Debt challenge awaits next administration

MANILA, Philippines — The next Philippine president could become unpopular to taxpayers, both rich and poor, as the new government would have to resort to tax reforms and spending cuts to avert a potentially disastrous debt crisis.

The Duterte administration will pass on the largest outstanding debt, as measured against gross domestic product (GDP), in the post-Marcos era at an estimated 60.9 percent this year.

Department of Finance chief economist Gil Beltran said the next president would have to embark on fiscal consolidation wherein tax rates could be raised and state expenditures slashed.

“The medium-term program is only up to 2024 and, by that time, the debt-to-GDP ratio starts to trend down.  The national government

debt ratio of 60.5 percent rose to a level we had 15 years ago, [and] the general government debt was set back by 14 years to 52.2 percent,” Beltran said in an interview with The STAR.

“We need fiscal consolidation and a return to 6.5 percent annual growth to bring us back to pre-pandemic levels. A mix of tax reforms – not necessarily tax rate increases, [but] could be better designed taxes – and expenditure cuts may be needed,” he said.

The debt pile has jumped to P11.73 trillion as of end-2021, equivalent to 60.5 percent of GDP, which means the Philippines owes P60.5 to creditors for every P100 worth of goods and services it produces.

Further, the latest debt ratio surpassed not only the government’s program of 59.1 percent, but also the international standard of 60 percent, raising concerns on the country’s capacity to repay its obligations.

Based on data, the Duterte administration will also pass on the largest debt payable in the next 10 years since former president Joseph Estrada left 17.9 percent in short-term and 22.5 percent in medium-term debts.

As of 2021, more than a third of the outstanding debt at around P3.92 trillion will mature within the decade, pushing the next two administrations to pursue fiscal policies to pay for these debts. Of the P11.73 trillion in public debt, short-term debts due within one year made up 6.8 percent, while medium-term debts payable in one to 10 years accounted for 26.6 percent.

Given the ballooning debt, the state’s economic team plans to submit a consolidation plan containing a list of fiscal measures that may be worth considering for the next administration. As Beltran said, Duterte’s successor will have to shake up the tax system and tighten on spending.

In a case study, the International Monetary Fund (IMF) warned that nations that undertake fiscal consolidation face the costly price of blowing the following elections.

The IMF said that voters punish political incumbents for hiking taxes and reducing expenditures, and administration bets end up losing the next elections after fiscal consolidation.

“For example, one percentage point of GDP tax consolidation lowers the probability of reelection of the government by about eight percentage points,” the IMF said.

For fiscal consolidation to be less costly on electoral results, the IMF said governments can look into adjustments in personal income taxes with offsetting measures in place. However, the IMF cautioned against raising corporate income taxes, as investors tied to political parties tend to be unforgiving during the polls.

Ateneo de Manila University economics professor Leonardo Lanzona said the next president will inherit limited space for fresh borrowings due to Duterte’s debt legacy. What the succeeding administration can do, however, is to maximize debts to stimulate the economy, he said.

“If the debts are utilized efficiently and allocated to high yielding investments, including in human capital resources, the high debt-to-GDP ratio can stimulate greater economic activity that can be sustainable,” Lanzona told The STAR.

In pursuing fiscal consolidation, he proposed that the next administration assess the need to impose a wealth tax against billionaires to generate additional revenues and equalize the tax bracket.

“If the benefits of the recovery are only gained by the top-income classes and our tax generation relies on salaries of middle-income workers, the tax revenues then may not be sufficient to pay for our debts,” Lanzona said.

“We need to consider wealth taxes imposed on the top one percent of the income classes. This will be the best way to mitigate a possible overheating that can result from the increased economic activities during the recovery, thus reducing inflation,” he said.

In an analysis by Oxfam, billionaires in the Philippines saw their wealth jump by over 35 percent during the pandemic, while about 3.7 million Filipinos fell into extreme poverty just in 2020. The study said the government can raise $6.3 billion if it taxes two percent on wealth over $5 million, three percent on wealth above $50 million and five percent on wealth beyond $1 billion.

“An annual wealth tax applied to the wealth of multimillionaires and billionaires would raise $6.3 billion a year, enough to increase government health financing by 73 percent or reduce the out-of-pocket health budget by 84 percent, or enough to reduce poverty at $3.2 a day by 90 percent,” the analysis read.

But for De La Salle University economics professor Maria Ella Oplas, the next administration should consider keeping taxes at the same rate to encourage consumption in the face of rising commodity prices brought about by spiking fuel costs.

“Raising taxes will only kill businesses and people in a time when we should be pushing them to spend. It should be the government who should tighten its belt. The next administration should just freeze taxes so that people can spend,” Oplas told The STAR.

To repay debts, she said the government can rearrange its fiscal position by cutting spending without tinkering with taxes.

Oplas suggested that the government can close non-performing state universities and colleges. She said the next economic team can also look into the state’s assets to identify which one can be sold to the private sector.

In the long term, Oplas said maintaining tax rates at their current levels will make sure that the economy can sustain its recovery pace. She added revenues raised from business activities can supply the government the resources it needs to repay debts.

“They should really facilitate the recovery of the business sector, so that the business sector will be the one to bring in their much needed revenues,” Oplas said.

Both Lanzona and Oplas agreed that debts can be used to push the recovery of the economy; it will be up to the next administration, however, to rebuild its fiscal stability.