Sustained government spending to ease calls for tax cuts

MANILA, Philippines - Philippine Equity Partners Inc. (PEP), the research partner of Bank of America Merrill Lynch, believes calls for the Aquino administration to cut tax rates would recede as government spending continues to pick up.

PEP research analyst Jojo Gonzales said government spending is expected to accelerate further after it rose 19 percent in the third quarter from a growth of only nine percent in the first half.

“We reckon that if the government is able to pick up the pace of productive spending – as implied in its 2015 and 2016 budgets – calls for tax cuts may recede,” Gonzales said.

Gonzales said there is added pressure on the government to pick up the pace of spending as there are now calls for government to cut personal income taxes.

Such calls for tax cuts gathered support after the government recorded a surplus mid-way through 2015 against expectations of a full-year budget deficit-target of two percent of gross domestic product (GDP).

Government spending posted a compounded annual growth rate of nine percent between 2009 and 2014.

 “Having seen the modest pace of spending in the first half of 2015, there are doubts whether these spending growth targets can be achieved. We point out, however, there are signs the pace of government spending is finally accelerating,” he said.

Gonzales said the slower spending pace may be due to the government reforms implemented by the government particularly in the area of procurement.

The government stresses the need for transparency, competitiveness and accountability when undertaking public works projects or contracting services.

These principles may also help explain the seemingly slow pace of public private partnership (PPP) programs.

Various groups are pushing for the reduction of the 30 percent corporate tax rate as well as the top-end personal income tax rate of 32 percent.

He explained proposals for some form of tax cut are becoming a campaign issue that populists have already started to push ahead of the May 2016 elections.

“The government is reluctant to concede more tax revenue at this stage, noting its strong fiscal position is a cornerstone of its improved credit rating and lower domestic interest rate environment,” Gonzales said.

The country’s GDP growth eased to 5.3 percent in the first half of the year from 6.2 percent in the same period last year due weak global demand and low of government spending.

Economic managers penned a GDP growth of between seven and eight percent this year from 6.1 percent last year.