The Philippines’ fiscal consolidation efforts need to focus on sustainable revenue sources and not merely on the privatization of state-owned assets, the Asian Development Bank (ADB) said.
While the ADB recognized the “significant reduction” in the government’s “fiscal imbalance,” it also said the Philippines must address the problems in the country’s tax revenue stream.
“There are many examples of the Philippines doing the right things, and doing them right. For example, prioritizing fiscal consolidation and reducing the budget deficit are the right things to do at this time and reforming the tax system to increase the tax effort is one of the right ways to achieve it,” said Tom Crouch, ADB deputy director general for Southeast Asia, in a recent paper.
But he also said: “The structural erosion of the tax effort must be addressed.”
The ADB echoed the views of other lenders such as the International Monetary Fund and the World Bank on the need for the country’s excise tax rates to be indexed to inflation.
At present, excise taxes – taxes on cigarettes and alcohol – are based on 1997 prices even as the current prices of these so-called sin products have since escalated.
Multilateral lenders and members of the donor community have been urging the government to change the excise tax system and align the rates to inflation or the rise in consumer prices.
The ADB noted that the relatively less-taxed economic sectors are the ones that are growing.
Furthermore, Crouch recommended a thorough review of fiscal incentives extended by the government to local and foreign investors to avoid redundancy. Proposals to rationalize these tax perks are still pending in Congress amid strong lobbying from big business for the retention of these incentives.
In terms of economic growth, the ADB said the government must work to improve the investment climate so that growth must be sustained instead of the country relying heavily on dollar remittances from overseas workers.
The government also needs to boost infrastructure and social spending by specifically raising public capital spending closer to five percent of gross domestic product by 2010.
In the area of governance, the ADB said authorities must continue to address corruption so that it is seen as a “high risk-lower reward activity.”
The ADB said it would continue supporting the Philippines in its efforts to achieve higher sustainable growth.
Last year, the government incurred a budget deficit of P12.4 billion or significantly better than the programmed deficit of P63 billion.
It hopes to balance the budget this year or two years ahead of the original 2010 deadline.