'No new taxes plan won't cut deficit'

MANILA, Philippines - The Aquino government’s plan to cut the burgeoning budget deficit without raising taxes won’t work.

The deficit will likely breach the ceiling of P385 billion or 3.9 percent of gross domestic product (GDP), the World Bank said, even as the government rationalizes spending and its two main tax agencies take turns in filing cases against evaders every two weeks.

This because the President’s no-new-taxes plan continues to pose a challenge to revenue efforts.

“Without policy changes... raising the tax effort will remain challenging,” the multilateral lender said in a recent report. “Given this, the deficit is likely to remain at 4.2 percent of GDP in 2010.”

For the first nine months, the government incurred a budget deficit of P259.8 billion, five percent lower than target, due to controlled spending.

Taxes, privatization

The government relies on tax and privatization revenues to fund the national budget.

The latter has taken a back seat as there are only a few state assets left to sell.

And unlike the previous administration, which relied heavily on privatization for revenues, President Aquino wants to focus on raising the country’s tax administration effort.

In doing this, however, he promised not to increase or impose new taxes, but to go after tax cheats and smugglers to cover the leaks in the collection system.

The Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) have been taking turns in filing cases against companies and individuals who have deprived the government of much-needed revenues.

BIR recently slapped movie director Carlo Caparas with a P540-million tax evasion complaint. The week before that, the BOC filed a P24-billion smuggling case versus oil giant Pilipinas Shell.

But some economists said this anti-corruption crackdown by the Aquino government, which took over after a scandal-ridden nine-year rule of former President Gloria Arroyo, is unlikely to result in big gains soon.

Thus, they said “real policies” to tackle the fiscal problem are necessary.

Debt watchers S&P and Fitch recently said they are keenly watching how the country’s economic managers’ fiscal tack will succeed.

Pending tax reforms

The World Bank urges the Aquino government to pursue tax measures, such as the rationalization of fiscal incentives and the increase in excise taxes on sin products.

Tax cuts that came into effect in 2009, notably the reduction in corporate income tax and the increase in personal income tax exemptions, continue to weigh on tax administration, the lender said.

A measure to rationalize incentives is pending in Congress, along with the controversial bill to increase excise taxes on tobacco and alcohol products.

Mr. Aquino, a smoker, had earlier expressed his support for the passage of these revenue-enhancing measures.

Tax reforms to fuel spending

Tax policy reforms are also needed to sustained revenues that would enable the government to spend and accelerate growth of the economy, the World Bank said.

In its first two months in office, the Aquino government began to rationalize spending to control the deficit.

It plans to continue doing this, and improve spending efficiency, next year.

The proposed budget for 2011 limits special purpose funds by eliminating some items and incorporating others into the agency budget.

Some inefficient programs, such as the food for school program and several agricultural input subsidies, have been cut. In their place, the government scaled up the conditional cash transfer program from one million to 2.3 million households (nearly half of poor households in the country).

“But while improving the efficiency of public spending is a welcome move, increasing the level of public spending is also needed to improve the stock of human and physical capital,” the World Bank said.

“This would entail some tax policy reforms to ensure a higher and sustained revenue base that would enable the government to embark on more ambitious reforms,” it added.

The World Bank noted the 2011 budget does not propose any tax policy measures, but relies solely on greater revenue efficiency and moratorium on revenue-eroding measures.