Revert to pre-pandemic debt level to take time

MANILA, Philippines — The next two administrations face the daunting task of raising the tax effort to 17 percent of gross domestic product (GDP) or slashing primary spending to 11 percent to trim the debt stock to pre-pandemic levels by 2031.

Philippine Institute for Development Studies (PIDS) research fellows yesterday said tax collection has to expand to 17.4 percent of GDP to revert to the pre-pandemic average of 40 percent by 2031.

Otherwise, the state think tank said the government needs to cut primary spending to 11.3 percent of GDP to achieve the goal of normalizing the debt level.

PIDS senior research fellow Margarita Debuque-Gonzales said the economy could get a credit rating downgrade if the government fails to consolidate its finances to trim the debt stock. She urged the next set of economic managers to draft a consolidation plan to weather uncertainties from investors.

The national debt has risen to yet another all-time high of P12.76 trillion as of April. In the first quarter, the outstanding debt amounted to a 17-year high of 63.5 percent of GDP, breaching the 60 percent mark observed by credit monitors and multilateral lenders.

“It is really the job of the government, the economic managers, to show the credit raters that we are still fine even at this rate, that we will cut it down, and that will calm the investors,” Debuque-Gonzales said.

In coming up with estimates, PIDS researchers said they used the debt sustainability analysis of the International Monetary Fund.

They computed that the debt-to-GDP ratio will ascend to 64.4 percent in 2022 and peak at 66.8 percent in 2023 and 2024, the highest since the record 71.6 percent in 2004.

The PIDS researchers said the debt ratio would drop to 66.4 percent in 2025, 66 percent in 2026 and 65.7 percent in 2027. It may return to the pre-pandemic level of 40 percent by 2031 by way of fiscal consolidation, where revenue effort should be improved and select expenditures should be defunded.

The Department of Finance (DOF) pitched to the next administration a string of tax reforms that will require it to lift VAT exemptions, defer tax cuts, and slap new taxes. If pursued, the DOF said the government can collect at least P349.3 billion in new revenues every year that can be used for debt payments.

On the other hand, the DOF warned the government might be driven to source new loans to settle old debts, a scenario that entails a credit rating downgrade and a fiscal crisis eventually.

As a share of GDP, tax effort went up to 14.13 percent last year from 13.96 percent in 2020, while government spending, including interest payments, reached a record 24.12 percent from 23.57 percent.