A growth target of 7% is viable

Last week this column argued “Why Philippine growth of six to 6.5 percent in 2025 is possible.” The three main reasons with corresponding numbers that I gave were the 2025 election cycle growth, low base growth, and declining inflation and unemployment rates.

The past few days showed a rise in global economic optimism. One, improvement in US-Russia economic and diplomatic relations and eminent end to Ukraine war with high level face to face meeting between the foreign affairs secretaries or ministers of both countries last Feb. 18 held in Saudi Arabia.

Two, Vietnam as the fastest growing large economy in the world in 2024 (growth of 7.0 percent) has revised its growth target for 2025 from 6.5-7.0 percent to 8.0 percent, anchored by stronger industrial manufacturing.

Three, China reiterated their growth target of 5.0 percent in 2025, from 5.3 percent growth in 2023 and 5.0 percent in 2024. China is the Philippines’ largest trade partner, total trade (merchandise exports plus imports) was 40.3 percent of total in 2023 and 42.2 percent in 2024.

Four, Japan is the second largest trade partner of the Philippines and it showed a surprising mild recovery of 1.2 percent growth in the fourth quarter 2024, from -0.8, -0.8, and 0.6 percent in the first to third quarter, respectively. So the quarterly growth in 2025 is expected to be high from low-base (2024) effect. Then the meeting between US President Donald Trump and Japan Prime Minister Ishiba Shigeru last Feb. 7, huge Japan investment pledge up to $1 trillion in the US and leveling of tariff rate discrepancy between the two. These are good ingredients for rising growth of both countries this year. The US is third largest trade partner of the Philippines.

So a decline in threats of big, prolonged wars and an increase in economic optimism, these should have positive effect on business and investments in the Philippines and many other countries. A seven percent growth or higher in 2025 is possible for us.

The country’s economic team can further fine-tune the growth targets from 2025 to 2028, focus on the high end of eight percent growth target by instituting some hard fiscal and economic reforms.

Last Feb. 17 the Economic Development Group (EDG) and the Inter-Agency Committee on Inflation and Market Outlook (IAC-IMO) met but they focused on inflation control, digitalization of social programs, common towers and mining policy.

Members of the EDG include EDG chairperson and Special Assistant to the President for Investment and Economic Affairs Secretary Frederick Go, Finance Secretary Ralph Recto and NEDA Secretary Arsenio Balisacan, Budget Secretary Amenah Pangandaman, Trade Secretary Maria Cristina Aldeguer-Roque.

There is a need to significantly change our fiscal condition, reduce the borrowings. Our financing or net borrowings significantly jumped from P0.8 trillion in 2019 to an average of P2.2 trillion/year for four years 2020 to 2023, though expected to taper to around P1.6 trillion in 2024. Our interest payment alone from January-November 2024 (no December data yet) of P705 billion means we were paying an average of P64.1 billion per month or P2.1 billion per day. Huge and wasteful.

The CREATE MORE law of 2024 (RA 12066) and its implementing rules and regulations signed last Monday, Feb. 17, will help improve the business environment of the country, expand the tax base.

One fiscal measure is to reduce incidence of illicit trade and smuggling which significantly reduce government tax revenues, particularly in tobacco products. During the Tobacco Summit last month Jan. 27-28 held at Seda Vertis North, I was one of the speakers and I showed and discussed the Laffer Curve of Philippines tobacco taxation, the numbers.

Tobacco tax revenues peaked at P176 billion in 2021 when the tax rate was P50/pack. When it became P55/pack in 2022, revenues declined to P160 billion; when it became P60/pack in 2023, revenues declined further to P135 billion. In 2024 at P63/pack, revenues would be flat at around P140 billion.

The goal of taxation should be to optimize revenues. If higher tax rate results in lower revenues, then tax rate should step back, go down to a level where revenues were highest. That is why I argued that tobacco tax rate should go back to P50/pack, reduce the price difference between legal vs illegal cigarettes. Currently the tax is P66/pack and the cheapest product is about P120/pack for legal and P50/pack for illegal tobacco.

On the expenditure side, spending by national government agencies should flatline if not decline as the mandatory share of local government units (LGUs) to total revenues keeps rising. Allotment to LGUs increased from P530 billion in 2017 to P1.103 trillion in 2022 or doubling in just five years. It was P941 billion in January-November 2024. So certain social and economic programs of many national agencies should be devolved and given to LGUs.