’ pockets or go to waste owing to inefficient systems. The economic managers are quick to point out that there will be no corruption in the new system, a refrain that the Filipino people have heard many, many times before.

These issues and challenges are expected to take center stage when the Senate deliberates on the proposed tax reform package in the coming days. Provided the process is not rushed, it is likely that the senators will be able to come up with a legislative measure that will save the Filipino wage earners and consumers the aggravation of a heavy tax burden that could only push inflation aggressively.

Agenda for the Senate

The Senate can perhaps look into the experience of other developing countries with taxes on fuel products. For instance, although the proposed excise tax on diesel, which will be imposed for the first time in this country if approved by Congress, looks like a viable option to correct market failure (for instance, untaxed diesel favoring also the rich who drive diesel-fueled cars along with the poor who use diesel-fueled jeepneys).

But the diesel excise tax is bound to eat into the already meager earnings of jeepney drivers. And manufacturers and traders that transport their products with diesel-fueled trucks and vans can be expected to raise their prices on the market.

The tax on diesel is proposed to be indexed to inflation—which means that the tax rate will automatically be increased in line with changes in the inflation rate. Because inflation, in a healthy economy, goes nowhere but up, this means that the excise tax on diesel will continually be adjusted upward, thereby driving up prices some more.

Recent studies made by economists at the Asian Development Bank noted that while there is agreement that a combination of carefully determined tax policy and tax administration are important to a successful fiscal policy and the overall management of the public sector. However, the economists also cautioned against “tax burdens that are too high” because these can be detrimental to economic growth by decreasing private investment, discouraging savings and work effort.

Other analysts have come up with findings that effects of fuel taxes on developing economies are not uniform. Structural features of an economy play a role in recycling back revenues from such taxes, and textbook policies—which the Duterte administration seems to be favoring—do not necessarily spell success in achieving overall goals.

Surely, there are various options that the economic managers can look at in search of ways to make the country more attractive to investors and dollar-spending tourists. There is no need to apply punitive shock measures to make the Filipino people share in the burden of nation-building.

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.