Yearender
MANILA, Philippines — The start of 2024 confirmed a longstanding rumor of a significant change at the Department of Finance (DOF): a new secretary was coming.
True enough, veteran lawmaker Ralph Recto returned to the economic team.
Recto’s appointment in January signaled a completely different direction, fiscally speaking, as the former senator maintained that he is not inclined to impose additional taxes, especially consumption-based ones, so as not to burden Filipinos more.
No matter how unpopular they may be, new taxes may be needed, considering that the government is still faced with a limited fiscal space.
But Recto has been firm in his view that any increase in taxes should be the last resort of the administration and that the focus should first be on collecting what needs to be collected.
Leonardo Lanzona, economist and professor at the Ateneo De Manila University, said such a stance is Recto’s most glaring politicized principle in the DOF.
“And yet, this year, taxes were added to the use of digital service platforms. This indicates the continued reliance on indirect taxes, disproportionately shouldered by the low and middle-income classes while leaving the richer classes virtually unaffected,” Lanzona told The STAR.
President Marcos, in October, enacted into law the imposition of a 12-percent value-added on all digital services in the Philippines.
The new law on digital services covers online search engines, marketplaces, cloud services, online media, online advertising and digital goods.
It covers video streaming such as Netflix, Viu, Prime Video and HBO; music streaming like Spotify and Apple Music; and service vendors iTunes Store and Google Play, as well as video games like Activision and Nintendo.
Other than the pending tax proposals before he came in, Recto has no plans to introduce new ones directly attached to his name.
De La Salle University economist Ma. Ella Oplas also does not believe that there is a need for a new set of taxation that could burden taxpayers.
“There are a lot of things to do to generate revenue such as letting go of non-performing corporations, reassessing poor quality state universities and colleges, selling idle assets or venturing into PPPs (public-private partnership),” Oplas told The STAR.
“New tax is not always the way to go,” she said.
However, the cold stance toward new taxes is impacting fiscal consolidation, which should mean reducing the budget deficit and bringing down debts, both of which are expected to be challenging for the Marcos administration over the course of its term.
Earlier this year, the Cabinet-level Development Budget Coordination Committee (DBCC) moved to re-balance fiscal consolidation efforts amid various risks.
These include persistently high inflation and interest rate environment, geopolitical tensions, slower-than-expected global economic recovery and the progress of tax policy reforms in Congress.
Also included are heightened climate change risks, other environmental vulnerabilities and development gaps and opportunities.
Because of these factors, the government is expecting that slashing both the budget deficit and the debt as a percentage of the economy will take longer than initially projected.
As a solution, the government is promoting more efficient tax administration and a proactive debt management strategy, all the while expanding the tax base through new revenue measures and implementing sound expenditure policies and reforms.
Nonetheless, Lanzona argued that the current challenge that the economy is facing is fiscal consolidation, especially given the massive debt incurred during the pandemic.
“There are ways of solving this: stop productive investments, incur more debt and raise taxes. The first option is obviously non-negotiable, given the high demand for unstructured and other public goods,” Lanzona said.
“Hence, we are left with the last two options. The DOF has virtually made the third option impossible especially with CREATE MORE (Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy) and the no new tax policy,” he said.
Unfortunately, Lanzona said the huge debt has placed the country at significant risk, and further debt can place the country on the brink of disaster.
“We have now no other alternative but to raise taxes,” Lanzona said.
Further, Lanzona maintained that no additional taxes means that debt becomes the only option amid the increasing demand for productive public investments, such as infrastructure.
This would result in the outstanding debt continuing to rise. As of end-October, the country’s outstanding debt pierced the P16-trillion mark, driven by the valuation impact of peso depreciation against the dollar.
It is expected that outstanding debt will reach P16.06 trillion by yearend and further increase to P17.35 trillion by end-2025.
For Oplas, the country’s debt transparency is something to be lauded for, and the DOF’s priority is to maintain a good credit rating.
“I believe that the key is to manage debt and to make sure that our credit rating is maintained. It is a good signal for credit providers and investors of our capacity to pay and sustain economic growth,” Oplas said.
While domestic debt comprises much of the total obligations and can provide more government control and flexibility compared to foreign debt, Lanzona emphasized that excessive dependence on it can strain the economy and lead to long-term challenges.
“Whatever control and flexibility the government may have over these locally sourced debts, these advantages over foreign become useless if these debt increases,” he said.
Rizal Commercial Banking Corp. chief economist Michael Ricafort said that fiscal reform measures may still be needed in terms of intensified tax collections and running after-tax cheats and more disciplined government spending.
Ricafort said new and higher taxes could be a final option if inflation eases further. These are realistically needed to bring down the country’s debt-to-GDP ratio to below the 60 percent international threshold.
The debt-to-GDP ratio remained above the internationally accepted threshold in the third quarter. It even breached the 61-percent level as well as government targets following a weaker-than-expected economic performance.
Following the 5.2-percent GDP print in the third quarter, the share of national debt to the country’s output rose to 61.3 percent from 60.9 percent in the previous quarter.
This was also significantly above the 60.2 percent recorded in the third quarter of last year.
Similarly, the latest ratio is above the DBCC’s 60.6 percent target by yearend.
For Lanzona, it is high time for the DOF to realize that without additional taxes and prudent budget management, there will be fewer investments for productive investments and social services.
“This would lead to lower growth and a higher debt-to-GDP ratio. This will be the right recipe for a fiscal and economic crisis,” he said.