MANILA, Philippines - The fiscal deficit is once again a hot national issue with presidential candidates offering their respective prescriptions. But whose proposed solution is more realistic and credible?
In early 2008, an elusive dream of over a decade – a balanced budget - was finally in sight for this deficit-weary and debt-laden nation. The fiscal cancer of severe and chronic fiscal deficits that have been afflicting the country since 1998, will finally be excised. Or so we thought. A year later, in 2009, that hope was dashed. The Arroyo administration’s promise of a balanced budget by 2010 is now just a mirage that has vanished.
In just a year, a fiscal crisis looms once again. It’s the perennial one-step forward and two-step backward national jig, which we are by now familiar with.
In 2009, the deficit unexpectedly ballooned to an all time record-breaking P300 billion. The forecast deficit for 2010 is expected to be just as dire or even worse.
As recently as 2006, the deficit has, remarkably without benefit of privatization proceeds, been greatly reduced by the Arroyo administration to P64 billion from the peak P210 billion in 2002. In 2007, the national debt saw an uncharacteristic decline of P139 billion.
But the government again started borrowing heavily in 2008 and the national debt rose by a stunning P508 billion. In the first ten months of 2009, the debt rose by another P204 billion to total P4.424 trillion. In the first week of January 2010, part of the projected deficit was prefunded with a $1.5 billion bond sale and more massive borrowings are expected to follow.
What really happened? From the prescriptions offered by the two leading presidential candidates, it appears that the fiscal problem is mainly deficient tax administration.
Candidate Manny Villar made the conventional promise: eliminate corruption to improve tax and customs revenues. A week later leading candidate Noynoy Aquino essentially made the same commitment, but went one big step further by bravely promising no new taxes.
Was Villar’s a smart act that will leave the door open to new taxes once he is elected? Did Aquino overreach? His one-upmanship immediately elicited heckling from the Palace with a reminder of the elder Bush’s “read my lips – no new taxes” campaign promise that was not kept. The current Palace occupant prides herself with turning around, momentarily as we now know, the fiscal problem by exerting “strong political will” in enacting the unpopular E-VAT in 2005.
The E-VAT raised new revenues that, in turn, raised the tax effort or tax to GDP ratio from the dismal 12.4 percent in 2004 to 14.3 percent in 2006. Consequently, the deficit plunged to P64 billion compared to P187 billion in 2004, before E-VAT.
Some observers of public finance are skeptical that no new taxes will be needed. But, expectedly, the audience at the Makati Business Club-sponsored forum exploded in applause at hearing the no-new-tax promise. Even the public at large will cheer. And, why not? Taxes are loathed, especially when not visibly accompanied by improved public services and confronted with in-your-face profligacy on the part of officialdom.
Aquino’s promise would mean that the lowered corporate income tax rate will remain. The VAT rate will not be raised nor its coverage expanded. The putative attempts to tax cellular telephone text messages will not succeed and there will be no VAT on expressway tolls or utilities consumption, among other possible tax measures.
The skepticism is not without basis. One should keep in mind that there are two imperatives in generating tax revenues – the country’s body of revenue laws – the National Internal Revenue Code and Customs and Tariff Code, and the revenue administrators – the Bureaus of Internal Revenue and Customs. These agencies enforce, assess and collect taxes and duties based on the laws and regulations.
Many have overlooked or ignored the fact that the tax structure had been severely eroded over the years. The first round was in the mid-1990s when the average nominal tariff rate was brought down from an average of 28.1 percent in 1996 to a low six percent in 2002. Coincidentally, the ratio of customs revenue to import value declined from a high 13.7 percent in 1995 to a very low 6.2 percent in 1998. With JPEPA, and the new Asean-China free trade agreement that takes effect this year many imported items will enjoy zero duty. This will cause further deterioration in Customs revenue.
Recent enactments have also eroded the tax base. A recent bill, already approved by the BICAM, and which will exempt senior citizens from the VAT, will further cut tax revenue. Will GMA veto this bill? It is not likely as she did not veto the many other popular enactments that contributed to the erosion and decimation of the tax structure, e.g., reduction of the corporate income tax rate from 35 percent to 30 percent, additional personal exemptions for income earners pursuant to the Personal Exemption and Retirement Act or PERA, exemption of minimum wage earners from filing of tax returns, exemptions from documentary stamp taxes of certain transactions and establishment of more free ports.
One could argue that tax revenues should increase as the economy appears to be growing. More tourists are coming as reported by authorities, massive residential condominium complexes have been completed or are under construction, and mining operations are buoyant, once again. All of these and many other economic activities, including export of goods and BPO revenues, are, alas, exempt from payment of VAT and income tax.
In 2003, for instance, total fiscal incentives amounted to P340 billion, equivalent to 7.9 percent of GDP, vs. the deficit of P200 billion in the same year. The economy had been transformed and the revenue yield drastically reduced. From the peak 17 percent tax effort in 1997, it has since declined to 12.4 percent in 2004 although notably improving to 14.3 percent in 2006 after the passage of the E-VAT.
As a consequence of the weakened tax structure, the economy was growing but did not commensurately produce tax revenues. It is a real puzzlement to many! Predictably, the conundrum is attributed to weak tax administration.
It would indeed be most laudable if any presidency would deliver us from the path to fiscal perdition without raising new taxes. One would hope that a combination moderating the greed on the expenditures side to reduce the apparently large “bukol”, and greatly improving tax administration to eliminate leakages, is the solution.
*Eduardo H. Yap is the author of “The National Budget, A Broad Overview” in the publication Getting to Know the National Budget, released on January 20, 2010. This consists of discussion papers to create awareness and interest in budget reform, which is an educational service of the Public Affairs Committee of the Financial Executives Institute of the Philippines (FINEX).
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