IMF to RP: Raise taxes to rein in budget deficit

The International Monetary Fund (IMF) said yesterday the government would have to increase taxes and streamline its bureaucracy to control its ballooning budget deficit.

The IMF, which concluded yesterday its annual post-program monitoring review on the economy, said that while they are encouraged by the country’s economic performance the government must work hard to control its deficit and trim its burgeoning debt problem.

The persistent deficit problem, according to the IMF, is the underlying weakness that would make the Philippines especially vulnerable to such factors as the downside economic risks resulting from the outbreak of dreaded Severe Acute Respiratory Syndrome (SARS).

"Although SARS poses a downside risk, the impact has so far been minor," said IMF senior adviser Masahiko Takeda. "In general, growth is on track, inflation is below target and the external current account is expected to be broadly balanced," he added.

According to Takeda, however, these positive aspects could be undermined by the sustained decline in government revenue relative to gross domestic product (GDP). This, he said, had prevented the government from reducing debt levels over the medium term and creating room for needed development expenditures.

According to IMF Asia and Pacific Division head Sean Nolan, debt would continue to be a problem unless the government could address its deficit situation over the medium term.

"The crude arithmetic of debt is controlling deficit," Nolan said. "If you reduce the deficit, there would be less need to borrow and reducing the debt stock would improve ratings which would ultimately bring down the cost of servicing existing debt."

"The Fund has always maintained that the government’s deficit problem is a revenue problem," he added.

For his part, Takeda said he government should consider raising the value added tax (VAT) rate in conjunction with the improvements in VAT administration.

The IMF has been insisting on the government to increase taxes but its recommendations have been repeatedly rejected as politically unpalatable. With the presidential elections so close, its latest recommendation is also expected to be rejected outright.

However, Takeda said there are other drastic measures that would have to be undertaken if the government wanted to provide a long-term sustainable solution to its deficit problem, specifically the streamlining of its bureaucracy.

"Civil service reform is an important priority that would free up budgetary resources, including for salary increases for public servants over the medium term,"Takeda said.

According to Takeda, the IMF was pleased with the government’s effort to improve its tax administration but the left-over tasks were even more critical, such as the conduct of internal audits, the collection of tax arrears and the prosecution of large tax evaders.

"Tax policy measures are also indispensable to reverse the reduction in revenues since 1997," he said. "Initial measures could include restoring the real level of excise taxes to 1997 levels and indexing tax levels to inflation including for petroleum products where easing world prices would limit the price impact of tax increases," Takeda explained.